The content here is an article to be published in the Eastbourne Herald in December. I have agreed to write six monthly articles on investment issues. It is pretty basic but perhaps a useful reminder for you.
For those with a portfolio or money ready to invest this article will help you grasp key principles and increase the potential for you to make money and avoid pitfalls.
Firstly it is essential to set aside accessible cash from the investment portfolio for emergencies and short term needs. This will normally remove the need to cash out investments at low market prices if money is needed urgently.
An investment portfolio must be compatible with your existing investments and suited to your financial objectives, timescales, requirement for ethical investment, tax position and attitude to risk. However a balanced risk investor should include a range of risk assets including cautious and adventurous investments, provided the overall risk profile of the portfolio is balanced. This spread is to ensure diversity and wide market exposure.
Further you should understand the risk issues of individual investments. The risk of stockmarket investments is not just about volatility of value – there may be inflation risk, default risk, liquidity risk and counterparty risk. For example inflation risk affects gilts and investment grade corporate bonds whilst counterparty risk affects structured products. Finally it is essential to grasp that the risk profiles of different asset classes are not fixed. For example gilts, underwritten by the UK government are traditionally viewed as safe investments. However they have enjoyed a spectacular rally since the banking crisis of 2008, they yield returns less than inflation and are arguably in bubble territory. In my view gilts, except index linkers carry considerable risk and offer low potential.
The single most important decision in constructing an investment portfolio is your asset
allocation; how you divide your money between and within the main asset classes – equities, fixed interest, index linked, commodities and property. A broad portfolio reduces risk through diversity and negative correlations. However asset choices should also reflect to some degree valuations and potential. For example within bonds I would avoid traditional gilts but recommend index linked corporate bonds and high yield corporates.
Whilst strategic asset allocation determines the long term game plan I don’t think a pure buy and hold strategy is sufficient. It should be overlaid with tactical asset allocation. For example cash can be held within an investment portfolio for good buying opportunities that might arise in the shorter term.
Finally it is imperative to regularly review your portfolio to bank profits, switch to cash for
tactical investment, use capital gains tax allowances and adjust the strategic allocations. If higher risk investments perform best they will increasingly dominate and the portfolio will need rebalancing. Reviews also should check the ongoing suitability of the portfolio and weed out and replace poor and underperforming investments.
In conclusion adopting key strategies and avoiding the traps will improve your chances of making money but you should seek individual advice before making investment decisions. The value of investments can fall as well as rise.