How investments fit into your portfolio

How investments fit into your portfolioWhen it comes to investing for the longer term you need to make sure you build up a sustainable and well-diversified investment portfolio. For example, having no retirement fund but investing all your spare cash in bitcoin or forex trading would be a very risky and unsustainable approach to growing wealth.

A good way to approach your investment strategy is to break down the types of investments into green, orange and red flags. You want to have the majority of your investments to be green flags, with some orange flags as your investment knowledge increases and a very small amount of red flags. Red flags would be highly speculative investments that are more about FOMO (fear of missing out) than forming the basis of your investment portfolio.

Green, orange and red flags

A green flag would be investments that do not require much investment knowledge in the underlying assets. This would be your retirement funds and tax-free savings account in unit trusts or exchange-traded funds. With a green-flag investment, you have handed over the decision-making to someone else or you are just tracking a market return. You don’t need to be an investment guru for green flags.

An orange flag would be an investment that requires some market research and knowledge. This would include having your own share portfolio with a stockbroker where you make the decision of what shares to buy. It would also be property investing as you need to do research into rental demand and property values. Investments into alternative assets such as cattle, art or investment cars would also fall into the orange category.

A red flag would be those investments that not only require additional knowledge, but which carry high risks of money loss or volatility. Bitcoin, or cryptocurrency, would fall into this category along with forex trading. This could also include investing in a fintech crowdfunding initiative or your friend’s latest business idea. This should be money you can afford to lose and should not make up a significant portion of your wealth.

There is nothing wrong with taking risks and a punt on a new trend, but make sure you have a stable investment base first. A portfolio full of red flags will most likely end up losing you money rather than turning you into a billionaire.

This article first appeared in City Press.

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