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Investing your Money? Diversify!

I have a fairly long history of running my own investment portfolio going back to the late 1980’s, and the country like now, was in recession territory, but what it does teach you is that if you can invest successfully in those conditions then you should be OK in much calmer water.

One of the main things that I have learnt from investing my money is that there really is not any replacement for having an investment portfolio that is widely diversified in assets. Now frankly, that is a bit of a mouthful but what I mean to say is that the chances of your money doing well is largely reliant on the type of assets you invest in, rather than a specific company share, bond or even savings account. Figures indicate that around 90% of your investment return is dictated to by the kind of things you put your money in.

Example: say you think that the world is going to hell in a handcart (not an unreasonable view at the moment) and that you don’t trust anyone to invest your money wisely and want it somewhere relatively ‘safe’. So, you put it all in cash savings accounts and keep it there for say 5 years. If the last 5 years are anything to go by putting a lump sum of say £10,000 in cash would return (with your capital) a total of £11,885 or an average interest rate of 3.77% per annum. Now that takes no account of inflation, which over the same period amounted to 17%, so your money would have only just about beaten inflation.

But what if you were more adventurous and put your money somewhere a bit more racy?

What about the stock market for instance? If you elected to put your £10,000 in a FTSE 100 Tracker (that replicates how the top 100 UK companies perform), that £10,000 would now be worth £10,100- a return of just 1%- substantially less than putting your money in cash, although the last 5 years have been a very torrid time for stock markets in general.

So, what about Bonds? These ‘Corporate Bonds’ are basically IOUs that companies issue to its investors and you can get your capital back at the end of the term together with a fixed income amount which can be paid monthly, quarterly or yearly. Well, a 10k investment in the average Corporate Bond fund would have returned a very handsome £12,110 – or a 21.1% return of the half-decade, easily beating shares and also cash.

How about Government Bonds (or ‘Gilts’ as they are properly known)? Well, £10,000 would have returned an even more impressive £14,280 or a total return of 42.8% or around 8.5% each year.

And what about the much talked about asset of Gold? Well, that really beats the lot as your £10,000 invested in 2007 would now be worth a whopping £23,160 or around 26% each year. Let’s look at those figures together:

  • Gold     + 131.6%
  • Gilts     + 42.8%
  • Bonds  + 21.1%
  • Cash    + 18.85%
  • Shares  +1%

The range of returns is actually quite huge from a measly 1% for shares to a massive 130%+ for gold and of course, this just looks at the last five years, the next five years, indeed the next 5 days, may not perform in anything like the same way. The stock market may recover which would likely lead to diminished returns for the ‘flight to quality’ and so-called more ‘secure’ investments such as Gilts, Bonds and Cash.

What I have learnt though is that in the world of investing the adage of ‘no one knows anything’ is a sound maxim and that in order to reduce the risk of you losing money to the latest trend or fad but also to increase the chance of making money, it is prudent to invest in a range of asset classes- so for example if you had invested your £10,000 across the five investment areas above (£2,000 in each) you would have got back after the five years a total of £11,885 – a return of 18.85% - identical, incidentally, to that of cash, but it would have reduced your risk that by putting all your money in any one asset class that your money would have been in jeopardy if there was a ‘crash’ during that period or even if interest rates were slashed at various points.

I think that asset allocation and good diversification of your money is key to protecting and growing your nest egg, so that you spread your risk/returns- but, as ever, whenever you talk about money, do get independent financial advice. I did and it has paid off. So far.