DIVERSIFICATION is the surest way of reducing risk and makes for a less volatile portfolio.
Diversifying among several or all the various asset classes is the best strategy for the average investor.
The recent volatility in the markets only further highlights the strong case for diversification in one's portfolio.
Everyone's circumstances differ and this determines your investment strategy.
Investing in order to maintain one's lifestyle in approaching retirement, for example, is a very different process and requires a completely different investment strategy to those attempting to create wealth.
Those already in retirement need to consider life expectancy and ensure that they have achieved some growth on their investments.
The performance of the various asset classes have varied over the past 10 years and there is a lesson to be learnt from this.
It is very difficult to predict which asset class is going to perform best on an annual basis. But many of us do try to do this and get our fingers burnt in the process.
Past performance is no indication of future performance.
When making diversification decisions one has to carefully consider various factors, including time horizons, expectation of return, appetite for volatility and liquidity and income needs.
The following are some basic guidelines in helping you to make these decisions:
lBe realistic - a conservative investment is not going to double in value every five years, - and an aggressive one is not going to give you a smooth ride.
lPatience - if you are taking a long-term view, don't stress about short-term fluctuations in markets and currencies.
lGoal setting - understand what you are trying to achieve with each investment you make.
lBe proactive - re-balance a portfolio if the percentages originally allocated to your chosen asset classes is out of kilter. This ensures you continually lock in profits of any asset class that has become too heavy due to good performance.
lTime horizons - the less time you have to commit to your investment the less risk you can afford to take.
lSecurity - It is important to know who you are investing with. If you are offered interest well above the going rate, beware, because if it sounds too good to be true, it probably is!
lPlan for Tax and Estate Duty - there are many legal ways to reduce Tax and Estate Duty, and thus enhance the growth of your investments.
lKnowledge - there is no longer any excuse for investors to claim they did not understand before renewing or making a new investment.
Intermediaries are obliged in terms of the new FAIS Act to make full disclosures on risk levels, charges, commissions etc to any potential investor.
lShop around - if you don't feel completely comfortable with any aspect of the advice you are getting, don't be afraid to ask for a second opinion.
lThe writer is a director of Pioneer Financial Planning. Visit www.pioneerfinancialplanning.co.za