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Are your investments diversified enough for the second wave?

Stock market turbulence around the corner? Here’s how you can help get ready to weather any potential stock market storms.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Coronavirus has impacted all of us, in lots of ways. The economy’s been turned on its head, and as part of that, so has the stock market.

Now, governments and communities alike brace themselves for a second wave. Added to the mix, we have the likes of Brexit and the impending US elections hanging over us. If there was ever a time for investors to batten down the hatches and make sure that their investment strategy could weather a storm, it’s now.

Nobody knows what will happen in the months ahead. But we do know that keeping your investments well diversified across a range of assets, sectors and geographies is one of the best ways to spread your risk. As noble prize winner Harry Markowitz famously said, “diversification is the only free lunch in finance”.

New investors are taking too much risk

Lots see market ups and downs as an opportunity to jump into the stock market, try to make a quick buck and then get out before it falls. In reality this is near impossible to get right, and things normally don’t end up going well.

CNBC reported that popular investment platforms in the US saw new accounts surge by as much as 170% in the first quarter of 2020. These fresh-faced and younger investors mostly funnelled their money into technology stocks they know of and use, without considering the wider market.

But there’s a problem. These new investors aren’t diversifying their portfolios. Instead they’re relying on the fate of one sector. That only spells disaster for any future market turbulence around the corner.

Investing is not a game

You might have done your research, and you might be sure that you’re onto a winner, but at the end of the day, there are no guarantees. And with one bad run, you could end up sacrificing a large chunk, if not all, of your money.

Spreading your money across different holdings is not just sensible, it’s essential. Your wealth is important, so you should look after it. It’s what you need to reach your financial goals or carry you through your retirement years.

So, if you don’t have the mind-set of keeping your investments for the long term, then you shouldn’t be investing.

After all, as one of the greatest investors of our time, Warren Buffett, put it: “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes’’.

How to tighten up your investment portfolio

Now’s a good time to review your portfolio and make sure that you’re in a good shape for the road ahead.

Here’s a simple five-point checklist to help you make sure you’re ready for any potential market storms to come:

1. Check your risk

How much do you have invested in one stock? If it’s more than 10%, you might have a problem. That’s probably too much risk to put in one company. History is riddled with over-confident investors who put too much money into one ‘fail-proof’ venture.

Spreading out your wealth also spreads out your risk. It might be tempting to invest heavily in one sector (like tech, healthcare or consumer staples) today. But try to take a step back and consider how your investments will look over the next twenty or so years. Today’s hottest stock could be tomorrow’s laughing stock.

How many shares make a diversified portfolio?

2. Think about a core-satellite investment strategy

While a core-satellite investment strategy might sounds like a mouthful, in reality it’s a very simple idea.

If you have some stocks that you love and believe in, of course you should feel free to invest in them. But it shouldn’t be your entire investment strategy. These stocks are normally better to hold as a kind of side dish to your main investment portfolio. This style of investing is known as a core-satellite strategy.

As a core-satellite investor you’ll have a main group of investments, well-diversified and matching your risk profile. This is normally quite a sensible portfolio, filled with a good mix of funds and some cash (depending on how soon you’ll need it).

Then, for that added pop of adventure and even more diversification, you might have a few stocks that you think will do well in the long term on the side – known as the “satellites”. If you imagine planet Earth as your main portfolio, and some satellites orbiting around as the more adventurous stocks, that should give you an idea of the style.

Building a core-satellite strategy

3. See if you have enough diversification

Finding the right amount of diversification for you, is more of an art than a science, and different people have different opinions. Some might want hundreds, others might even want thousands.

The take away here is that there’s no right answer as it depends on your own circumstances. What looks good to some might not look good to others.

However many stocks you have, one of the most cost-efficient ways to do this is through investing in funds. If you’re comfortable in picking your own investments that fit your investment goals and attitude to risk but need some help choosing funds, you could think about the HL Wealth Shortlist – a collection of funds selected by HL analysts for their long-term performance potential.

Or if you need a little more help with building a diversified portfolio, you could think about Master Portfolios.

This article isn't personal advice. If you're not sure if an investment is right for you make sure you ask for advice.

4. Think about when you might need cash

It’s always important to consider your financial needs. Nearly all financial advisers would encourage investors to have a rainy-day fund. But nowadays that might be even more important than before. It’s better to invest less money which you can afford, than more money which would land you in difficulties further down the line.

How to decide on what to do with your money

Unlike cash, investments will rise and fall in value so you could get back less than you put in. If you’ll likely need the money you’re investing within the next five years then you’ll be better off staying away from the stock market.

But just because you might need your money sooner rather than later doesn’t mean you can’t get it working for you. The Active Savings service can help get your money working for you no matter when you need it. You can pick and mix easy access and fixed-term savings products from a range of banks and building societies, all in one online account.

Discover Active Savings

5. If in doubt, talk to an expert

Financial advisers are a bit like accountants – the good ones should pay for themselves.

To get investment direction, which is completely tailored around you, reach out to one of our experts. Having an initial conversation is completely free, convenient and could give you peace of mind for the months ahead.

If you’d like to talk to us about financial advice, our advisory helpdesk is your first port of call.

This free, no obligation call is to help you understand:

  • The extra support we offer
  • Why our expert financial advisers could be the answer
  • How financial advice works, including the benefits and charges

Our helpdesk won’t give personal advice on this call. If you decide financial advice is right for you, an adviser will be in touch within two working days.

Talk to us about financial advice

Hannah Duncan is an investment writer, and founder of Hannah Duncan Investment Content, with years of experience producing content for global leaders in finance and retail.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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