by Andrew Porter

Created on: February 04, 2009   Last Updated: March 03, 2009

The easiest way to reduce the risk of your investments is to build a "balanced" portfolio: a mixture of different uncorrelated asset classes. Most investment portfolios are highly correlated to just the stock, bond or property markets and when disaster strikes all of these markets can fall. Having a mixture of these different investments and other uncorrelated assets such as precious metals however can provide some insurance against this outcome.

Gold and silver are volatile and have had a bad time against the dollar recently (although have performed well when compared with pounds Sterling) but are generally uncorrelated to other assets so they can be used to reduce your risk. Throughout history Gold and Silver have been real money. The dollar, pound, euro and yen are just pieces of paper ("fiat" money) and have no actual value. If the dollar or any other major currency collapses gold and silver should retain their value.

Stock markets are high-risk, but can give very good returns or lose you all of your money, whereas bonds are mostly lower risk and generally not very correlated to stocks and do pay an income, but are far less fun and gold pays no income, but does at least preserve some of your wealth when disaster strikes. A balance between these asset classes and property is usually the best bet.

A simple rule of investing states that the higher the risk of an investment the higher the return. This is the Risk Premium: The amount you get paid for taking the extra risk. So if you want to make lots of money you need to take more risks. It is however possible to reduce the risk by building a balanced portfolio. The risk of buying a single share is high with many possible unknown influences on the share-price and future dividends. Buying two shares results in some reduction of risk because a crash in one share price may not affect the other one adversely. Many shares are highly correlated to each other, so having two shares in the same field (e.g. BP and Shell) does not reduce the risk as much as two shares in unrelated industries (e.g. BP and Lloyds) Similarly mixing shares with other asset-classes will also improve volatility of the over-all portfolio (e.g. mixing shares, bonds, property and gold bars)

Many people made the mistake of ignoring the equity, bond and precious metal markets in favour of property, making their portfolio extremely highly correlated to one market, and heavily geared (mortgaged) to improve returns or increase losses. Property may have

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