How to spread your wealth effectively
Strength in diversity: How to spread your wealth effectively
Diversifying your investments is an important aspect of growing your wealth over time and minimising the risk of volatile markets without forgoing returns. Basically, it means not putting all your eggs in one basket, but spreading your investments across a diverse range of assets, such as property, cash, shares and fixed interest.
People often focus on only one type of investment, mostly cash or property, which is not an ideal long-term approach as all markets are subject to volatility at some stage – and if you are forced to sell your assets when the market is down, you will most likely incur a loss.
The main benefit of diversifying your investments is that the low correlation of the asset classes – meaning the performance of one class is not affected by the performance of the other – helps reduce volatility in your portfolio because they respond to different market trends at different rates. Therefore, having a portfolio diversified among different classes creates more consistency and can improve overall portfolio performance.
Another possibility of diversifying is within the same asset class, such as buying shares from different companies and industry sectors. The less these companies and industries are correlated to each other, the less risk you take. In other words if you buy shares in three different oil companies, the risk is almost the same as investing in just one of those companies, as the industry factors that affect one oil company are most likely to equally impact all companies within the oil industry.
Many people find planning their financial future daunting and don’t quite know where to start, so here are some tips to keep in mind when developing your investment strategy:
Seek professional advice
Speak to a professional financial planner about your investment goals and objectives and the level of risk you are willing to take. The adviser will then develop a long-term investment strategy that supports your goals, and take you through the risk assessment of each investment class. In most cases a diversified investment portfolio is spread across property, cash, fixed interest, managed funds and shares.
Plan for the long-term
There are many schemes out there that promise quick returns, but the 20 per cent return within 12 months is simply unrealistic. By spreading your investments you can ride out the storm in some markets without incurring losses. With a long-term, diversified strategy you can afford to wait for market conditions to recover again – which is the normal cycle of every market – and therefore protect the value of your assets.
Don’t be emotional
Fight the temptation to spontaneously invest in a scheme you read or heard about. Stick to your strategy and avoid knee-jerk reactions to chop and change your investments to follow potential trends. Sustainable growth can only happen over time.
Review your portfolio regularly
Review your portfolio with your financial planner every 12 months to potentially adjust risk levels. In volatile market conditions a 6-monthly review is recommended.
In summary, diversifying your investments helps you spread your risk, so that a loss on one investment may be balanced out by a gain in another, creating sustainable growth over time.
^John – General Manager Professional Services