The potential risks that are inherent when investing can be intimidating and even off-putting for some.
However, diversification can help you significantly reduce this risk and make investing less a game of chance and more a strategic vehicle. But what is it and how can you have a diverse investment portfolio? In today’s article we delve more into the world of portfolio diversification.
What is Diversification?
Diversification is a risk management strategy that involves increasing the variety of investments in your portfolio. The idea is to spread your risk by investing in different types of assets.
You see, investing is a number’s game, so by spreading your investments into assets with differing risk profiles, the odds of losing your entire investment become extremely low.
For example, if you were to invest your entire fund into one company, putting ‘all your eggs into one basket’, so to speak, the results are much more consequential should this company go under or if the stock prices drastically fall.
On the other hand, with a diversified portfolio, if one stock or even a whole asset class falls in value, the portfolio as a whole, fairs much better, because the other asset classes in that portfolio have held their worth.
Where should I invest my money?
Now that we’ve established the importance of diversifying your money, the next question naturally is:
“Where should I invest my money?”
There are many options to consider: shares, funds, bonds, cash in the bank, cryptocurrency, gold etc. Each one has its own risk profile. The graph below shows, at a high level, the risk profile for the various mainstream asset classes – the key is to choose a mix of assets that balances the risks
The next question is then how much to put into each one. Of course, we are not financial advisors, but this really depends on your risk appetite, which may depend on your age and circumstances.
If you are young and risk loving, you may steer towards riskier investment choices, whereas if you are older and need more certainty, you may be better off choosing less risky assets.
The graph below shows one possible allocation – 5% of the total funds invested in low (cash and bonds) and 5% invested in high-risk assets (crypto currency) and 90% in medium-risk assets, such as leveraged property and the stock market.
It is worth noting that even within an asset class, there can be a number of options, each with differing risks.
Why Should I Invest in Property?
While all investments have an element of ‘luck’, Property offers you more control over your investment.
You can choose which properties to invest in, how best to manage the property, how much to charge tenants and which tenants you would like to rent to.
You can also choose how involved you wish to be. Would you like to be hands on? Good for you. Would you like to find professionals to run your property portfolio for you? That’s also fine.
Property investment, unlike any other investments in the UK, also allows you to extend your reach. It is much easier to secure leverage, in the form of a mortgage, than it would be trying to convince a bank to give you a loan to buy more shares.
This leveraging strategy allows you to multiply your returns.
As well as this, the property market is generally much more stable than any other forms of investment, making it much easier for normal people to hold. You don’t have the volatility that comes with the stock market where prices can go up and down by as much as 40% in one day!
Another advantage of Property is that renting properties allows you to make a steady income as well as watching your asset grow in price over time. In this way, Property investment is doubly rewarding as it steadily grows over time.
And finally, with inflation tracking at double digits, the mortgage debt devalues over time in real terms. So as time passes, you actually owe less, while the value of the property increases!
The Bottom Line
If you want real financial security, then you need to consider diversifying your portfolio as soon as you are in a position to do so.
Property is a tangible asset and is a key component of a well-diversified investment portfolio.
If you’re looking to get involved with Property, but want some guidance on how to go about it, sign up to our Property Investment Masterclass by clicking here