Investment diversity, meaning?
Discussion
Avoiding the 'eggs in one basket' perhaps.
I am sometimes amused to hear people say, I must to have some of my money invested in overseas funds.
They don't seem to be aware that many of the UK's biggest companies, do most of their business in overseas countries, and therefore in many different foreign currencies.
An example of a spread of geographic risk, and currency risk.
terrydacktal said:
Mark300zx said:
Have a couple of quid to invest and want to know what the above means or will it entail a sit down meeting with an FA?
It means be diverse with your investments. As an example I have a SIPP as a pension. I invest in in multiple funds (which are in turn invested in multiple shares/countries). That means my investment is unlikely to be hit a major upset (unless the USA attacks NK!). Its far less risky that buying into a few shares.
Mark300zx said:
Have a couple of quid to invest and want to know what the above means or will it entail a sit down meeting with an FA?
Simplest way to do that would be DIY, no need for an FA. If you aren't using your ISA allowance, open an Investment ISA (using moneysupermarket to find the cheapest platform), you can contribute £20k p.a.Invest it in a variety of low cost index tracking funds and forget about it. Portfolio composition probably depends on age - the younger you are the more you should go risk-on (i.e. equities and the smaller FTSE indices), older you are go more towards bonds. Also depends what your time horizon is to get the money out.
Some on PH are rockstar traders and seem to be able to beat the market reliably. My job is investing but for my own money I just prefer to get the market return and not worry about trading too frequently. Maybe I'm leaving a couple of % p.a. on the table but life is too short.
Jockman said:
Similarly, do not OVER diversify.
I spoke to someone a while back who was going to invest in Japan simply because he did not yet have a Japanese fund in his portfolio. No other reason.
I spoke to someone a while back who was going to invest in Japan simply because he did not yet have a Japanese fund in his portfolio. No other reason.
Best of luck to 'someone' with that then.
Japan were dominant, particularly in consumer electronics, but their glory days have not been very easy to keep going.
I hear that the present 'queue around the block' in Japan, is for heat not burn electronic cigarettes. Not a Japanese company though.
Edited by Jon39 on Thursday 7th September 14:39
It is more about asset allocation. Large cap, medium cap, small cap, bonds, gilts, property, land, precious metals, etc. It depends on how far you want to go.
There are geographical elements to fosters into this (with US equities you may be best with large cap, UK smaller cap, or the opposite) and then thematic considerations (pharmaceuticals/tech/banking/everyday goods/etc.).
It can go on and on. What it really means though, is don't put everything on red or black.
The smaller your portfolio the easier it is to diversify, the larger it is the more effort needs going into it.
You can pick up many low cost ready made portfolios that will do everything for you, but has been said don't over do it. To much diversification can really hit your investment returns.
There are geographical elements to fosters into this (with US equities you may be best with large cap, UK smaller cap, or the opposite) and then thematic considerations (pharmaceuticals/tech/banking/everyday goods/etc.).
It can go on and on. What it really means though, is don't put everything on red or black.
The smaller your portfolio the easier it is to diversify, the larger it is the more effort needs going into it.
You can pick up many low cost ready made portfolios that will do everything for you, but has been said don't over do it. To much diversification can really hit your investment returns.
NickCQ said:
Mark300zx said:
Have a couple of quid to invest and want to know what the above means or will it entail a sit down meeting with an FA?
Simplest way to do that would be DIY, no need for an FA. If you aren't using your ISA allowance, open an Investment ISA (using moneysupermarket to find the cheapest platform), you can contribute £20k p.a.Invest it in a variety of low cost index tracking funds and forget about it. Portfolio composition probably depends on age - the younger you are the more you should go risk-on (i.e. equities and the smaller FTSE indices), older you are go more towards bonds. Also depends what your time horizon is to get the money out.
Some on PH are rockstar traders and seem to be able to beat the market reliably. My job is investing but for my own money I just prefer to get the market return and not worry about trading too frequently. Maybe I'm leaving a couple of % p.a. on the table but life is too short.
Diversification of a portfolio is the only free lunch in financial markets. Generally you should get a higher return for an asset that is risky vs an asset that is less risky. However, if you diversify your portfolio (say 13 different stocks) the covariance of risk wrt the different stocks means that you will get a higher return with a lower risk as a result.
Mousem40 said:
This is good advice.
Diversification of a portfolio is the only free lunch in financial markets. Generally you should get a higher return for an asset that is risky vs an asset that is less risky. However, if you diversify your portfolio (say 13 different stocks) the covariance of risk wrt the different stocks means that you will get a higher return with a lower risk as a result.
Lower risk? Yes. Higher return? Not so sure...Diversification of a portfolio is the only free lunch in financial markets. Generally you should get a higher return for an asset that is risky vs an asset that is less risky. However, if you diversify your portfolio (say 13 different stocks) the covariance of risk wrt the different stocks means that you will get a higher return with a lower risk as a result.
sidicks said:
Mousem40 said:
Diversification of a portfolio is the only free lunch in financial markets. Generally you should get a higher return for an asset that is risky vs an asset that is less risky. However, if you diversify your portfolio (say 13 different stocks) the covariance of risk wrt the different stocks means that you will get a higher return with a lower risk as a result.
Lower risk? Yes. Higher return? Not so sure...In my long experience of the stock market, about the only thing that we can be certain about, is never knowing which way the market will go next.
The only way to be sure of a higher return, is to select a business that will continue to increase their profits at a high rate, but how can you be certain that will actually happen? Steadily higher profits will eventually mean a higher share price.
With your own share portfolio, say with diversification of about 25 companies, individual share price movements should be of little interest, because the annual performance of companies can vary so much year to year. It is the overall portfolio percentage changes that are more important, growth and income.
My way of diversifying, has been to have long-term investments in large, mostly non-cyclical, defensive businesses.
Even by staying within the FTSE 100, you can have diversification with industry sector, geographic trade and currency spread.
During market downturns, the portfolio usually continues to make surprisingly good progress, because the share values have tended to fall less than the market average. If you can get ahead of the game during difficult times, it all helps with the long-term percentage growth.
One of the differences in risk between small and big companies, has always been evident. If both face major trouble, then the big businesses are more likely to have the resources to survive, both talent (existing or new) and financial. A recent example is BP. A small oil explorer would not have survived that disaster, so shareholders would have lost all of their investment.
Always remember the risk though, so never use money that you will need to live your life.
Edited by Jon39 on Saturday 9th September 16:55
Getting diversity by using an index is safest if you happen not to be George Soros.
But of course it will expose you to sectors that may be in the doldrums.
I like to shift or increase my non US exposure when the Dollar is strong and repatriate when the Dollar weakens, hopefully grabbing a little currency gain along the way.
I recently (last week) reduced my Emerging Markets and Asian funds as they had both returned close to 30% ytd and placed the proceeds in an American Allocation fund on a one Month low.
I know it's not so easy for UK investors to diversify out of UK because of the relatively weak Pound and the expense ratios in UK based funds.
But with a possible rate rise (inflation up) the Pound could gain, although at 1.32 maybe that's already factored in.
Giving a possible op to maybe invest in a European Fund, Giving you a bet on both horses re Brexit.
Investing is about maintaining the value you have, hitting a six will only happen once or twice in a lifetime.
A little understanding of how markets work can help, prices of companies will get pulled up or down by the index, no matter how well or badly the company is doing. The pull of indexes will probably increase as Index funds increase in number and their managers have a mandate to buy the shares in that index!
So the average P/E at which you enter an Index fund can have a greater importance than it did 20 years ago because of index funds.
In essence companies are being bought and possibly inflated just by being in a major index.
The effect would of course be lesser in less covered index like the 250 over the 100, giving a more true growth derived from earnings, which is how it should be.
Oh dear, I have rambled on. Sorry.
But of course it will expose you to sectors that may be in the doldrums.
I like to shift or increase my non US exposure when the Dollar is strong and repatriate when the Dollar weakens, hopefully grabbing a little currency gain along the way.
I recently (last week) reduced my Emerging Markets and Asian funds as they had both returned close to 30% ytd and placed the proceeds in an American Allocation fund on a one Month low.
I know it's not so easy for UK investors to diversify out of UK because of the relatively weak Pound and the expense ratios in UK based funds.
But with a possible rate rise (inflation up) the Pound could gain, although at 1.32 maybe that's already factored in.
Giving a possible op to maybe invest in a European Fund, Giving you a bet on both horses re Brexit.
Investing is about maintaining the value you have, hitting a six will only happen once or twice in a lifetime.
A little understanding of how markets work can help, prices of companies will get pulled up or down by the index, no matter how well or badly the company is doing. The pull of indexes will probably increase as Index funds increase in number and their managers have a mandate to buy the shares in that index!
So the average P/E at which you enter an Index fund can have a greater importance than it did 20 years ago because of index funds.
In essence companies are being bought and possibly inflated just by being in a major index.
The effect would of course be lesser in less covered index like the 250 over the 100, giving a more true growth derived from earnings, which is how it should be.
Oh dear, I have rambled on. Sorry.
Before you decide which investments you want to take you need to look at your risk profile.
This is something most IFAs don't take seriously, IMHO. They just tend to look at a balanced portfolio based around your investment sum, ongoing contribution and stage of life.
I second the DIY route if <20k PA. (or <40k PA if a couple).
If its more than that then SIPP / IFA.
This is something most IFAs don't take seriously, IMHO. They just tend to look at a balanced portfolio based around your investment sum, ongoing contribution and stage of life.
I second the DIY route if <20k PA. (or <40k PA if a couple).
If its more than that then SIPP / IFA.
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