The adage about “not keeping all of your eggs in one basket” rings true (oops I have mixed my metaphors) when it comes to investing.
Whilst it is fair to say that for some people keeping all of their investments in cash makes sense and for some an investment portfolio almost exclusively in shares might work, for the vast majority of people having a diverse portfolio makes real sense.
What do I mean by “diverse portfolio?” Well here I am not referring to products such as ISAs or pension plans; those are simply tax wrappers.
I am also not referring to a range of investment funds inside a tax wrapper (altough they well have a role to pay as you will see shortly).
What I am referring to is a range of investment “asset classes”. Put simply I am going to put investment asset classes into four distinct groups.
Cash – money in this context held in an account that earns interest. Perceived as low risk, low reward.
The capital is secure and the reward of that capital security is some interest that can be accumulated.
Even in a low interest rate environment, having some money in cash, for emergency purposes or to pay known bills, makes real sense.
The amount of an investment portfolio held in cash is usually relative to the investors attitude towards risk and reward but might also be to pay investment fund charges or to invest into other asset classes when the time is considered right to do so.
Fixed Interest – think of these investment assets as the next step up the risk and reward ladder. Effectively you are lending your money to a Government or a business in return for which they promise to pay you a fixed rate of interest.
This is not without risk because the borrower might in certain circumstances default on both the payment of interest and/or the repayment of the loan.
Risk also exists because fixed interest securities are traded and the price you buy and sell them at can rise and fall.
Property – and here we refer specifically to commercial property, offers the prospect of capital growth if the value of the property rises and a steady income of rental payments.
We all know of course that the value of property can fall as well as rise and of course it may not be possible to get a tenant in order to generate rent or a tenant may default in the payment of the rent.
But having some exposure in your pension or investment portfolio might make long term investment sense.
Shares – (Equities) are part ownership of a company. Rewards might come in the form of a share price that rises over time as investors believe the business is more valuable and dividend income which is the share of the profits made by the company.
The value of shares can of course fall as well as rise and the company may not make sufficient profits to generate dividend payments.
For most investors seeking to grow their money in the longer term it makes real sense to have a portfolio that is a mix of these asset classes.
It isn’t always the case but generally the asset classes move in different ways. For example, when share prices a falling there is often a flight towards fixed interest securities for perceived safety.
And when share prices a expected to rise investors sometimes move our of fixed interest and buy equities.
Not having all your investment eggs in one basket generally makes sense.
You can achieve this by either buying multi-asset class investment funds or as we prefer to do selecting a range of single asset class funds to match an identified investment view.
Either way diversification makes sense.
