Ask anyone in the finance industry what they think is the No.1 most important rule for a successful investment strategy. I bet they’ll say “DIVERSIFY!” In other words, spread your risk.
“Don’t put all your eggs in one basket” is another way of summing it up. Leave all your money invested in the one place and you are headed for disaster.
A diverse investment portfolio will bring you (a) higher returns, and (b) protection against volatile markets – in other words, if one of your investments is doing badly, you’ll still have lots of other investments to balance it out.
So how do you spread your risk? The first important step is to spread your money across different investment types, such as Shares, Property and Cash.
The next step is to Spread Your Risk within each of these categories. For example, if you invest in Shares you would invest in various companies and various industries rather than putting all your money into one company. Although a company might seem like a “sure thing”, even the most well-known and seemingly profitable businesses can go broke. Even an industry that seems fail-safe, could be badly affected by new taxes, mismanagement, supply issues or the occasional wrath of mother nature.
Let’s take another example. If you are lucky enough to be buying your second investment property, would you buy in the same suburb as your first property?
Imagine your first property was a Unit in Brisbane and you’ve made good money on the investment - you would be tempted to buy in Brisbane again and make the same money, right? But this may not be the best way to go. The market has changed. Perhaps you bought at a good time? Perhaps the property was a bargain? Regardless of all this, you should be thinking about spreading your risk.
Buy a property in a different State. Do some research and find out what areas are predicted to experience huge growth (try to focus on Capital Cities, which are almost always the safest investment). Also consider switching from a Unit to a Townhouse or free-standing house. This is how you spread your risk.
The same principle applies when you look at Managed Funds. Consider investing with more than one Fund Manager and spreading your money across different funds, e.g. International Shares Fund (very high risk – possibility of very high returns), Australian Shares Fund (high risk – possibility of high returns), Growth Fund (Low/Medium Risk – possibility of average returns).
Calculate each investment as a percentage of your total investments. For example, you might invest 40% in the highest risk funds, 40% in medium risk funds and 20% in the low risk funds.
Look closely at the Product Disclosure Statement (PDS) before you make any decisions and if you are dealing with broker or a representative of the Fund Manager, don’t allow them to sign you up on the spot. Take the PDS home and read it thoroughly. Take the time to compare various funds before you make a decision.
Just don’t leave it too long – the worst investment mistake anyone can make is to do nothing.
Sarah Belle is the webmaster of SmartPiggy -
clik.to/smartpiggy/ - a money management website designed especially for young adults. There's no sales pitch, just unbiased and easy-to-follow information to help you save money, invest smarter and build wealth.
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