Choose your own personal investment strategy

When you are thinking of investing some of your money, there is one equation that must always be borne in mind :-

Greater reward = Greater Risk

The following investments are in order of increasing risk and decreasing return :-

1) Building society accounts.

2) Bonds.

3) Low risk investment funds.

4) Low growth Share portfolio.

5) High growth share portfolio.

It is not surprising that building society accounts are very low risk, they also give the lowest rates of return over a certain period.
Bonds also have a relatively low risk associated with them. They give a slightly higher return than a building society account but the money invested must remain untouched for its lifetime.

Investment funds give a mixture of the above, but remember a fund manager will always take his or her cut. You may wish to invest directly in shares by opening your own share dealing account. So what sort of strategy should you employ in choosing the number and type of shares in your investment portfolio?

It all depends on how much risk you are prepared to live with.

The name given to risk management is called Modern Portfolio Theory. MPT simply states that if you wish to reduce risk in your portfolio then you must spread it over a large number of investments. A less cautious investor may want to invest in a smaller number of shares or a larger number of higher risk shares.

Before discussing the relative risks of different of different types of shares it might be worth explaining what a market index is.

The mean performance of world stockmarkets is calculated by a number of indices. The most well known index in the UK is the FTSE100, which was introduced in 1983. This index maps the value of the top 100 companies in the UK. The index is weighted so that it gives greater importance to the larger companies. When the value of a large company moves, the index moves by a correspondingly large amount.

There is a quantity called the beta risk of a share which tells you how risky a share is relative to the market index as a whole. A beta risk of 1.0 means that any movement of the index up or down is generally reflected in the same movement of the share. If the market moves up 10%, the share generally moves up 10%.

A higher beta number means the shares are more risky. A lower number means they are a safer. Tables of beta risk for shares can be obtained.

So what sort of share strategy should you use?

It is a fact that 80% of managed funds with stocks picked by professionals will underperform the market. Because of this you may wish to simply put your money into an index tracker. This type of investment generally buys into the top 650 companies and reinvests any dividends received. You can do a Google search for index trackers.

For people of a less cautious nature, the buying of individual shares is a more attractive proposition.





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