Get Your Portfolio Healthy.
As we move into 2011, gym memberships are taken up (and dropped as quickly); the running paths around Hyde Park are at their ‘new trainers’ busiest, and new resolutions are still being kept to. So why not make sure your investment portfolio is knocked into shape and made as healthy as you are?
With a new year comes the perfect opportunity to sit back and take stock of your investment portfolio, see what shares you are holding, maybe trim a bit of extra weight from it, and crucially, check your portfolio remains effectively diversified.
Diversification is the key to any healthy investment portfolio. It all comes down to personal risk preference, but there are a number of rules worth following to make sure all your eggs are not in one metaphorical basket. And the more you know your portfolio is diversified, you can start to feel comfortable taking on more risky, potentially fast-growth, shares, as long as you are not investing money you can’t afford to lose.
Diversification should be seen as a pyramid, with cash at the bottom.
Cash is the most liquid type of asset. If you have all your money in a cash account you have access to it any time you want. This means that it is in many ways the safest ‘investment’ and all investors should hold enough cash to meet their needs. However, with interest rates at a record low, savings accounts are not performing at all well, and as inflation is growing, your cash holdings are unlikely to be breaking even.
Fixed Income Bonds
Buying a bond is essentially like lending money to a company or government, and in return they commit to pay you back with interest after a certain time period. There are low yield, low risk bonds, such as government bonds, and then there are corporate bonds which have higher returns and consequently higher risk.
The main risk with owning bonds is that the counterparty won’t be able to pay you back when the bonds mature. The other downside is that your investment is only able to be liquidated at the date set by the bond, typically, 2, 5 or 10 years. But if you have some money saved up you don’t think you’ll need over the next few years, it makes sense to hold some in bonds.
FTSE 100 Shares
Stocks offer the best potential returns out of these particular asset classes, but are also the highest risk. Within your share portfolio, investors should also diversify between what is considered more stable shares in blue chip companies, and more high risk shares which can suddenly soar in value, and just as easily lose it.
These should not be considered stock tips, and investors should always speak to an independent financial advisor before investing, but to give an idea of some blue-chip stocks, look at ever-popular companies such as Barclays. A stalwart of the FTSE 100, Barclays, like all banks hasn’t always subscribed to the view that bank stocks are a safe haven, as the banking crisis of 2008 showed us. Bank shares crashed as credit dried up, but as the recovery slowly starts to take hold, the FTSE 100 is still often where the most stability is to be found. Trading at around 273p before Christmas, Barclays was at 320p in September, and could easily see these levels again. Another banking crisis would see them hit hard, but it is a stock many investors keep in their portfolio for stability.
HSBC is another bank, which is kept in many portfolios for diversification. During the banking crisis HSBC turned down the bank rescue scheme, saying a bailout was unthinkable and its balance sheet was strong. This has kept HSBC trading in a relatively tight range, with its 52-week low 595p and its 52-week high 747p. Before Christmas it was trading at 664p.
Outside of the banking sector, the telecommunications company Vodafone is often held as a stable, FTSE 100 company. Trading at 164p before Christmas, it has gone to 126p in the past 52 weeks and as high as 179p, so there is some volatility as with all companies, but it is worth additional research.
Higher-Risk (AIM) Shares
At the top of the diversification pyramid are higher risk shares, which are typically smaller companies quoted on London’s Alternative Investment Market (AIM). These companies can often be highly volatile. The upside to investing in these companies is the shares can be bought cheaply; meaning if there is a surge in share price large profits can potentially be made.
Here is a quick look at some companies on the AIM market which investors have found success with. However, this is not an invitation to invest in these companies and care should be taken before any investment is made.
On the 2nd of December, Desire Petroleum released news saying it had found oil in its drilling prospect off the waters of the Falkland Islands. Its share price immediately soared 24%. Then on the 7th further news showed the fluid they found was actually water. Their value plunged by more than half. A look at the 52-week history of Desire Petroleum shows a 52-week high price of 180p, and yet a 52-week low price of 35p. This severe volatility would have been very profitable for investors buying at the low point and selling at the high point, but very bad news for people on the other side of that trade. Before Christmas it was trading at 70p, but don’t expect that to last long, it could go either way depending on its future discoveries.
Arian Silver is an emerging silver producer, trying to build through a mixture of exploration and development in Mexico. The range of prices this share has seen is not for the faint-hearted, with a low of just 3.13p and a high of 41.50p, trading at 39p just before Christmas. Holders of stocks like these can see prices go either way extremely quickly, seeing their portfolio grow by 40% or 60% for example. However, these prices can equally fall away and should be a relatively small part of an investor’s overall portfolio.
By following the principles of the diversification pyramid and doing in-depth research into each company you look at investing, as well as getting good, independent, advice, you will be going about the business of potentially investing on a solid footing. So with that, here’s to a profitable 2011!