Portfolio Planning
Whether we are helping clients to plan ahead for retirement or managing and protecting their wealth, the shaping and management of their investment portfolio will be a pivotal part of our advice.
Each client portfolio will contain a different blend of assets, depending upon a number of factors including:
- Their long term objectives
- Their current position
- The length of time available to achieve the objectives
- Their attitude to investment risk
Asset Allocation
There are 4 main asset classes available to investors:
- Cash
- Fixed Interest & Bonds
- Property
- Equities
Research has shown that the mix of these assets accounts for over 90% of the variability of investment returns within a portfolio, so the importance of achieving the right balance cannot be overstated.*
Portfolio Construction
By spreading our client's investments across the different asset classes (known as diversification) we ensure they participate in the returns from each sector, without over-exposure or over-reliance on any one particular area.
For example, the impact of a sudden fall in the stock market is lessened if some of the portfolio is in cash, fixed interest or property. However, equities have been proven to be the best performing asset class over the longer term, so having no exposure to the stock market could limit the returns.
Risk versus Return
Diversification also helps to change the risk within a portfolio. In ascending order, cash carries the lowest amount of risk to capital, followed by bonds, property and finally equities. In simple terms, a portfolio containing only cash is described as very low risk whereas a portfolio full of equities is seen as higher risk.
Historically, cash deposits have struggled to provide an attractive rate of return, once the effect of inflation has been taken into account, and the incentive for moving away from cash (and taking more risk) is the potentially bigger returns on offer.
So when constructing investment portfolios, we aim to achieve the returns our clients require within the level of risk they feel comfortable with.
As with so many aspects of financial planning, achieving the right portfolio balance is only the start...
Portfolio Management
The portfolio then needs to be reviewed and managed on a regular basis to ensure it is still relevant to a client's needs and objectives. Individual funds need to be closely monitored to ensure that they continue to be suitable for the objectives of the portfolio and, if not, action needs to be taken at the right time.
But even if the individual funds remain appropriate, growth in one particular asset class can affect the overall balance of the portfolio, so it should be rebalanced on a regular basis.
Individual advice and guidance is essential for successful portfolio management, to ensure it takes account of your needs, objectives and attitude to risk.
Interested?
Click here to request more information or to arrange a personal consultation.
You can download information sheets on Asset Allocation and Risk Assessment from our downloads page.
*Source: Financial Analyst Journal, May-June 1991
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