Investing is a risky business. This is why it can be rewarding. The greater the risk the higher the returns is the usual rule. No-one likes to lose hard earned cash but the attraction of winning more is irresistible for many. The best way to build safety into an investment portfolio is to diversify.
For safety the best investment is probably in precious metals. Gold and silver are the traditional choices with gold being the favourite for most. The very rich often keep gold in one form or another in their own safe keeping as a hedge against major failures in other parts of their business. Gold earns no interest but of late it has increased in value considerably. Capital appreciation in any earning area should not be ignored.
After gold cash in a savings account at a reputable bank is the next best. Finding a safe bank which offers a reasonable rate of interest has become more difficult in recent times. Anything over five per cent in a bank where capital is guaranteed by the government is worth having. The days of ten, fifteen or even twenty per cent in almost “risk free” very profitable banks with solid reserves are long gone. There is still safety in the best accounts at the well known large banks and the funds invested therein have the useful quality of liquidity. For fixed term investments the returns are higher than “on demand” accounts. More than one account of the various types available provides for reasonable returns and the instant availability of cash when only that will do.
Good work in the share market will give better earnings than bank deposits. This risks are higher and capital is not guaranteed. Again, it is possible to mitigate the risks involved. Investments should be spread over different industries. The investor or his trusted broker must constantly watch the performance of the shares owned. There are “blue chip” stock which provide capital safety and low but constant, reliable dividends. Some businesses are seasonal. It is possible to buy shares in the low season and sell in the high season when a capital gain can probably be made. Some business flourish when the world wide economy is expanding. The price of others respond more to local conditions. To avoid losses and maximize returns a close watch needs to be kept on these factors. Some businesses with good accumulations of cash on their balance sheets look to grow not organically but by taking over or buying other firms in the same or a closely related field. Holding shares in a “take over” target can be profitable so buying shares in smaller concerns should not be ignored in a diversified portfolio. In stock market dealings bonds should not be ignored. Bonds give the coupon holder a stake not in the equity of a company but the investor becomes a creditor to the borrowing concern. Bonds may be issued by governments. The decision whether to buy shares or bonds is really a matter of the liquidity desired. Bonds are often issued for a fixed term.
The least liquid investment would be in property or real estate. Here the choice may be between residential and commercial or industrial land and buildings. The state of the respective markets in particular areas would be the determining factor in any investment decision where property is concerned.
The extent of diversification depends on the funds available but the aim should be to develop a widely spread portfolio as soon as possible. An investor’s risk averseness will often determine where the weight of available funds will be concentrated as much as any of the factors mentioned above. A gamble can be either a fun winner or a salutary loss but a balanced investments will compensate for the latter and maintain a sober and overall winning position.