In this post, we're going to look at some ways to invest to manage risk.
Blend Assets to Manage Risk
The practice of combining assets into a portfolio is called asset allocation. There are lots of studies into this but it is widely accepted as one of the largest factors contributing to the success or otherwise of your portfolio.
Conventional wisdom is that the greater the equity content of your asset allocation, the higher the risk or volatility of the portfolio. As we’ve seen in earlier chapters, risk is important to our future wealth, so we mustn’t shy away from it. You’ll learn further in the blog series that our behaviour as new accumulators is a much bigger factor.
The difficulty for novice and experienced investors alike is that volatility has the ability to trigger behaviours in us which might detract from our success as investors. While I can write thousands of words about how risk is necessary and we should embrace it, if that same risk or volatility leads you to lose sleep and eventually to make a bad decision to sell your investments just to stop the pain, then I’ve done you a disservice.
Use Platforms to Invest
One last word about the mechanics of investing. If you’re going to use funds like trackers and ETFs to invest as I suggest you do, then you need somewhere to buy them. This is usually achieved using an investment platform.
There are loads of these available these days, so to save you a ton of time researching the available options, I suggest you download free copy of the guide produced by my friends at The Lang Cat consultancy. It’s due an update this summer, but is still very relevant. Choose your platform based on a few factors:
- Cost – percentage-based fees are better for smaller investment amounts, fixed fees for larger pots. Some fixed-fee platforms also charge dealing fees. Chances are you’re not going to be trading that much, but make sure you know what the implications are of regular investment each month – will there be a trading fee each time? What about reinvestment of dividends? Know the costs before you invest.
- Ease-of-use – you want to be able to see what’s going on with your account, to trade and to get info about gains and losses etc easily, so a system with a good user experience is a must.
- Financial strength – make sure the platform you use is well-established. You still want it to be there in a few years, ideally. Not that they can take your money with them if they go bust, but it’s a hassle you don’t need.
- Research tools – there are thousands of funds to choose from, and some kind of filtering and research tool will help you narrow down the field.