The UK’s financial services sector is believed to add more than £100bn a year to the British economy, which means that there’s a whole host of opportunities out there to expand your portfolio. From options and futures to foreign exchange, you can find the perfect instrument for your needs quite easily. However, there are also pitfalls: it’s not uncommon for individual funds to decline in value by several percentage points per year, and there are also strategic and legal considerations to make.
Whether you’re an armchair investor with a small, balanced portfolio of stocks and ETFs or you’re a large-scale trader with a highly diversified investment base, there’s plenty to think about when it comes to expansion.
Falling for scams
As the Money Advice Service reports, investors lose millions each and every year as a result of scams – and they are seemingly everywhere these days. Just last month, for example, it was revealed that even an investor with a PhD in economics fell victim to such a scam. Representatives from institutions affiliated with big names such as Barclays, meanwhile, are facing trial in the US for allegedly fixing rates – a scandal known as the “Forex Cartel”. The point here is that nobody is free from the risk of alleged scams, and portfolio size or predominant asset class doesn’t make you immune.
However, there are ways to avoid the worst of them. Before working with an investment provider, you should ask to see details of how – and by whom – they are regulated. In the UK, most providers should be registered with the Financial Conduct Authority (FCA) or a similar regulator abroad. Another way to ascertain the legitimacy of a broker is to check out a list comparing them. ForexFraud’s social trading platform comparison is a good way to check out whether your preferred copy trading provider is properly registered.
Diversification essentially means splitting up your investment cash so that not all of your eggs are in one risk-heavy basket. When you first start out as an investor, it’s possible that your pot will be so small that diversification is either a hindrance or even impossible.
After all, spreading your cash too thinly is unlikely to yield any significant profits, at least not in the short term. However, if you’re now in a position where you can diversify, then it makes a lot of sense to do so. Diversification can reduce your risk significantly, and that’s because if one plank of your investment strategy fails, then there’s always another to make up for it.
Forgetting to research
However, perhaps the main thing to remember when expanding your investment portfolio is that you’re going to have to learn the ropes of a whole new instrument type. Say you’re a stock trader with plenty of experience in the field, and you’re looking to expand to different asset classes. You may, for example, choose the foreign exchange market: after all, in recent years, the UK has enjoyed global forex market shares of over 40%, so it’s a popular and well-established route. However, the forex market operates differently from others: all assets on the forex markets are traded in pairs, for example, and they are uniquely affected by particular economic events such as interest rate rises.
Other asset classes also have their quirks. CFD shares, or contracts for difference, may look like shares for all intents and purposes – but they are in fact highly leveraged derivative products, and they are traded entirely on the margin in order to maximise potential profits if your open position works out in your favour.
If you misuse the leverage function by accident, then you could find yourself losing a substantial amount of cash. Luckily, the internet is your friend: websites such as Investopedia are full of explanations, and you’ll be able to educate yourself about how your chosen new asset class works relatively quickly.
If you’ve seen some success as an investor, then it’s no surprise that you’re now thinking about trying out some new investment opportunities. By adding to your portfolio, you’ll be able to build on these successes and hopefully expand them further. In order to do so without causing unnecessary risk, though, it’s a good idea to follow the tips outlined here. Whether it’s using resources to educate yourself about the intricacies of a new asset class or double-checking that any new broker you use is legitimate, there’s a lot you can do.