Investment Planning!
An Article by Brian Berney of The Spectrum IFA Group
When deciding where to invest your money do you rely on the recommendation from your financial
adviser or do you have an idea or the experience to make your own choices?
The first decision you have to make is
how much risk you are prepared to take and if you are prepared to leave your money invested for the short, medium
or the long term. When designing a portfolio for my clients I don't leave it to chance I use a stochastic investment
model developed by Tillinghast-Towers Perrin, a respected international actuarial consultancy. Such modelling
techniques are not widely available for retail investors and are typically used by pension fund managers and large
institutional investors, thus taking the guesswork out of which asset class a client should be investing in. A 6 page
report is then generated explaining the different asset classes sectors and fund choices. The report considers an
investment portfolio designed to help meet the clients investment goals within their risk profile and financial situation.
Different types of assets, such as equities or bonds, behave in different ways. The first step in forming any investment
strategy is to achieve the right balance between the major asset classes. This "asset allocation" is fundamental to
meeting the clients investment goals in the medium to long term. In fact, asset allocation can be as important as the
choice of individual funds themselves.
A recommendation is then made after discussing in detail the factors such
as the clients attitude to risk and their growth and income needs. A typical medium risk portfolio would be made up of the following asset classes.
| Property | 25% |
| UK Equity | 25% |
| Fixed Interest | 20% |
| US Equity | 15% |
| Cash | 8% |
| European Equity | 4% |
| Far East Equity | 3% |
So let's look at these asset classes on an individual basis and what they represent.
Property
Property funds enjoy relatively low
volatility and provide good, reasonably
stable returns over the mid to long-term.
They also provide good diversifi cation
from equities.
UK Equity
UK Equities have historically
provided high returns over the mid to
long-term. However equities tend to
be volatile over shorter periods and the
uncertainty over the future movements
of their prices make them a riskier
investment than some other asset
classes.
Fixed Interest
The fi xed interest asset class includes
both gilts and corporate bonds. Gilts are
issued by the British Government and
are considered one of the safest forms
of investment. Gilts provide a good
diversifi cation from equities but returns
are generally more modest. Corporate
Bonds are issued by companies. They
are considered riskier than gilts but
pay a correspondingly higher interest
rate to investors. Bonds are negatively
correlated with equities and so provide
diversifi cation.
US Equity
These potentially offer a more
diversifi ed portfolio than UK based
equities. Exposure to the world's largest
economy can offer the prospect of
higher returns, but also a higher level of
risk than UK equities. These funds are
also subject to movements in currency
exchange rates and these factors in
combination lead to above average
short-term price fl uctuations.
Cash
Bank deposits are virtually risk free.
Returns are likely to be more modest
than equity based funds and are without
infl ation protection but the basic capital
is protected from any loss.
European Equity
Not totally correlated to UK markets
and therefore providing diversifi cation.
Potential exposure to smaller emerging
markets can offer the prospect of
enhanced returns but a higher level
of risk than UK equities. Affected by
movements in currency exchange rates
and therefore subject to short-term
volatility.
Far East Equity
Exposure to markets that
historically have experienced dramatic
price movements and higher growth
economies provide potential for higher
future returns. Consequently there is a
corresponding higher level of risk and
short-term price volatility. Far Eastern
equities also provide diversification
from UK equities.
It is also advisable to review these asset
classes and fund choices on a regular
basis to asses fund performance and to
make changes if required. The value
of investments in the funds in each of
the above asset class can fall as well as
rise. You may not get back the original
amount invested. The sterling value of
overseas assets in these funds may also
rise and fall as a result of exchange rate
fl uctuations.
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