Posted on Jan 18, 2021
A model investment portfolio should have a healthy mix of stocks, bonds, funds, or even property. The allocation of these assets is reliant on the type of investor you are, and the risks you’re willing to take.
Many investors will set up their investments with a hands-off strategy, leaving their investments untouched so that the value could appreciate and accumulate over time. This is a good strategy, especially for stock investments. According to data aggregated by Market Watch, stock trends from the last two centuries prove that if you hold your stock investment for more than 20 years, there’s a 95% probability that it would outperform bonds.
While it’s a good practise to not take money out of your investments unnecessarily or too early, you also need to know when it’s time to take action.
The Concept of Investment Rebalancing
As the market constantly changes, and as time goes by, the allocations of each investment may deviate from the initial percentages that you set. Say, you start with an allocation of 65% stocks and 35% equity holdings, and your equity holdings skyrocket so much faster than your stocks, you’ll then have disproportionately more money in equity holdings than you originally intended.
It may seem counterintuitive to sell assets that perform well, but in theory, the skewed allocations make your portfolio riskier. As an investor, you need to rebalance in order to bring the asset allocation back in line with your original plans. In this case, you’ll need to sell some equity holdings and buy more stocks to get you back to your 65/35 split. Most studies and previous trends suggest that rebalancing helps you in the long run, reducing big, unintentional risks.
Diversify Your Investment Portfolio
Should your portfolio remain low-risk at all times? This is entirely up to you. Although, you need to realise that as much as risks could lose you money, they could also pay off in returns. You need to be open to some form of risk when you’re investing. Investors who put all their money in cash products run the risk of their earned interest not being able to keep up with the prices of commodities.
Those who exclusively invest in corporate bonds have to contend with the risk of company failure. And those who only use the low-risk UK Gilts also get low yields. As you see, there’s no single investment asset that provides a completely risk-free profitable return. It makes logical sense, then, to invest in different types of assets and diversify your portfolio. This is important as one of the main purposes behind building up your portfolio is for it to support you at whatever stage in life you’re in—whether you’re just starting out and accumulating assets, relying on liquid assets to support you in your retirement, or simply preserving your capital.
How and What to Invest in
It goes without saying that you need to do extensive research before putting your money into any investment.
Keep an eye out for market trends, and how assets and companies have responded to spikes and drops. If you’re investing in corporate shares, look beyond the stock price and consider the company you’re buying into. It would help if you understand the nature of their business and share their goals and values.
It’s also important that you feel secure with the way management runs their operations and treats their employees—after all they give companies a lasting competitive advantage. Financial advisors suggest that 2021 is the year investors should dial back on assets in bonds as well as gold and silver. The effects of the COVID-19 pandemic have destabilised the prices and left them valued lower than before. In fact, they recommend investing in equity investments, as the prospects of successful COVID-19 vaccine rollouts raise the possibility of economic growth after a disastrous 4th quarter in the UK markets. Although UK funds are starting to finally look up, you may also find that overseas stocks can be good investments.
Advisors are endorsing a 10% allocation of assets in global funds; this allows you to avoid greater risks, should the UK market plummet again. Investment portfolios are designed to be rebalanced and adjusted over time, based on how the assets are performing—so take calculated risks and trust in your investment strategy.
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