How to spice up your portfolio

25 February 2014

So, when you have more money to invest, be it a lump sum or an increase to your monthly savings, you may well want to add a bit more oomph to your portfolio.

This might be through investments in emerging markets, a more specific region such as Latin America, or you may want to move away from the giants of the FTSE or the Nasdaq and invest in a smaller companies fund. Alternatively you might want to invest around specific industries such as healthcare and pharmaceuticals or mining and natural resources.

However, at this stage investors shouldn't get too cocky and plough a fortune into higher risk investments. With performance data so easy to access it's all too tempting to just buy up last year's winners.

At the other extreme, buying up depressed stock on cheap valuations is only a bargain if prices do actually rise. A few years down the line and your portfolio could end up being a very random mish mash of investments with no sense of strategy or direction.

You need to pay as much attention adding to your portfolio as you did when you set it up. Think about your goals, what you need to achieve and how much risk you are really prepared to take. You also want to be sure that you have the right asset allocation for your risk profile.

How to choose the right funds for you

Even for less aggressive investors, if you have a lengthy investment horizon it can make sense to invest in higher risk sectors. The key is to steady yourself for some inevitable volatility and only invest small sums. Think of these holdings as being ‘satellite' holdings that are spicing up your ‘core' bread and butter portfolio.

For higher risk fund ideas check out the Moneywise Fund Awards 2013

Investing a lump sum into a volatile sector can be particularly high risk. If you invest £1,000, and markets fall by 10% you've quickly waved goodbye to £100. However, this risk can be reduced by drip-feeding your money into the markets.

Reducing your risk

2013, for example was not a good year for emerging markets. According to Chelsea Financial Services, someone who invested £1,200 into the average emerging markets fund at the start of the year would have ended up with a disappointing £1,151 – a loss of £49. But had the same investor drip-fed their money into the markets – paying in £100 every month – they would have ended up with £1,240. It's not exactly an impressive gain, but importantly, it's not a loss.

Of course the reverse can happen in rising markets - where paying a lump sum in at the start of the year will make you more money - but in volatile markets where big drops are par for the course, it's a useful way of controlling risk.

Staying in the game

Once you have committed to your higher risk investments you then need to have the nerve to stick with them. While you should hope for long-term gains, you need to be able to handle short-term volatility - give your chosen fund manager time to prove their worth.

When one fund falls, chances are most of the funds in the sector will fall too – so as long as you still want to be in that sector, you only need to think about switching if your fund manager is underperforming their peers year in, year out.

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