How to build the right investment portfolioNew research shows investors aren't diversifying
15 January 2013
Scores of investors are failing to protect their nest eggs by getting the right mix of investments they hold in their portfolios, according to new research by Lloyds Private Banking.
Investors failing to diversify their portfolios
A widely-held first principle of investing is diversification. The idea is that holding a mix of asset classes – including shares, government or corporate bonds, commodities like gold or silver, property and cash – will spread risk and help achieve a balanced, less volatile portfolio.
In theory, when one asset class falls, others could rise or offer greater protection, meaning fewer sleepless nights in turbulent times and steady progress over the long term. Because some asset classes are considered safer than others, you can adjust your allocation according to your attitude to risk.
Yet new research from Lloyds Private Banking suggests that wealthy investors disproportionately favour property and the stock market at the expense of lesser known assets like corporate bonds. Moreover, this is also true among investors who claim their portfolios are well-diversified.
Investors don't recognise the risk they take
The survey of 1,399 adults with over £250,000 in savings and investments found that only 19% hold corporate bonds, 16% government bonds and 7% precious metals. Where as 79% hold shares and 41% hold property investments (excluding their main residence).
Despite this, when questioned few investors acknowledged that their portfolios are imbalanced, with only 17% accepting that they are not well-diversified. Of those who accept the charge of overexposure, 21% take the view that one or two asset classes will significantly outperform others. However, 37% state that they are simply unsure where else to invest.
Is your portfolio as diversified as you think it is?
As the research demonstrates, some investors will take a considered view and favour certain asset classes over others – and if you are happy with increased risk this is not necessarily a bad approach. But it's imperative to know your options and explore those assets you are less familiar with in order to make informed decisions.
As a starting point, Which? has created a number of investment portfolios, which can help you within which assets to invest based on how much you'd be comfortable losing.
And you can find out more about the risks of investing your money and how they might affect the money you place on the stock market by reading our expert guide to investment risk.