Taking too active an approach to equity markets can be fraught with danger, but keeping hold of too many safe investments is not necessarily a winning strategy either. The sensible solution is to allocate your assets between cash, bonds and equities, a diversified mix that should form the basic core of your investment portfolio.

Holding too much cash over the long term could cause your savings to shrink if the rate of inflation exceeds deposit rates. Guaranteed funds look ideal for the conservative investor but place a ceiling on your upside if the markets turn around, while specialised investment assets such as those unit trusts focusing on single countries or sectors require constant monitoring.

By taking care of your core portfolio you can get a good night’s sleep even if your active investments are not performing well. In the long run, equities will do better than bonds but they introduce more short-term volatility. Bonds moderate that volatility and provide a regular source of income, so the investor enjoys the benefits of capital appreciation and capital preservation.

The precise balance depends on your risk profile, investment objectives and time horizon. Younger investors 30 or 40 years from retirement are likely to make capital appreciation a higher priority than capital preservation. As you mature, however, your exposure to risk should decline and returns should come from stable, recurring income sources like dividends and interest payments.

It takes time and expertise to work out what suits your changing needs, but you must periodically review your portfolio. Remember that as you approach retirement, substantial short-term losses can be devastating. Imagine building up a sizeable retirement nest egg over 35 years only to see it crumble thanks to 12 months of equity-market volatility.

ARTICLE REPRODUCED WITH THE KIND PERMISSION OF SMART INVESTOR.