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Asset Management
Asset Management - Diversifying Your Portfolio |
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The key to a secure long term financial future is to make sure that you are well diversified in
terms of exposure. This means having a good spread of assets that cover both the main geographic
markets and the types of investments. No one has the knack of backing just winners. Therefore, it is only to be expected that some investment choices will perform less well in either the short or medium term. Whether you are active and hands on in managing your investments or a passive bystander letting fund managers handle your affairs, you should ensure that you have a balanced spread of investments to guard against a single asset class failure. So what are the options for the more adventurous investor looking for a way to boost returns in an era of low interest rates, poor dividends and hit and miss capital growth? Volatility in markets can mean that there are rewards to be had for the more risk aware investor. Large swings in share prices over short periods mean that it is possible to make big gains, or losses, based on spread betting. With the growth in on-line companies now offering education, trading software and accounts it is easy for the average, home based consumer to try their hand at making significant returns. In addition to spread betting on share price movements, it is also possible to trade in foreign exchange by buying and selling currencies and hoping to cash in on the movements in relative values. On a typical day, the Euro can move by up to 200 points against the US dollar – but fees and margins mean that you need to be able to take large positions to capitalise on small movements. Some companies offer leverage positions of as little as 1% - meaning that a $10,000 bet buys a position on $1m of currency. Trading on fixed margins or spreads means that good returns can be had for a small stake. However, currencies can move in either direction so the leverage effect also works to multiply loss positions. Most trading software allows you to minimise your loss through the use of a stop loss limit. This triggers and crystallises when currencies (or spread bets) move against you to a point where you would lose as much money as you can afford. With today's markets now open 24/7, it is always possible to take a position on a share price, market index or currency. The bet can be for a short period or held open for longer if you believe that the movements will improve in your favour over time. So buying a forward option in shares, currencies or commodities can be a useful, if risky, addition to your wealth portfolio. Since the stakes can be high (both positive and negative) it is not for the faint hearted and should be undertaken slowly at first until some experience is gained in how the markets move. Relative safety can be had in the betting of market indices. Since these are an amalgam of share prices and can be a bellwether of general economic sentiment, it may be easier to associate with their movement than with, say, an individual share. Likewise, trading in commodities can be linked, loosely, to economic sentiment since metals such as gold tend to be safe haven investments at time of turmoil. Other metals such as copper, coal and oil are linked more to the general economic demands so rise when things are going well and fall when demand drops. Movements in currencies are harder to predict since they reflect the relative attractiveness and risk rating of individual economies versus one another. Therefore, a currency may appreciate in value relative to another based on any number of factors rather than just economics. Government policy, economic and fiscal strength and long term gilts (government borrowings) all mix together to determine their value. A less risky way in to all of these types of investments is through one of the many investment funds that have broad exposure to a number of companies, currencies or commodity markets. So whilst the risk is reduced, so too is the opportunity for significant returns. Looking at the underlying investments in these funds can be a guide to what the experts believe to be the winners and losers. |