12 Feb 2012

Diversification

Diversification

Neil Aspinall, Independent Financial Adviser with the firm writes about the importance of diversification when investing

Neil Aspinall, Independent Financial Adviser with the firm writes about the importance of diversification when investing

When deciding whether to invest, it is important that any investments you make are matched to your feelings and preferences on how much risk you wish to take. 

A key question to ask is “how comfortable would I be facing a short term loss in order to have the opportunity to make long term gains.” If you are not willing to accept any risk, then maybe investing is not for you. 

All investments have a degree of risk, even choosing not to invest is risky, as savings in deposit based accounts are normally paying less than the current rate of inflation.  The key is getting the right balance between risk and reward. 

If you are willing to invest then it is important that you take a diversified approach.  This means you spread your investments, and therefore your risk, among several asset classes.  When diversifying your portfolio you would normally invest in a combination of UK Equities, Overseas Equities, Property, Bonds (Corporate & Gilts) and Cash.  Your relative weightings in each asset class will depend on your own attitude to risk. 

If you “put all your eggs in one basket” you are more vulnerable to risk.  Different asset classes behave in different ways and are subject to different risks.  Diversifying and investing in a range of assets helps reduce your exposure should one of the assets suffer a downturn.  It can effectively reduce your risk exposure, although even with a diversified portfolio the value can go down as well as up. 

There is no one investment strategy that suits everyone and the decision on how to divide up your portfolio will also depend on when you need access to the funds.  It is essential therefore to seek professional advice on what is best for your own individual circumstances. 

Neil Aspinall, Independent Financial Adviser

 


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