Portfolio insulation

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While it cannot guarantee against losses, diversifying your portfolio effectively – holding a blend of assets to help you navigate the volatility of markets – is vital to achieving your long-term financial goals and for insulating your portfolio.

Your potential returns available from different kinds of investment, and the risks involved, will change over time as a result of economic, political and regulatory developments, as well as a host of other factors. So, your money needs as much time as possible to grow – at least ten years is best, enabling you to benefit from compounding. This is when the income on your original capital begins to earn and grow too.

Stay focused on long-term goals

It is easy to become reactive when markets fall and alarming news headlines make you want to rush into investment decisions. But market volatility and falls are a natural feature of investing. During these times, it is possible that emotions may overcome sound investment decisions – the key is to stay focused on your long-term goals.

This is why it is important that your overall asset allocation needs to reflect your future capital or income needs, the timescales before those capital sums are required or the level of income sought, and the amount of risk you can tolerate. Investing is all about risk and return.

Individual attitude towards risk

Not only does asset allocation naturally spread risk, but it can also help you to boost your returns while maintaining, or even lowering, the level of risk of your portfolio. Most investors would prefer to maximise their returns, but every investor has their own individual attitude towards risk.

Pooled investment funds also enable investors to gain access to a diverse range of funds that invest in different things, with different strategies – high income, capital growth, income and growth, and so on.

Reflecting prevailing market conditions

In order to insulate your portfolio, it should be diversified. With a diversified portfolio, investment managers actively change the mix of assets they hold to reflect the prevailing market conditions.

These changes can be made at a number of levels, including the overall asset mix, the target markets within each asset class and the risk profile of underlying funds within markets. As a rule, an environment of positive or recovering economic growth and healthy risk appetite would be likely to prompt an increased weighting in equities and a lower exposure to bonds.