Planning for retirement can be a tiresome activity, especially if you’re not sure where to begin. That’s why we’ve decided to give you a hand by explaining how to build the profitable portfolio that will save you in the long run.
After our last retirement planning blog post, we decided to flesh out our thoughts in two more comprehensive blog posts. Building your portfolio is dependent on understanding four factors: diversification, currency, timing and redeploying income. Today, we’re going to look at diversification and currency in detail, so that you know on which foundation to build your portfolio.
Diversification is Mediating Risk
According to Investopedia, “Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.”
When you diversify, you do so from an understanding that markets will always fluctuate and that we can’t control that. Nothing is ever certain, only probable. That’s why, despite your certainty of a stock’s rise or fall, it’s important to diversify to protect your investments as a whole… because they might still surprise you. The beauty of a well-diversified portfolio is that where one stock falls short, another will rise to make up the loss.
In order to diversify well, you’ll need to:
- Understand what your investment goals are (short-term, long-term, or a combination) by completing your investment profile.
- Decide at what level of risk you’re willing to investing into (create your investor profile).
- Analyse which stocks, properties or markets match your investor profile.
When you’ve selected your investments, divide them between their risk factors (market cap, industry, geography, etc.). Diversification spreads your specific risk-level investments over multiple sectors, meaning that you're able to manage and limit your risk. Of course, undiversifiable risks (political unease, war, geological disasters, etc.) will always find you, but if you’re protected against your investments’ other risks, these will certainly hurt less. A good portfolio should have a balance of high, medium and low risk slices (depending on your investor’s profile, which you should have answered when setting up your portfolio). In short, diversification is surety for the future.
Currency is Temperamental
It’s up, it’s down, it can be all over the place or it could be stationary. Despite its movements, currency is something to keep your eyes on. Depending on how you’ve invested geographically, currency may singlehandedly be the blessing or curse that controls your investments… but we wouldn’t recommend that being the case.
Three top thoughts on currency:
- All currencies fluctuate, just like markets around the world, and this is inevitable. Don’t let this deter you, but treat it as you would a stock, pay careful attention and try to use it to your advantage.
- You can protect yourself against currency dips by diversifying globally. This is called geographic diversification, and allows you to invest in multiple currencies.
- You can take advantage of businesses trading in weak currencies, because they will be selling on the cheap. However, the opposite applies for businesses trading in strong currencies. This is why currency shouldn’t be a factor in making your investment decisions.
Retirement planning may well be tiring you out, but understanding how to build a strong portfolio will give you peace in the long run. And we all know that retirement is about investing in a peaceful future. That’s why this is just a taste of what can be found in our Practical Guide to Investing for Beginners: Building Your Portfolio eBook. If you’d like to know more, just grab our eBook below.