If you weren’t paying attention, you would barely know what a spooky month October has been for investors. As analysts debate and discuss what caused this volatility in the equity markets globally, you and I can agree on the shared anxiety it has created.
What would you rate as one of the most reliable safeguards against stomach-churning market volatility in the stock market? I would say ‘diversification‘, both among your investments and within your share portfolio. November might be a good month for you to revisit your investment goals for 2019.
What is your risk tolerance?
In investing, risk and return go together; where there is a potential return, there is also a potential loss. For example, since the end of the financial crisis of 2008, most technology shares have been the darlings among investors; there seems to have been no limit to how much some of these stocks can appreciate. However, the past few weeks have also shown investors how far and how fast they can fall. On the other hand, a savings account at a UK-regulated bank or building society guarantees the safety of your money for up to £85,000 per person, yet offers a relatively low annual return.
Asset allocation – which can simply be defined as how you’d divide your investments among shares, bonds, bank-deposits, as well as other types of investment vehicles such as real estate or physical gold – determines your portfolio risk and returns. The aim is to strike the right balance between more potentially volatile assets such as shares and more stable ones.
Constructing a diversified share portfolio that works for you
Once you have decided how much of your wealth you would like to have in equities, it is time to look at how you want to allocate your money among different types of shares.
How many shares should you have in your equity portfolio? The answer would partly depend on the amount you have to invest and how much time you can spare to follow your shares. If you are not a seasoned investor, it might be better to start small; you can always increase the number of shares you hold if the company performs well in the long run.
Diversification will not eliminate all the risk in your equity portfolio. But your long run risk/return ratio is likely to be more attractive. A share portfolio constructed of different kinds of companies and sectors will, on average, yield higher returns and enable you to ride out the volatility of the stock market.
Are you in the markets for the long term?
How can you keep calm and carry on investing when the FTSE 100 has fallen to a seven-month low? Building an all-season portfolio to weather the choppiness in the markets does not have to be difficult! At The Motley Fool we believe in holding shares for the long term. Well-performing shares tend to keep on winning; therefore, a fall in their share price during a market downturn might give you the opportunity to buy more into those shares as long as you still believe in the fundamental story of those companies.