Selecting investments that don’t lose money seems impossible. After all, how can you predict whether an investment can go up or down? Surely if you could pick these investments, you’d be a millionaire!
The only ‘investment’ that truly doesn’t lose you money is that of a Cash ISA or a savings account. By using these bank accounts, you give your money to the bank to hold and save for you, in return you receive small amounts of interest for giving them the privilege with zero risk of your money going down.
You see the reason you only receive small amounts of interest is because of the ‘Risk -v- Reward’ matrix. Investors expose themselves to greater risk (such as volatile stocks or even Cryptocurrency) but give themselves the potential to gain vast rewards!
Unfortunately – savings accounts are literally zero risk and therefore the rewards are not going to be far from this either.
Now don’t panic, I’m not going to leave it at that – I have a few tips for you to implement in your investment selection to reduce the risk that your investments lose you money.
Portfolio Diversification
The best – and I mean the BEST, way to reduce the risk that your investments lose you money is to have a diversified portfolio.
What Does This Mean?
Having a diversified portfolio essentially means that you have a wide range of investments that aren’t all to do with the same thing. This could be having investments in different countries, different industries/sectors, different investment types – the list goes on.
The beautiful thing about doing this is that it hedges your bets against a bad investment taking your portfolio into the red!
The ULTIMATE way to diversify yourself without needing to worry about doing a mountain of research is to invest in funds and indexes/trackers. I’ll explain these later.
Diversification by territory
Let’s take an example of the US presidency campaign between Biden and Trump – during this period. There were points in the election race where they were neck and neck and there was mass uncertainty as to whether Donald Trump would be re-elected.
‘Yeah but who cares?’ Well… you would if you had ALL of your money invested in US companies! As investors have different expectations of how well each candidate will manage policies, they were buying and selling like crazy – this made the US stock market crazily unpredictable and investments in the US were scary to watch.
I personally have stocks in US companies and it was not a fun ride… however, my portfolio didn’t dive because 40% of my investments are US based – the other 60% of my portfolio continued growing so I technically lost zero money.
Here’s my current breakdown for those who are interested:
- North America – 39.9%
- UK – 29.3%
- Europe – 12.1%
- Emerging Asia – 6.1%
- Japan – 5.3%
- Developed Asia – 1.4%
This is by no means perfect, but it helps me keep growing!
Diversification by industry
Similar to ‘Diversification by territory’ – you should also consider having investments in different business sectors or industries.
Let’s use another example – remember COVID-19? That thing that is still shaking up our lives? Well, although pretty much EVERYTHING fell – airlines were the worst hit and are still super depressed at the time of writing. You know why? ALL international travel has been restricted for 1-2 years… you can imagine how upset you’d be if you’d only been invested in airline companies.
To keep yourself from losing too much money from investments, try to keep yourself spread across a few different industries – preferably none that have any correlation with each other. That way, if there is any breaking news that hits one sector hard, you’ll still have a portfolio that keeps performing well.
Again, here is how my portfolio is diversified:
- Technology – 23.33%
- Consumer Discretionary – 13.01%
- Consumer Staples – 10.28
- Industrials – 10.87%
- Healthcare – 9.64%
- Financials – 6.79%
A Brief Word On Investment Types
Before I talk about diversification through investment type – I wanted to give a little overview of what each investment ‘does’, so you can see how each could become volatile.
- Bonds – debt issued by businesses/governments, you receive interest at a coupon value, these are seen as low risk and tend to do well when the market is perceived to be too high;
- Shares – issued by businesses on the stock exchange which allows holders the right to receive profit distributions. Technically, you will own part of the business if you invest;
- Funds – this is essentially a professional team of investors’ portfolio. They take a small piece of your earnings (usually less than 1%) but in return, they monitor EVERYTHING and tend to have well balanced/diversified portfolios;
- Indexes/Trackers – this allows you to invest in a sector or ‘bucket’ of companies as a whole. A good example would be the ‘FTSE All-Share Tracker’ – this essentially means you’re invested in EVERY SINGLE SHARE that is listed on the FTSE, just without the admin; and
- Cryptocurrency – not traded on the stock market but could make up some of your portfolio of investments. My recommendation is to steer clear as there isn’t much in the way of valuation that can be done to determine if a ‘good’ price to buy in.
Diversification by investment type
Following ‘A Brief Word On Investment Types’ – you should have some idea of the different things you can invest your money into. Now let’s look at how being invested over a few different investment types can actually help reduce the risk of losing money.
Bonds tend to be super low risk, however they do still fluctuate and can do very poorly if everyone is investing in stocks. Therefore, if you’re also invested in stocks – if everyone is buying them then your stock growth is going to fly!
You could see this as a double-edged sword – ‘why would I want to invest in bonds if I know shares are doing well? Surely I should just fully invest in shares so I don’t lose anything on bonds?’. I see your logic but let’s be smart about this – all it takes is one bad piece of news and shares could become seemingly unattractive and plummet… guess who just lost a tonne of money.
Being partly invested in bonds and partly invested in shares helps to hedge against any huge movement in either investment as they tend to be inversely correlated i.e. as one goes up, the other tends to go down.
As a rule of thumb, aim to be 25% in Bonds and 75% in Shares when the market is perceived to be low, then 25% in Shares and 75% in Bonds when the market is perceived to be too high.
As mentioned above, funds are the easiest way to diversify your portfolio with little effort. You can get funds for all sorts of things – including Bond focussed funds and Share focussed funds.
Summary
To give a brief summary of what we’ve covered here:
- The only ‘investment’ that will never lose you money is that of a Cash ISA or Savings account – although as it is zero risk, there is not much in terms of reward;
- The key to maximising the chances of not losing money is portfolio diversification;
- You can be diversified by territory/country, industry and investment type;
- Bonds and shares have an inverse correlation and can therefore act as a hedge against volatility in one of these; and
- Funds are the ultimate way to diversify your portfolio – although they charge a small fee. I would personally prefer to have 99% of something great, rather than 100% of zero.