Is your portfolio safe? Here's how you find out...
Recently a friend of mine told me that he was planning to buy some "sensible, retirement style shares". Another told me that he liked his portfolio to consist of about two-thirds conservative stocks and one-third speculative stocks. This is all well and good, but the question is what does this all mean? Is there a way that you can invest and have a ‘safe’ investment portfolio at the same time?Different investment products have a different level of risk allocated to them. For instance, single stock futures trading is regarded as highly risky, whereas equities (shares) less so. Yet, even within the equities market, there are shares that are less risky than others. One of the most commonly practiced forms of investor protection is to ensure your investment portfolio is well diversified, so you spread your risk across the board. The old analogy of ‘don’t put all your eggs in one basket’ is critical here.A diversified portfolio doesn't concentrate on one or two investment categories. Instead, it includes investments whose returns behave in the opposite way from those of another. The net effect is lower volatility in returns.There are different ways to diversify your portfolio, but the most common method is to allocate a target percentage of your total investment portfolio to stocks, bonds and cash.What’s the first step?You first have to decide how to allocate your investment funds among the three primary classes of financial assets. These are cash reserves, bonds and shares. You should then assess the asset class before investigating the associated potential risks and rewards. You must keep in mind that risk is always present in investing. Although risk can't be eliminated, it can be managed.The following three points should be kept in mind when considering the diversification of your portfolio:
- Diversification can protect you against risks from a single stock or bond, but not against market and inflation risks.
- Shares have historically offered the highest annual return, but with substantial short-term risk.
- Time has a moderating influence on stock and bond market risk. The longer you hold an investment, the more likely it is to earn a positive return.
The key points to remember to make your investing career a successful oneWhile shares and bonds may offer higher returns than cash you may have in a savings account, they also expose you to higher levels of risk. The risk-reward trade-off is a key consideration when investing. If you wish to pursue higher returns you must be willing to assume additional risk.Individual shares and bonds expose you to specific risk, i.e. the risk that problems with an individual company or bond issuer will reduce the value of your investment dramatically. Specific risk can be eliminated through diversification using unit trusts and mutual trusts.Diversification among stocks and bonds will greatly diminish the impact of a single stock or bond. However, diversification doesn't remove risk from market movement caused by investor perceptions.So my aim here at Red Hot Penny Shares is clear – to maintain a portfolio that's well balanced between speculative, medium risk and conservative stocks when it comes to the share portion of your portfolio. It's a continually challenging task, and one that I relish!To take advantage of the recommendations in Red Hot Penny Shares, start your no obligation trial now!
The past is not a guide to future performance. Trades in stocks recommended by Red Hot Penny Shares are small company shares. By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances.
