Investment Strategies

2 Basic Types of Risk Investments
As far as risk is concerned, there are 2 basic types of investment:

  1. Investments with LOW risk.
    This includes investments such as government stock or local body stock and other bank fixed interest type investments. Government stock is 'gilt edged' which means it is very secure and almost risk free. Because it is rare for a government to become bankrupt and not meet its obligations for government stock investments, this type of investment is low risk and attractive to those concerned with the safety of their capital.

    Other low risk investments could include debentures offered by companies and secured by the companies, or fixed interest type bonds available from those companies. These are riskier because of the possibility that any company can fail and therefore take your investment down with them.

  2. Investments with HIGH risk.
    High-risk investments will always be those promising a much higher return such as property and investment in companies by way of shares. Because there is no guaranteed return from these investments, it is dependent on the results of the company or the property market at any time. The fact that the decision as to a return on shares is made by the directors who have to take the needs of the company into account as first priority, means that the dividend income return the investor receives can never be depended on and could vary from year to year.

    Property will depend a great deal on the economic state of the country, as well as confidence in the property market. High-risk investments usually can produce higher capital gain over time and so this makes this type of investment attractive to those prepared to take a risk in order to make a higher capital return.

Try not to Panic
When share prices drop it is normal for everyone to get nervous about the value of their investments. Some investors always jump in to redeem their investments when prices are high and buy into the market when prices are low. Profiting from short-term market fluctuations generally requires more luck than skill.

The best defence any investor will have against the volatility in the market is time. This means the longer you stay invested in the market the less impact any short-term fluctuations will have on your investment portfolio.

It also means that if you move in and out of the market frequently, it can have significant consequences. For example, you may sell your shares and then be hesitant to re-enter the market, which means you will miss out on any future upswings. Unfortunately, in order to get financial reward from your investments, you always need to assume some risk.

This requires taking the good with the bad, and while there is never any guarantee your investments will winners, it can strengthen your share portfolio and improve your chances for financial reward by maintaining a long-term plan.

The main thing is – don’t panic. Think through every aspect of investment before making any further decisions.

Types of Diversification
Diversification, as already explained, is making sure you spread your risks by not putting 'all your eggs in one basket'.

Diversification includes:

  • Diversification by country.
  • Diversification by company and industry.

(a) Diversification by country.
By purchasing shares from overseas you will not have to rely so much on the economic conditions in the USA alone. Exposure to a number of industries is essential for a proper diversification programme of your share portfolio. This exposure to overseas economies achieves a better diversification for the the USA investor. Purchasing shares from overseas companies rather than relying on the the USA economic conditions will help reduce the investor’s risk significantly.

(b) Diversification by company and industry.

The other thing you cannot afford to do is wrap up all your investments funds in the performance of one company. If the company runs into problems, you could lose the lot. You need to share your investment funds among a number of quality shares involved in quality companies, as part of your portfolio.

They don’t have to be chosen at random. You can do a little homework to assess the performance of different companies within different industries, as each will respond differently to the market. Adding more shares to your portfolio and having exposure to a larger number of different companies will reduce your risk.