You are probably familiar with the expression "don't put all your eggs in one basket". Officially found to date back to the beginning of the 19th century, it uses the image of the eggs all tossed into a rigid basket and suggests not to put them all together so as not to lose them all at the same time. This advice obviously applies to things other than eggs. One should never rely on one single means. On the contrary, diversify and always have several exit plans to avoid getting stuck if one of them turns out to be defective or bad. Managing an investment portfolio follows the same logic.
Investment products are a bit like eggs: they are fragile and incur risks. Risks are, of course, part of every investor's life. Any asset, regardless of its type, can have a negative return under certain circumstances and perform worse than expected. The risk is not the same for all assets, as this depends on several factors. To limit the natural investment risk and maintain profitability with lower risk, the best strategy is to build the portfolio from different types of assets. This way you avoid investing everything in a single security and losing all or part of your investment in an unfavourable situation. By diversifying your portfolio, you ensure that a drop in profits on one of your investments will be compensated by your other investments.
Broadly speaking, there are three main ways to diversify your portfolio: by industry, by type of asset and by geography. Thus, all business sectors have their own characteristics and do not undergo cycles or crises in the same way. Diversifying according to this criterion will help to overcome a possible crisis in a given sector. Similarly, the returns on different asset classes, such as equities, bonds and cash, never - or very rarely - go up or down at the same time. If one asset class has average or low returns, another asset class will tend to perform well. The losses on one will be offset by the gains on the other. Another smart alternative is to expose your investments to several different countries or geographical areas. Even though the economy tends to become more global, each country still retains its own economic characteristics. You can also combine all three types of diversification.
If you are interested in the stock market, diversifying your portfolio may seem relatively easy on paper. In reality, it looks somewhat different. The range of financial products is now so extensive that it is difficult, if not impossible, to put together a balanced investment portfolio without having in-depth knowledge of the market or the necessary time to really get to grips with it. Moreover, all this also depends on your appetite for risk.
One solution is to entrust investment decisions to a team of experts via a tailor-made asset management mandate. A portfolio manager will take care of managing your assets according to your needs and investment strategy. You can also delegate the diversification of your portfolio to asset managers by buying investment funds. You subscribe to a fund that is already diversified in itself and the fund manager himself selects and weights those assets that are likely to outperform the market. Another investment option is so-called “trackers” or index-tracking certificates. These are instruments that replicate the performance of stock or bond indices. This type of instrument closely replicates the performance of a benchmark market.
Also, make sure that you invest your capital gradually rather than everything at once, as the risk of entering the market at the "wrong time" could have a detrimental effect on your returns.
Investing is a good way to supplement your savings and attempt to make it grow, provided you’re well prepared for it. Here are the five fundamental questions you need to answer beforehand.
"The Personal Banker is a customer's key contact. He/she has a thorough knowledge of the client's situation and goals. Therefore, he/she is able to guide them towards the solutions best suited to their needs." According to Rafik Khendek, Lead Personal Bankers, and Elise Jacobs, Personal Banker at ING Luxembourg.
The answer is simple: no, not at all. Choosing between advisory and discretionary management offered by the banks is far from being a headache. It will depend on you, your financial knowledge and the time you are willing to devote to making your investment portfolio grow. To make things clearer, let's start from the beginning and review the main advantages of both.