Hey, remember that house you considered buying but didn't five years ago when the market was gasping? Know how much it is worth today? Gagging, eh?
By now you must have realized that it's practically impossible to forecast when any type of upswing will happen. Besides, that's high-risk strategy. When certain stocks (especially in the technology sphere) were way up there on the totem pole a few years back, many investors figured they could make a killing. We all know what happened. Who got killed?
Most financial planners advocate that their clients have a diversified portfolio. Although it will translate into lower returns against plunking all your shekels into one winning investment (ah, Microsoft), it will certainly be better than if you had supported the worst one by mistake. A huge advantage of diversification is that it helps to lower risk but still provides a steady overall return. This is primarily due to the fact that different types of investments behave in a myriad of ways. For instance,
- Deposit accounts with banks will offer capital security plus interest, albeit quite small. But, this is good for those who need to have cash on hand in case of emergencies. Today, people should have an amount equal to three months worth of living expenditures.
- Fixed-interest securities, or bonds, are issued by governments and companies who are looking to borrow money from investors. They pay a fixed rate of interest for a specific term. The security of an investor's capital depends on the financial strength of the organization borrowing the money. U.S. government bonds are considered extremely secure as it is deemed unlikely that this government will fail to repay its debts. As you know, bonds do not have to be held until maturity. They can be bought and sold but their prices will depend on supply and demand.
- Property investment includes commercial premises and residential property. Returns can consist of a rental income plus potential increases in capital value. Incidentally, prices usually don't increase or decrease by as much as share prices.Of course, there is a disadvantage in owning physical property: it is a non-liquid investment.
- Equities is a term used to describe shares and funds that invest in shares, including unit trusts, investment trusts, et al. One key advantage is that equities offer the possibility of significant income and capital growth. Historically, they have produced better returns over a period of time than other types of investments. Investors, of course, need to remember that as shareholders they are part owners of businesses. Accordingly, if a business does well, then the shareholders can also do well but if the whole thing blows up, there may be nothing around but dust. So, investors here must be prepared to take the rough with the smooth.
A financial planner worth his or her salt will tell clients to have money in each of these investment areas. Guaranteed, there are no rules carved in stone about what percentage should apply. How the capital is divided will depend on how much is available for investment and how much risk one is prepared to take. For example, the more modest the capital, the less risk. This could range from 40 percent for the conservative investor down to 10 percent for higher risk takers.Incidentally, fixed-interest securities or bonds can provide a lower risk element. They could represent 35 percent of a portfolio, decreasing to 10 percent for those who are most risk-friendly.
Including property in a portfolio is more difficult because of the outlay required. Low-risk investors may consider putting 10 percent of their portfolio into property while those willing to take more risk may consider 40 percent.
And finally, stocks always involve some risk, but those who are in there over the long haul should include them. This could range from 10 to 25 percent for those who want a low-risk exposure.
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