Why diversify your savings? 5 essential tips!
Diversify your savings, here is a golden rule that always comes up when you are interested in the different ways to optimize your investments. But why shouldn’t you put all your eggs in one basket? What is savings diversification? And what are the essential tips to follow to diversify your savings?
Why is it important to diversify your savings?
Diversifying your savings makes it possible to reconcile two essential goals sought by any investor.
The first is to protect your investments by limiting the risk of capital loss. Overall, the presence of several investments of different natures minimizes the loss of the money invested and the depreciation of the portfolio.
The second is to increase the performance and profitability of your savings, so that they grow. By diversifying your investments, you are more likely to maintain your purchasing power in the face of inflation.
In other words, betting everything on a single investment, you risk losing everything. Whereas by diversifying as much as possible, you reduce the volatility of your portfolio and dilute the risks.
What is savings diversification?
In concrete terms, diversifying your savings means investing your money in several assets, whether financial, movable or real estate. And within the same asset, you can also choose several supports.
Each product brings you advantages and disadvantages, but their multiplication allows you a balanced diversification. You could, for example, hold your savings on the following investments:
- Regulated savings accounts (LEP Livret d’Epargne Populaire, Livret A, LDDS Livret de Développement Durable et Solidaire, etc.),
- Free savings booklets (boosted booklet, taxed booklet),
- CAT Term Account and DAT Term Deposit,
- Life insurance with supports in euros and supports in units of account,
- PEA Stock Savings Plan and CTO Ordinary Securities Account with bonds and stocks,
- Stone-paper real estate with SCPIs Société Civile de Placement Immobilier or real estate directly with hard investments,
- Speculative values ​​with commodities, crypto currencies or any other niche investment, etc.
Of course, any investor must develop a strategy according to his own objectives. Here are our 5 essential tips for diversifying your savings.
Tip number 1: know your investment horizon
All the savings you can amass don’t have to satisfy a single project. As a general rule, it is important to see your investments as sources of money in the short, medium and long term. Let’s take a few examples, if you want to finance a trip abroad this summer, if you want to prepare for your retirement or if you want to anticipate your succession, you will have different investment horizons.
Of course, your age as an investor also has a role to play in how you save. But you can remember that a short-term investment should be low risk, a medium-term investment should involve moderate risk and a long-term investment may involve higher risk.
Indeed, the time variable is important, especially if you want to invest in the stock market. Because if you are not immune to a momentary collapse in the value of your savings, the return tends to be obtained over time. It is therefore essential to take into account your different objectives and investment horizons before diversifying your savings.
In addition, some products are fiscal envelopes. This means that they give you certain tax advantages after a minimum of years of ownership, like the PEA after 5 years or life insurance after 8 years. Setting a date by opening these products as soon as possible, even with a limited investment, is advisable to save on these media a few years later.
Tip number 2: know your risk profile
It is a fact, we do not all have the same sensitivity to risk. Our education, our life, the absence or presence of children, our level of income, our way of apprehending the world, our character, are all factors explaining the existence of a diversity of investor profiles.
It is therefore important not to go “against your nature” at the risk of stressing unnecessarily and getting white hair. A prudent person should not take a high level of risk on a whim, for example. On the other hand, fears linked to a loss of money are above all due to ignorance of the markets, products or taxation.
It is therefore important to be well informed, to gather information, to identify the advantages and disadvantages of a product, in order to understand how the different media work, in order to make an informed decision. And if this work takes up too much of your time, if it seems nebulous to you, if it leaves you perplexed, you should not hesitate to entrust the management of your savings to a professional.
In terms of investments, there are five types of saver profiles:
- The safe investor: he has an aversion to risk, he invests 100% of his savings in passbooks or term accounts, even if the return is not sufficient to maintain his purchasing power,
- The cautious investor: he does not like risk, but would at least like his savings not to devalue, he invests 80 to 90% of his money in savings accounts and 10 to 20% in safe vehicles such as bonds,
- The balanced investor: as his name suggests, he seeks performance with moderate exposure to risk, he places 40 to 50% of his savings in security, and the remaining 50 to 60% in riskier vehicles,
- The dynamic investor: the risk does not scare him, he seeks performance above all, a distribution of 60% or more on the equity market for example, is not uncommon,
- The offensive investor: return is his priority, he does not hesitate to take risks, even if it means risking all his capital, and can go so far as to invest 100% of his savings in risky vehicles, including the most speculative.
Knowing where you stand is essential. Moreover, nothing prevents you from moving from one profile to another during your life. For example, an investor can be dynamic from 30 to 50 years old, become balanced until 60 years old, and then finally opt for prudent management as they approach retirement in order to secure their capital.
Tip number 3: know how to choose your investment products
After having identified your investment horizons and risk profile, it is much easier to move towards products adapted to your vision of savings. The main idea is to only go for products whose mechanisms we understand and which correspond to our needs.
It is quite possible to seek advice from your banker or an independent wealth manager at this stage. Take advantage of an audit or a heritage report, to better identify the investments that suit us, can be useful if you are a beginner saver, or if you feel the need to take stock of your objectives. .
Finally, if you want to invest in a product, such as life insurance for example, you will have to find the one that best meets your aspirations. Comparing before taking out a contract is therefore essential, because not all insurers and financial organizations have the same attractiveness. The costs, the supports offered and the management methods are not to be neglected.
Tip number 4: track your savings regularly
Unless you are an offensive saver, seasoned in the financial markets and mainly speculating to hope for quick gains, following your savings does not mean being obsessed with them.
The idea is more to set goals and stick to them, and to check that the ideal portfolio you have built is respected. For example, a prudent saver might choose an envelope like this:
- 50% of their savings in passbooks,
- 50% of its savings in life insurance, with 30% invested in secured euros and 20% in government bonds.
The follow-up will consist, every month or every two months, in checking the distribution of its assets, and in correcting it if necessary.
On the contrary, a dynamic investor could choose an envelope of this type:
- 20% of their savings in passbooks,
- 20% of their savings on unit-linked life insurance,
- 60% of their savings on a PEA via ETF Exchange Traded Funds or trackers.
Here, the follow-up will consist, every week or every two weeks, in checking the distribution of its assets, but also the repair of its ETFs (for example 40% on the American market, 20% on the French market, 20% on the European market and 20% on the world market).
Tip number 5: delegate your portfolio management
Acquiring in-depth knowledge of financial markets and taxation takes time and interest. Not all investors can play the game and become a wealth manager overnight.
But never mind, this does not exempt the less seasoned and the less concerned about financial news from saving effectively. Going to an investment firm or a wealth manager is then an excellent initiative to boost your savings.
This professional will be responsible, depending on your expectations and the degree of risk you are willing to take, to take care of your savings while respecting your wishes. He will keep you informed of opportunities, your assets, and will take the right decisions for you, depending on your profile.