One key factor that all investors should look when investing is their own attitude to risk. This is normally part of the fact finding questionnaire that a financial adviser will undertake with a client when they first meet. This will help the adviser structure a portfolio for the investor.
Diversification traditionally means a mix of equities, bonds and cash. Greater diversification within these areas will be into equity or bond funds where the investors can get a better diversification than they would be able to achieve from individual purchase of a share or bonds in one company
Once the equity percentage has been calculated based upon your risk profile the adviser will discuss which equity funds you want to invest in. Again each of these will have a different risk return profile, which hopefully should meet your desired outcome whilst keeping your level of risk down to an acceptable target.
Once the equity holding percentage has been set up, the investor’s needs to decide what percentage should be allocated between cash and bond funds. This allocation helps to protect the portfolio against adverse movements in the equity part when equity markets are not trending upwards.
This level of portfolio diversification is ideal for the investors who have not taken the time to develop their knowledge of investments to the next level. It will enable them to sleep better at night, but will still leave them after a few years wondering why the returns on their portfolio have been disappointing.
This buy and hold strategy I believe is only effective when financial assets are increasing in value. This strategy is not particularly effective when the financial markets are moving sideways or downwards. Fund managers try to hold a greater percentage of cash during these periods but don’t have strategies to make money for the investor during this part of the cycle.
Advice in this market situation will be to hold defensive income yielding equities. What this means is Companies who regularly pay dividends And whose shares will drop less when the market is falling, don’t believe this will prevent you from still losing money
Your asset allocation during this period will be moved more towards bonds and cash, but again this is to help preserve capital, it is not designed to make you significant returns. This strategy is fine for the more risk averse investor, but is not particularly effective for the more aggressive investor.
A good investor will select a fund that has strategies for making a profit irrespective of whether the market is moving upwards, sideways or downwards. The only funds that have this trading strategy are hedge funds. The management of these funds aim to make money in three markets rather than just the one for traditional funds.
The investor needs to invest in some form of hedge fund that will have strategies in place to deal with sideways markets and down markets. Personally I would rather have my money in a fund that has a strategy of trying to make a positive return under these market conditions. I would rather invest with a fund that has a strategy for all parts of the market cycle rather than only one out of three.
Now Hedge funds were once the sole preserve of very wealthy investors who would need at least 25,000 to invest. There are however Managed Forex accounts that are available to investors who only have 5,000 to invest. The returns they have been achieving over the last 2 years are an average between 2% and 4% a month, after fees.
Whilst most investors have been suffering capital losses over the last few years, with most financial assets, investors in these managed forex accounts have achieved returns on average of between 30% and 60% a year depending upon the fund they were invested in. This is my opinion is true portfolio diversification.
Isn’t it about time you diversified your portfolio more effectively? Performance figures for these funds on request.