Thinking about diversifying your investments? Here’s what you need to know

The saying “Don’t put your eggs all in one basket” warns against relying on one plan for success. When it comes to investments, the expression is helpful for handling your funds and achieving better financial gains.

Whilst there is no need to change your investment strategy for the sake of it, at times, it can be beneficial to consider rethinking your current approach and exploring different types of investments.

So, where do you start? We’ve got a few pointers to get the ball rolling…

Spread the wealth

Diversifying your investments, also known as broadening your portfolio, involves distributing your funds across various assets. For example, if you have £50,000 that you’d like to invest, you could divide the fund up and place it in several different investments rather than one. In doing so, you could be limiting the chance of all your money being affected by poor performance; if an investment performs poorly, only this fund would be altered; other potentially better-performing funds may provide a bit more of a cushion.

In short, allocating your money to several investments means that where there is a loss, there is still a chance for growth.

Get to know your risk appetite

Much like everything else in life, how you approach investments is unique. Some of us would rather experience investing without putting our money at significant risk, while others might feel better suited to portfolios with higher risk with the hope of achieving larger potential gains. In financial terms, the level of risk you’re comfortable with taking, combined with the amount of money you are able to lose without resulting in major financial detriment, is called your risk appetite. Your risk appetite can help you understand your approach to investments and will likely influence your decisions.

For example, if you have a higher risk appetite, you are better suited to investments which may have a more volatile performance but have the potential for larger gains.

That’s why, when approaching investing, you should start to understand what you hope to gain and the level of risk you’re willing to venture to. Misunderstanding your risk appetite could lead to investing in a portfolio unsuitable for you and losing money you didn’t wish to. When analysing this, ask yourself the following questions: are the funds you’re using vital for future plans, are they your only savings, and is avoiding loss crucial?

Understanding investment types

You should understand the products you’re putting your money into, especially when diversifying your investments. Depending on your goals and risk appetite, specific options offer different benefits.

For example, stocks and shares investments provide flexibility, so you can buy or sell them at any point.

On the other hand, bonds are usually inaccessible for some time and can carry higher levels of risk, but they can potentially have higher rewards (depending on the type of bond and the market).

Another option could be illiquid assets, which include investments like real estate, retirement accounts, and collectables. Illiquid assets can provide less market risk but with longer-term value, although they can be harder to sell. Acknowledging the pros and cons involved means you can deduce how your investment might perform should you opt for that product.

When distributing your funds across different products, it’s crucial that you know how easily you can access them should you ever want to withdraw, the levels of risk involved, and if there are any initial required amounts to invest. This should all be considered before you decide on the types of products you select when diversifying.

Decide with advice

If you’re unsure whether investment diversifying is the best option, it is crucial that you seek advice. Independent financial advisers, like the team at My Pension Expert, will review your current circumstances and goals to create an investment strategy aligned with them. We work with our clients to ensure they are comfortable with the advice they receive and that they understand it.

As risk is often associated with investing, our advisers will ask for your level of agreement to a series of statements to gauge your risk appetite. The questionnaire will touch on subjects relating to your attitude to risk, capacity for loss, and overall investment knowledge and experience. The results will determine the portfolio your adviser recommends.

Deciding to diversify with advice removes any doubt, and you can take comfort in the fact that the decisions are tailored to you.

Speak to an adviser today to see how diversification can strengthen your investments.

*When investing, capital is at risk.