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Don't let this investment mistake pull your portfolio down… Here's how

by , 02 March 2015

One common investment mistake is to put too much money in only one or two investments within the same asset class.

It can decimate your portfolio.

So what's the best way to invest your money?

Read on to find out…

An investment strategy to reduce your risk

There is a simple investment strategy that you can follow to prevent this type of mistake hitting your portfolio. It’s called position sizing.

The idea behind position sizing is to limit your risk by not investing more than a specified amount into any one investment.

You can reduce your overall risk by sticking to asset allocation. This is when you spread your investments across different asset classes, such as stocks, bonds, property, cash and commodities.

But position sizing takes this a step further and reduces your risk within each asset class you invest in.

How position sizing works

Let’s say you have R1 million to invest. Using an asset allocation strategy like above, you could put R200,000 into each of the different classes.

Position sizing would determine how you spread that R200,000 in each asset class.

For example, you might decide that you’ll only risk R10,000 in each investment (R1 million x 1% = R10,000) within one asset class. That means if one investment lost all of its value, your investment pot would only fall by 1%.

If you’re a conservative investor, position sizing is a great way to protect yourself from devastating losses.

Pick a limit you’re happy with and stick to it. The more you put into one position, the higher the risks you take on with one investment.

You may decide that you’re happy investing 5% into each position. Do some calculations and find a level of risk that suits you.

So there you have it. Here’s how not to let this investment mistake pull your portfolio down.

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Don't let this investment mistake pull your portfolio down… Here's how
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