The three most important words in property investment are of course, location, location, location.
But the keywords for your broader investment portfolio may well all be ‘diversification’.
It can be the first step to successful investment, reducing risk and increasing returns.
What is diversification?
It isn’t just Easter eggs that need more than one basket. Your investments should be spread around too.
You would not want to put all your money into a single stock. As Carillion recently proved, even successful companies can fail. Buying shares in more than one company is the obvious first step, but a diversified portfolio takes things much further. It needs to include investments from different market sectors, different asset classes and even different countries.
Reducing the risk
The thinking behind this is obvious enough. All investments can fall as well as rise, but unless something catastrophic happens, they are unlikely to all fall together. Different assets and market sectors behave very differently in response to market conditions. When equities fall, for example, bonds tend to be on the up, and vice versa. Europe may emerge from the doldrums just as the US starts to look problematic. A portfolio that’s properly diversified should reduce the chances of loss overall, because any holding that underperforms can be compensated for by those that are starting to deliver the results you want.
How to diversify
The main classes of investment are shares, bonds, property and cash
The first stage might be to spread your share investment across several businesses in a number of sectors, essentially to broaden your holdings, and reduce the risk. The second might be to balance those equities with bond assets. The performance of shares compared with gilts and bonds are said to be negatively correlated, which means that both asset classes respond to the economy, but when one goes down in value, the other tends to go up. It automatically compensates for the ups and downs of the economic cycle.
As your portfolio grows, you can start allocating investment to other asset types. Investing in property can provide a steady income and capital growth that is independent of markets. You might also look at commodities, and cash.
Increasing the returns
But there is more to diversification than reducing risk. It can actually help increase the returns you enjoy.
Many investors struggle with their investments because they chase performance and put a high proportion of their wealth in investments that seem to offer the best short term returns. In a market downturn, they flock to lower risk investments. Both tactics tend to be dangerous – you don’t know where the market is headed from one day to another. They are less effective than simply diversifying, riding out the the short term extremes and benefitting from the underlying growth.
The easy way to diversify
As a new investor, deciding what to buy can be difficult enough when you are looking at single stocks. Building a properly diversified portfolio might appear to demand expertise across all asset classes and markets rather than just one.
At Continuum, our experts would be happy to help you build a portfolio to fit your needs.
The value of investments can fall as well as rise and you may get back less than you invested.