What to look for when choosing an investment
Diversification is a key part of a good investor’s playbook. When you invest, the first thing is to understand risk and how you can manage the risk you’re exposed to.
This is why it’s important to have a diversified portfolio.
But what does diversification mean?
Essentially, it means spreading the investments in your portfolio to generate a certain level of return and reduce your exposure to any potential losses.
Different types of assets don’t all go up and down at the same time. And different companies in different industries also do well and less well at different times. Think of it as having multiple eggs in several baskets.
When building your portfolio:
- Choose a range of assets and hold multiple investments within each asset type
- Pick assets across different industries (for example IT, consumer goods or pharma) and company sizes (small, medium and big companies)
- Spread your investments across the whole world rather than being focused only on one region, like the UK
- Consider your fees since they can quickly add up and reduce your total return on investment
If picking stocks or choosing assets for your portfolio seems overwhelming, funds are a great choice to get started with. You get to easily spread your money across different types of assets, which also spreads your risk. Alternatively, you can get started with a robo-advisor with ready-made portfolios to choose from based on your risk profile. Both of these options can be done at a low cost.