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How to plan your investment strategy
7/19/2010
Alok explains how to put together a suitable investment portfolio for your circumstances.
If you’re not happy with your bank returns, then now is the ideal time to find out how to make your money work harder through investing it. Everyone’s circumstances change over time, and there is no single investment that suits everybody, which is why it is important to regularly review your financial affairs.
The main points to consider when investing are: how much can you afford to invest, how long would you like to invest for, and what level of risk are you prepared to take?
Is there, for example, an amount of money you can set aside that you can be sure you won’t need to dip into over the next 5-10 years?
The best choice of investment for you very much depends on your goals and aspirations, whether you want to save for a deposit on a house, a new car, university fees, or your retirement. It is also important to think about the tax implications and benefits of the investment you make. You should think carefully about whether you want to pay by lump sum, monthly or annually.
Markets can be volatile, and timing is crucial. It is often the case with investments that as soon as people find that they have made a loss, they panic. It is therefore important to ask yourself – how comfortable would you be with a short term loss?
As the world’s stock markets are uncertain, this is a great opportunity to readdress how aggressive, or cautious, you would prefer your investments to be. The more risk you take, the more potential there is for you to achieve a higher return. Investments are particularly fruitful for young people, as the earlier you start investing, the bigger returns you can get. 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. Pooled investments are likely to be far more beneficial – such as OEICs, Unit Trusts and Equity ISAs. The recent situation with BP proves just how dangerous it can be to pin all your hopes on one share.
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. 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 Independent Financial Adviser to work out an investment strategy and 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.
With 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 Dhanda 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
