By James Hanning
Choosing shares and investment funds can be a tricky business and making inaccurate financial decisions can greatly damage your returns. When building your investment portfolio, consider the following tips to help avoid common pitfalls and safeguard your investments.
Overexposure to risk:
A common mistake for many people when creating a personal investment portfolio is overexposure to a particular type of risk. Putting all your money into one area will create concentrated exposure. Whether you invest heavily in one global area or place all of your assets in one type of industry, your portfolio will be overexposed. Should a crash occur in your chosen location or sector, your finances could be irrevocably damaged.
Investors who take a more diversified approach will see far less financial impact on their portfolios should a dramatic fall occur in a particular industry or country’s economy. A sufficiently diverse portfolio and good risk management are essential to the idea of reducing financial risk.
Spreading your money between different types of fund and asset class will help to protect yourself against risk. Selecting smaller companies as well as large firms and considering alternatives, younger economies will also help to create a well-balanced investment portfolio.
Inaccurate understanding of risk:
Inexperienced investors are understandably nervous about taking a risk with their hard-earned cash. Simply speaking, the more risk you take with an investment the greater the chance of higher returns will be. Of course, if the investment fails then losses are likely, but not taking enough risk can sometimes be just as damaging as taking too much.
Longer term investments allow for greater risk, as any short-term stock market volatility will even out over a greater length of time. A long-term view is essential when evaluating risk. The spending power of your capital needs to keep pace with inflation in order to avoid falling too far in terms of its real value. It is therefore vital to try and achieve an inflation-beating return on your investment by considering a fund with a sufficient risk factor.
Similarly, choosing to invest in a fund that is based on the perceived low risk of its well-performing past is another trap to be avoided. Investors may be tempted by a flawless performance, just as it begins to fizzle out.
Resting on your laurels and failing to monitor your investments can lead to poor performance. If the value of an investment has dipped for a considerable length of time and shows no indication of picking up its performance then perhaps it’s time to switch to an alternative fund. Making changes can improve the performance of your portfolio.
Likewise, it’s equally important to re-balance your portfolio in line with your own changing personal circumstances and attitude to risk. It may be time to take profits from a well-performing fund or reinvest them elsewhere in line with changing attitudes and predicted growth. While over-analysis and constant investment tinkering can be detrimental, monitoring and periodically rebalancing a portfolio is an essential element of successful financial investment.
*James Hanning is a broker with a successful property portfolio. He currently advises select student investment on a freelance basis and enjoys sharing his experiences of working within the finance industry.