Protecting your income with a diverse investment portfolio

Many of the wealthiest people in the world derive much of their income from their investments. You don’t have to be rich to start with, however, to become an investor. Even a small amount of surplus cash can generate a regular return if invested wisely, and from that small initial investment, you may be able to grow and expand your portfolio until it gives you a significant lifelong income stream.

Successful investing is about playing the long game. In the long term, a wise investment, however small, should give you a better return over time than the same amount squirrelled away in a savings account, even with generous interest rates. However, it’s important to be aware right from the beginning that investment is intrinsically risky, and that the value of your investments can go up as well as down.

Know your risks

As a general rule, these risks are greater in the short term than in the long term. In most cases, if you hang on to your investments long enough, you’ll be able to ride out any market fluctuations that see their value fall, so that eventually, they will be worth more than you paid for them – sometimes by quite a large amount. However, sitting tight and holding your nerve doesn’t eliminate all of the risks associated with investment.

The bottom line is that there is no such thing as a risk-free investment. The possibility that stocks or commodities may fall in value, or even become worthless, is the flipside of the possibility that they may rise in value. You can’t have one without the other. Obviously, you will invest in an area that seems likely to gain in value rather than lose value, but you can never be sure that this will be the case, especially in the short term.

Complex factors

There are many things that can affect the value of your investments. These include economic and business factors, and also geopolitical turbulence, trader sentiment, technological innovations, and even social trends and fashion. Being able to predict these movements and their effect on your holdings is the mark of the great investor, but no one has a 100% reliable crystal ball when it comes to the markets.

The golden rule

The best and most time-tested way to protect your investments, and therefore your income, is to have a diverse portfolio. This is the golden rule of investing, and one followed by every successful business investor. Even Evangelos Marinakis, who is known primarily as one of the world’s leading shipping magnates, has more diverse investments than you might think. These include two football clubs (one in Greece and one in the UK) and a wide range of shipping interests.

Diversification lowers risks and can theoretically lead to higher returns. It is based on the sound principle of not putting all of your eggs in one basket. Spread your investment across different asset classes, business sectors and geographical locations so that if one commodity or market should take a downturn for whatever reason, you’ll still be covered by your investments in other areas.

A disciplined approach

Diversification requires self-discipline. While it may be tempting to put all of your money into certain stocks when they are clearly on the rise, it is safer and more sensible to keep at least some of your money in a range of other areas. This is not to say that you should never rebalance your investments. A healthy portfolio is regularly updated, and assets can and should be bought and sold according to your inclinations and instincts.

20 or 30 different investments are generally considered to be a healthy amount. This is enough so that your wealth is spread around, but not so much as to make your portfolio unmanageable. Investing in several different companies as well as commodities, currencies and real estate should give you a balanced portfolio that will see you through both bad times and good.

Staying safe

Fixed-income or index-linked funds are another way of protecting yourself against market volatility. Because these are index-linked and track the performance of a broad index, they are less tied to the fortunes of one particular sector. These funds usually have a low management fee as they are pretty simple to operate. As a general rule though, you should definitely keep an eye on how much you’re paying in fees and commissions on your investments. These can chip away at your savings and may be a reason to move them around if they seem to cost too much.

However much you have to invest, a diverse and balanced portfolio is generally the safest and most beneficial option. A broad range of interests is better than a narrow one, as even industry specialists are aware.