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How to make the right investment
5/25/2010
Alok explains the importance of keeping your investment portfolio up to date.
Everyone’s circumstances change over time, and there is no single investment that suits everybody. That’s why it is important to regularly review your financial affairs and set aside some time to re-align your investment priorities.
As the stock markets are currently so uncertain, this is a great opportunity to readdress how aggressive, or cautious, you would prefer your investments to be. The investment you choose depends on your risk appetite and the duration of time you would like to invest for. The more risk you take, the more potential there is for you to achieve a higher return. However, please bear in mind that investment values can go up as well as down.
The importance of diversification is a key consideration when deciding upon the structure of an investment portfolio. This depends on asset classes, geographical consideration, and weightings. Through diversifying, there is no chance of you putting all of your eggs in one basket. By spreading your investments over several different asset classes, you prevent your portfolio from being reliant on one core asset class, and reduce the risk of possible negative returns.
The process of deciding between asset classes is called Asset Allocation, and there are four main asset classes available – Cash, Bonds, Property and Equities, all with different risk characteristics and behaviours.
Some assets are known as negatively correlated assets, such as bonds and property, which behave in a different way by offering lower but less volatile returns. A perfectly negative correlation occurs when one of these assets goes up and the other goes down.
Those who are about to retire may want to move away from investments such as capital growth stocks, towards finding a source of income. It’s all about getting the right balance.
If you’re planning to buy an annuity then you’re likely to want to reduce volatility. Types of annuities vary greatly, so it is necessary to sit down with an Independent Financial Adviser (IFA) who can explain them to you in detail before helping you to choose a suitable product.
Longer-term investment benefits can be seen from past schemes such as the Personal Equity Plan (PEP). Over the 12 years that PEPs were available (between 1987 and 1999), if you had invested the maximum allowable each year into a PEP then you would have been able to shelter an enormous total of £88,200 from the taxman. From 6 April 2008, all PEPs were reclassified as Stocks & Shares ISAs. This increases flexibility even further, as you can now add any of your investments made originally in PEPs to this ISA, up to the annual ISA investment limit.
We all know that nothing stays the same forever. For instance, the pound is at a two-year low at the moment, so it can prove dangerous to put money in one stock or country. There is also the risk of inflation to consider. If you’re aiming to beat inflation then it is very important to look into a wide range of investments, as the future can be unpredictable for you.
Speak to an IFA to work out an investment strategy, how long you’d like it to last for, and what purpose it is for. It may be the case that you want to save for your child’s or grandchild’s future, or for your retirement, but bear in mind that the longer the term, the better the chances are to secure a higher return on your investment. It is important to meet at least once a year with your IFA to discuss any changes to your personal or financial circumstances and work out how this would affect your portfolio.
Nothing worth having comes very easily in life, and everybody has to take some form of risk at some point. With the help of an IFA and a carefully sought-out risk profile questionnaire, you can work out the best investment option to pursue, so that in the longer term you can start reaping the rewards.
For further information on how Alok can help you with your personal or business planning needs, contact Dhanda Financial, 52 Dean Street, Newcastle upon Tyne, NE1 1PG, telephone 0191 255 8960, or email alok@dhandafinancial.com
