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Investment strategy: Risk-proofing your portfolio

The Financial Conduct Authority is cracking down on misleading investment marketing communication and advertisement. Crypto marketing has avoided the purge – for now – but new guidelines will make investment firms do more to ensure their products are appropriate from a risk perspective for potential customers and highlight all the positive and negative consequences of an investment.

Mike Charalambous, director of Invezz, the investor training and education platform said: “The pandemic has brought forth a new batch of investors that are younger and more diverse – some of whom do not have the financial education to understand the risks and thus have been more vulnerable to misleading ads – which gave the FCA concerns about how misleading adverts were influencing these consumers’ investment decisions.”

The FCA has therefore decided to ban some inducements such as ‘refer a friend’, and wants firms to make risk warnings more prominent – ​​which is especially relevant with the cost-of-living crisis that could induce people to go after higher risk investments in hopes of getting higher returns on their investment.

Under the stricter rules being developed by the FCA, companies that approve and issue marketing must have suitable expertise, and firms that market certain types of high-risk investments must do more thorough inspections to guarantee that customers and their investments are appropriately matched.

Risk tolerance

Charalambous said: “There is always some risk with any investment, and you have to decide how much to take. All assets will change in value, and your portfolio is likely to be in the red at times. Setting a budget in advance can manage your appetite for risk.”

He continued: “In addition, not every investment carries the same risk? large, established companies are safer than newer, unproven ones. Investing based on what you read online, such as ‘tips’ on social media, is a lot more dangerous than doing your own research and understanding the potential risks to each company and industry.”

It is important to look at an investment portfolio as a long-term enterprise, as opposed to a short-term cash-grab. Some speculation is good but basing one’s entire investment strategy on it is no better than putting a tenner on the greyhounds.

“Rather than attempting to earn quick money by timing the market, it is generally preferable to focus on a longer time frame in the market. Smaller corrections will have less consequence on your portfolio this way. It also enables you to employ a strategy called dollar-cost-averaging, in which you invest the same amount at regular intervals. You don’t have to worry about figuring out the ideal timing to buy a stock when you use DCA,” said Charalambous.

Diversify

Talk to any investor or financial advisor, and the rule of thumb to protect your assets is: diversification. A portfolio needs to be balanced across asset classes (equities, bonds, money markets), industrial sectors (such as industrials, technology, healthcare etc.) and geographies (UK, Europe, North America, Emerging Markets). Never put all your eggs in one basket.

“Not every firm or industry in which you invest will do well at all times. You can minimize the risk of your portfolio encountering downturns by investing in a diverse range of firms, industries, asset classes, and locations. This approach will reduce the overall risk of your investments,” said Charalambous.

With all of the technological tools at our disposal, it is easy to check, monitor, analyze and worry about our investments. Constant checking isn’t good for your mental health, but it is prudent to keep track of your investments regularly.

Charalambous said: “Monitoring your portfolio on a daily basis is definitely counterproductive if you’re investing for the long run. Regularly checking your investments, on the other hand, is a fantastic method to keep track of how your money is performing.”

He continued: “Reading business annual reports, keeping up with industry news, and having a strong grasp of the latest developments and shifts will help you make intelligent judgments regarding whether to purchase or sell.”

Stop-loss

One way to counter the itch to be checking in on your portfolio every five minutes is to set a stop-loss. Most investors can benefit from implementing a stop-loss order. A stop-loss is designed to limit an investor’s loss on a security position that makes an unfavorable move. One key advantage of using a stop-loss order is that you don’t need to monitor your holdings daily. However, short-term price fluctuations can activate the stop and trigger an unnecessary sale.

“An order you place with your broker to automatically sell an investment at a specific price is known as a stop-loss. Stop-losses can give your investments somewhat of a safety net and are best used in accordance with your risk tolerance. Stop-losses not only give peace of mind but are one of the best ways to reduce your investment risk,” said Charalambous.

Invezz has other investment insights online and has explored portfolio risk in detail.

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