You do not have to include an array of funds if you wish to manoeuvre your way around the present financial market. This may be contradictory to what most financial advisers may suggest, but having a very diverse investment portfolio may do you more harm than good.
The number and nature of investments you should make largely depends on your appetite for risk. But following are certain factors that you can consider to evaluate your overall investment portfolio:
How Many Fingers do you Need to Count your Investments?
No finance pundit in this world can tell you the correct number of investments that one should own. But it is believed that once you go beyond five or six investments you may have an overlap or you’re making investments which are arcane in nature.
A misconception that most novice investors hold is that investing in every next-big-investment is a good strategy to make quick money. The type of investments you hold may yield different results over different periods. Most of us get lured into buying more investments when markets are booming but there may be a good reason to think well before taking on more investments if you have included a decent mixture of stocks, bonds, real estate and shares.
Choosing the Type of Investments
A good way to spread the risk across your investments is to have a mix of different assets. This philosophy has been perfectly summarised in the old adage that one must never place all the eggs in one basket.
You should also put in place arrangements to ensure that the investments are handled and monitored efficiently. A foresighted investor makes the necessary provisions to ensure that their investment doesn’t suffer any losses. Most investors get their Will written using a Will template to safeguard their investments even after they have passed away.
The reason why this approach is generally followed is that the value of different assets fluctuates for different reasons and is not always dependent on the value of other assets. The prospects of a company influence the value of shares while interest rates govern the value of bonds. A real estate market often depends on the performance of an economy but interest rates also play an influential role.
Most investors tend to stick to an investment if it has performed well for them in the past. Suppose you had held a bank’s shares in 2006. It earned you a handsome profit so you decided to buy some more shares of other banks.
But in the following year there was a credit crunch which resulted in severe losses. The value of any type of investment is quite dynamic in nature and therefore it is difficult to predict if an investment which has fared well in the past will continue to perform well in the future.
Once you have decided which type of assets you wish to include in your investment portfolio you must try to diversify your investment portfolio by investing in different sectors. You should try to invest in different ventures which should ideally not be correlated to each other.
The advantage of investing across sectors is that you may not suffer losses if any one sector does not perform well. For example, having investments in the precious metals sector will help you balance the losses that you may incur owing to your investments in the healthcare sector which is suffering a downturn.
Buy Shares in Multiple Companies
A sector is relatively more stable compared to a company. A company may go through bad times or may even go bankrupt but the sector it belongs to may still continue to perform well.
Investing via an Oeic or unit trust will help you to spread your investments. They will invest in different bonds, properties, shares or currencies to spread the risk around. When talking about equities the investment may be 40 to 60 shares in a particular sector, stock market or country.
Spread Across the World
A good way to safeguard your investments from stock market movements is to invest in different regions and countries. Spreading your investments in this manner ensures that a particular country’s economic conditions and economic policies do not adversely affect your investments.
You must be aware that having diversified investments in different regions also adds risk to your investment. Investing in developed markets such as UK or US may provide better stability than the markets of developing economies such as Brazil, India, China and Russia.
You need to be comfortable with the level of risk involved when investing across companies, sectors or countries.