Spreading Investment Risk

If during this current recessionary climate, you are seeking to spread your risk and achieve higher returns from your investments, you may consider a combination of the following: corporate bonds, equity income, absolute return funds and emerging markets. This will, of course, depend a great deal on your attitude towards risk. In times of economic uncertainty you may wish to consider spreading the risk by having a good mix of assets. It is important to get the right balance within your portfolio and this will also depend upon your individual needs. The importance of diversification. You should consider the weighting and balance of the constituents of your portfolio. Above all, there is the importance of diversification, both geographically and between sectors, even between asset classes and the weightings you wish to keep in each part of your portfolio. Not having all your eggs in one basket means that if one part of your portfolio under performs, this could be compensated for elsewhere. When you choose to invest, your money can be spread across five main types of asset: Cash Gilts (government bonds) Corporate bonds Equities (stocks and shares) Property You should remember that different types of investments may receive different tax treatment, which could affect your choice. These asset classes have different risk characteristics and whilst these implicit risks cannot be avoided, they can be mitigated as part of the overall investment portfolio by diversifying. Saving your money in a range of assets helps reduce your exposure should one of your investments suffer a downturn. For many investors the creation of a ‘balanced’ portfolio means spreading investments across a range of products to minimise risk exposure. Given some forward planning, you could decide on the amount of risk with which you’re most comfortable. By spreading your investments over a wide range of asset classes and different sectors, it is possible to mitigate the risk that your portfolio becomes overly reliant on the performance of one particular asset. Key to diversification is selecting assets that behave in different ways. A ‘safety net’ by diversifying. Some assets are said to be ‘negatively correlated’ – for instance, bonds and property often behave in a contrary way to equities by offering lower, but less volatile returns. This provides a ‘safety net’ by diversifying many of the risks associated with reliance upon one particular asset. It is also important to diversify across different ‘styles’ of investing, such as growth or value investing, as well as across different sizes of companies, and different sectors and geographic regions. Growth stocks are held because investors believe their value is likely to grow significantly over the long term, whereas value shares are held because they are regarded as being cheaper than the intrinsic worth of the companies in which they represent a stake. By mixing styles that can outperform or under-perform under different economic conditions, the overall risk rating of the investment portfolio is reduced. Selecting the right combination of these depends on your risk profile, so it is essential to seek professional advice to ensure that your investment portfolio is commensurate with your attitude to investment risk. The important thing to remember about investments is that, even if your investment goes down, you will only actually make a loss if you cash it in at that time. You should be prepared to take some risk and you may see some falls in the value of your investments. There is also the issue surrounding currency risk. Currencies – for example sterling, euros, dollars and yen – move in relation to one another. If you are putting your money into investments in another country, then their value will move up and down in line with currency changes as well as the normal share-price movements. Another consideration is the risk of inflation. Inflation means that you will need more money in the future to buy the same things as now. When investing, therefore, beating inflation is an important goal.