Never put all your investments in one basket

Turmoil roils the financial markets after four years of positive rises.

Turmoil roils the financial markets after four years of positive rises.

It has been obvious for a while that the markets needed breathing space, and the recent volatility provides just that.

Where does this leave investors? They are subjected to information overload what with e-mail, the Internet and the ease of accessing information.

So no one can blame them for not knowing what to do.

Most investors are clearly puzzled. Confused investors see an article in the press or on a television show discussing particular strategies.

In many cases investment decisions are based on how investors are feeling - negative or positive - rather than on fundamentals.

If the information that investors have access to corresponds with their current feelings, they might act on what they have heard or seen.

But making an emotional decision is dangerous, especially when investors are sidetracked from their original investment fundamentals and goals. Another danger is that if investors act on advice from the media they might not read, hear or see when that advice changes or is updated.

Another interest rate hike is looming and the inflation outlook has become a little negative, with expectations of upwards trends.

These are some of the factors that affect the markets.

So how do investors avoid the confusion and the conflicting opinions on investments?

They must find a strategy that removes the short-term information from the equation. Though it is impossible to predict what happens in the short term, investors who take a long-term approach can mute the volatility and confusion.

The first step is to determine risk tolerance, which goes hand-in-hand with time horizons.

The younger you are, the more risk you can afford to take.

Your risk tolerance also determines the nature of your asset allocation. Sensible investors always diversify their investments among cash, bonds, property, equities and hedge funds. They also decide what percentage goes into which asset class.

All investors should regularly re-balance their portfolios. This will ensure that their risk profile remains what they had selected.

Investors can always change or adjust their strategy if needed. But to work out the balancing and weighting of a portfolio, work closely with your financial adviser because selecting assets and percentages is a complicated process.

lBryan Hirsch is chief executive of Pioneer Financial Planning.

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