When a person decides to invest money, we often hear the term diversification. Of course, to diversify means you do not put all your eggs in one basket, and you manage the risk by spreading it across different investment facilities and or risk profiles.
No matter what the flavor of the month might be (the dot com craze, cryptocurrencies, emerging markets) it is always good to keep in mind that history will always repeat itself. There will always be an up cycle as well as a downward fall when the market reaches its peak, saturates, or becomes obsolete.
By spreading the risk, you limit your exposure. Through diversification one investment will carry the other in good times and vice-versa. Your long-term growth is more secured and guaranteed with diversification and this article will try to help see how to go about doing just that.
What Are My Options for Investment Diversification?
We are going to look at three main options we thought should be discussed when diversifying your investment portfolio. They include traditional banking investments, Peer-to-peer (P2P) lending, and the good old stock market. There are other options, but these are the most popular ones if you consider your time and investment effort as an average Joe and not a professional trader.
Traditional Banking Investments
Traditional banking would normally offer fixed term deposit facilities and savings accounts. These are the products we all grew up with, and like Mr. Banks in Mary Poppins, we all knew no other place to put our “tuppence.”
The face and duty of the banking industry has however changed, leaning more toward a source of credit and a facilitator of transactions (hence offering transactional accounts on their secure platform).
You could utilize traditional banking if you want to play it safe with a certain portion of your money. Just keep in mind, low risk also means low return. Your funds will hedge a small growth. HSBC in the UK for example only offers 1.6 percent for a six months savings booster. Looking at emerging markets on the other hand, Capitec Bank in South Africa offers around about 7 percent.
Remember to be clear about your outcome. Consider the impact of inflation on your return as well. There is no point in receiving 1.6 percent on your capital when the UK inflation rate was reported by the Guardian at 2.4 percent for May 2018. If you want to keep some of your funds somewhere safe and with easy access to it, then it makes sense to use this option.
Peer-to-Peer (P2P) Investments
The P2P market has taken off with a successful track record of over a decade. Lending Works has a nice explanation about the value of P2P lending as a consideration of your investment portfolio. Even they argue that within P2P lending you should safeguard yourself through diversification.
Some platforms utilize a third-party peer-to-peer automated rebalancing tool to assist you with risk calculations. The P2P market is very competitive and well-priced loans are snapped up quickly. The high default rate however could catch up with you if you do not manage your risk exposure well enough.
It’s also good to remember that P2P loans are also not state guaranteed as is the case with traditional banks, although the UK does have some consumer protection in this regard. The fees are often fair, but be mindful of tax implications in your region, the remittance charges, and the handling fee of some P2P providers.
Shares are more a long-term investment consideration despite the allure of a fast return. Shares can be considered a volatile investment in the short to medium term. They are often reliant on the health of the market’s local economy, currency exchange rate, and political climate.
Shares can also react to perceptions created in certain circles. We all have the Steinhoff scandal fresh in our minds where a mere suggestion of possible irregularities sent the share price tumbling.
If you are not familiar with share trading, you could get a broker to manage your portfolio. Unit trusts are often considered a smart way to start out and it puts your money in the hands of an expert as explained by Money UK. Keep in mind that there will be brokerage fees and tax implications. If you play your cards right, you might find share trading rewarding.
Which Is the Best Investment?
The best investment is a diversified one. We recommend considering all the above and more. If it’s something you don’t know much about, then do your research and speak to your local financial advisor. In the end, you need to weigh up what your needs are and what it is you want to achieve.
Just keep in mind that there are no real get-rich-quick schemes and most investments need to mature over a period. If something sounds too good to be true, it normally is. Also remember to factor in any cost of investment to see what your true return will be.
Lastly, look at what you can invest in the short, medium, and long term. This will help you to formulate a combination that works best for you.