A healthy approach to your investments is to question them…all of the time. No, it’s not about being obsessively paranoid but as Andy Grove, former CEO of Intel put it, “Only the paranoid survive”, and so, when it comes to investments, you do need to question and challenge the status quo.
For a start, it is important to understand that any investment portfolio must evolve with time. If for example, your investment objective is to deliver an income in retirement, then you MUST adjust the risks contained with your investment portfolio and the assets that underpin it.
Here are three forms of diversification that you should include in your portfolio.
Asset Class Diversification
There are many assets into which you can invest. Examples include precious metals, property, mutual funds (UCITS), company shares, Government Bonds and cash. With each comes varying degrees of risk but broadly, the higher the risk, the higher the expected rate of investment return. During periods of economic uncertainty, you might find the value of shares of companies operating in different industries might decrease significantly but during periods of economic growth, share values can rise significantly. To protect your investments, look to diversify across different asset classes.
One of the major features of investing in Ireland over the past 30-years or so was the reliance on buying Irish-based company shares. But this strategy proved costly on a number of occasions with the fall in share values due a range of events. While having an Ireland-bias for investments, it can and does pay to spread the risk globally for specific periods of time, subject to review and investment adjustment/ rebalancing. For example, due to the rise of the Euro, it is possible to include geographic diversification while reducing currency risk.
It can be common for those with investments in Ireland to have done so through Share Incentive Schemes at work or, to have benefitted through local creameries going public. Whatever the reason, such scenarios mean that many can and will be exposed to industry risk. If for example the employee works for a Pharma company, the expiration of a medical trademark can impact the overall value of the company shares. Or, in the case of a farmer with a significant share holding, the risk of loss of value will remain high. In all situations, those with share ownership should look for opportunities to reduce the industry risk by investing across different industry sectors, including utilities, services and technology.
There is no substitute for employing a long-term critical view of your investments. What worked one year may not work the next when it comes to generating returns and protecting the value of your investment portfolio. Diversification is a tried and tested approach that can help reduce risk and over the long-term and protect your investment wealth.