Portfolio Diversification

As Easter approaches – Don’t put all your eggs in one basket!

“The saying these days is that the only thing that goes up when the market goes down is correlation.”FT.com

Diversification is a key concept in investments, used to reduce risk. By spreading your money over several different investments, you reduce the risk of any one reducing your total investments to zero. Although many will advise it, diversifying across many mutual funds or across shares in many sectors is NOT true diversification. It’s far better to allocate a portion of your portfolio to the most different of asset classes:

Cash: Bank account, Stashed Cash Under Mattress
Pros: Liquid, protected
Cons: Low or no returns, Eroded by inflation
Tip: Make sure you maximise your return in a secure place (find a good bank account), and check that your covered by the banks insurance. In the event of a collapse, only a set sum of money in every account is covered.

Stocks: Mutual Funds, Index Funds, Individual Stocks
Pros: Possible High Returns, Liquid
Cons: Possible High Risk, Fees (per transaction / management fees)
Tip: Most mutual funds under perform the market on a yearly basis. Try an index fund to reduce fees, while giving better returns.

Bonds: T-bills, T-notes, UK Premium Bonds
Pros: Safe
Cons: Not Liquid, Low Returns, Returns are eroded by inflation
Tip: Bonds only need to be considered for your portfolio if you want a very low level of risk. So unless you’re retired and living off the income solely from your investments, try splitting your assets between the other classes for greater returns.

Real Estate: Rental Properties
Pros: Control, Leverage, High rate of return
Cons: Not very liquid, no guaranteed returns
Tip: The housing market looks like it’s in trouble at the moment, so watch your back if you’re investing. Aim to find a property that returns a profit after all costs every month, don’t buy counting on an increase in value.

Gold: Bullion Coins and Bars, ETF’s, Online Allocated Storage
Pros: Negatively correlated with all other assets – when they go down, gold goes up. Liquid.
Cons: No dividend or monthly return.
Tip: Although buying physical gold is the ultimate winner in a doomsday scenario, online, ETF and gold mining stocks are also likely to cover you in the event of market problems.

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