When considering investment different investors are at different stages in their life. Younger investors may have a longer time horizon for their investing than older investors. Risk tolerance is a personal choice, but it is good to keep perspective on personal time horizons, and manage risk according to when access to funds from different assets is needed.
In investment terms there are four main types of assets, known as ‘asset classes’. Each asset class has different characteristics and advantages and disadvantages for investors.
Generally speaking, cash is a relatively secure asset but may lose value if the interest rate doesn’t keep up with inflation. Bonds provide regular income, but investors need to be aware that the bond issuer is sometimes unable to repay in full.
Shares pay regular income and offer the opportunity to grow over time. However, share prices can go up and down and a fall in share price will reduce the value of your investment. The final asset class is Commercial Property which can provide stable and regular income with the potential to grow over time. As most home-owners know property prices can fall, reducing the value of your investment, and property transactions take a long time, so your money may be tied up for longer than you want it to be.
Under normal market conditions, diversification is the most effective way to reduce risk. If you hold just one investment and it performs badly, you could lose all of your money. If you hold a diversified portfolio with a variety of different investments, it’s much less likely that all of your investments will perform badly at the same time. The profits you earn on the investments that perform well tend to offset the losses on those that perform poorly.
Whilst it cannot guarantee against losses, diversifying your portfolio effectively – holding a blend of assets to help you navigate the volatility of markets – is a vital way of achieving your long-term financial goals whilst minimizing risk.
Achieving effective diversification across and within asset classes, regions and currencies can be difficult and for this reason, some people choose to invest in professionally managed funds that package up several assets rather than building their own portfolio of individual investments.
Investors need to be mindful that stock markets can be unpredictable. They move frequently – and sometimes sharply – in both directions. During these times, it is possible that emotions overcome sound investment decisions. It is important therefore to resist the temptation to change your portfolio in response to short-term market movements. ‘Timing’ the markets seldom works in practice and can make it too easy to miss out on any gains.
The golden rule to investing is allowing your investments sufficient time to achieve their potential. It’s important to remember why you’re invested in the first place and make sure that rationale hasn’t changed.
If you or your clients would like further information please contact Shaun Bell, on 01548 856444 or email email@example.com .
Sabre Financial is a trading title of Sabre Financial Planning Ltd. Sabre Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.
By Sabre Financial | Wednesday, September 11, 2019