Diversify your portfolio
"The old phrase 'don't put all your eggs in one basket' couldn't be more appropriate when it comes to your investments," says Justine Fearns, investment research manager at independent research manager AWD Chase de Vere.
"A diversified range of investments should help you achieve your financial goals by evening out the ups and downs of the stockmarkets over time."
To get diversification in your portfolio, you'll need to spread your portfolio across four different asset classes. These are, in order of risk: cash; fixed interest (gilts and bonds); property; and equity, which is also known as stocks and shares.
Each asset class has a different risk rating and, although everyone should have some exposure to each, the proportions will vary according to your attitude to risk.
For example, if you're more cautious, you should have a higher percentage of cash and fixed interest than someone looking for as much growth as possible with a portfolio full of equity and property.
Cash aside, there are further opportunities for diversification within the asset classes.
For example, within equities you can gain extra variety by investing in the shares of different sized companies, different industries or different countries or regions around the world.
Generally, risk increases as the size of the company reduces, with small caps (smaller companies) usually seen as higher risk than the large blue chips.
You'll get more diversification in a collective fund such as a unit trust or an open-ended investment company. These invest in anything from 25 to 200-plus different companies. This is much easier and cheaper than buying lots of shares yourself.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.