What is the importance of diversification?
If you know anything about investments, you will have likely heard the term diversification, which means to hold a range of different types of assets. For example, if you only invest in tech stocks, you may wish to diversify by adding utilities.
The primary reason why investors diversify is to mitigate risk and reduce loss. For example, if all of your investments are held up in a single asset class and it crashes, you stand to lose everything. Whereas, if you have diversified you investments, one asset class can depreciate while another increases in value.
What is the difference between a diversified or a concentrated portfolio?
A diversified portfolio involves spreading investments across a range of different assets and markets. A concentrated portfolio, is essentially the polar opposite, i.e., holding only a few assets.
What is the definition of asset allocation?
Every investor needs to have a strategy, and asset allocation is one of them. This type of strategy involves balancing risk and reward by splitting investments depending on personal goals, investment horizon, and risk tolerance.
There are three main asset classes you’ll come across: cash and equivalents, fixed-income, and equities. Each of these has a different level of risk against the reward and they all act differently, which is why it’s worth investing across them all.
What is the role of risk management in a investment portfolio?
Whenever you part with your cash and invest it in an asset, there’s an element of risk involved because you no longer have hold of that money. Luckily, there are ways to manage the risk, and this is called risk management. Essentially, it involves identifying risks, accepting the risk, or working around the risks of a given investment.
Risk management will look different to everyone, as each investor has a different risk tolerance. For example, if two investors are looking to buy assets using £100, it doesn’t mean they’re willing to purchase the same assets. Low-risk investors may search out secure assets like dividends. On the other hand, high-risk investors may back an up-and-coming cryptocurrency. In this case, the high-risk investor is much more likely to lose £100.
How can I track the performance of my investment portfolio?
Naturally, you’ll want to keep track of your investment portfolio, but it may be spread out between various platforms. The most common way to track a portfolio in the digital age is by using brokerages, robo-advisers, and other financial apps. However, this comes with an extra element of risk, as it will be visible to a third party that may not be the most secure.
If you’re happy to spend a little time creating or editing a spreadsheet on Google Sheets or Excel, you can track your investment portfolio yourself. Although there’s a fair bit of setting up to do, the sheet speaks for itself once it’s set up.
Your portfolio is the collection of all financial investments, including cash-based assets and investments in collectables. Managing a portfolio depends on individual risk tolerance, goals, and investment timelines.