When looking for investment ideas, do you check the business pages of newspapers, investing gurus’ forecasts or the millions of "experts" on the internet? Either way, you could be forgiven for feeling confused by the plethora of investment opportunities and information available. So, how do you determine which investments and investment products are right for you? Do you focus on investment manager fees, past performance or your personal risk tolerance? Further, different investment products may have varying tax treatments and structures, so you should understand those differences as well.
In this article, we’ll discuss some important considerations when creating your optimal investment strategy and some potential investment products to consider.
Choosing an appropriate asset allocation may be the single most important decision that will help you achieve your investment needs. One thing some investors struggle with is investing in overly conservative or low-returning investments despite requiring long-term investment growth to reach their cash flow needs and long-term goals. Whilst risk tolerance is another important factor to consider, we believe investors should understand the risk-return trade off inherent in investing and how investing conservatively may not always be the best way to reach their long-term investment goals, depending on their individual situations. Alternatively, the pursuit of attractive returns can make it tempting to take excessive risk with your portfolio in order to enjoy a more luxurious standard of living in retirement. At times, you may be tempted to invest in “hot” sectors or areas of the market that recently performed well, but focusing all your investments in one area can introduce concentration risk—the risk that an area or company you might be overly invested in performs unfavorably. Generally, diversification and a disciplined approach can help you combat this risk.
Investors may underestimate their potential investment time horizon—how long they need their money to last—and cash flow needs later in life. If you’re investing for retirement, failing to account for a long enough investment time horizon or investing too conservatively could increase your risk of running out of money in retirement. When determining your investment time horizon, you may discover you need to plan for longer than you originally expected. Investors often believe their investment time horizon is simply their life expectancy. Life expectancies may be a good starting point for this estimation, but these are normally simple averages and, depending on your situation, you may live longer—potentially much longer—than you expected. Additionally, your investment time horizon could be longer if you have a spouse or other dependents who will be financially reliant on you after your death.
While any volatility can have a significant impact on the sustainability of any required income from a portfolio, the fear of market volatility can lead some investors to forgo the long-term growth associated with investment options such as equity funds and individual share portfolio. While these investments may be associated with greater market volatility than some others, some exposure may be necessary for your strategy if you need long-term portfolio growth.
When creating your optimal investment strategy, make sure that you are not overlooking the cost of inflation. When inflation outpaces the growth of your portfolio, it can reduce the future purchasing power of your money. Overlooking inflation or investing too conservatively too early may increase your chances of running out of money before the end of your investment time horizon.
The above points are merely examples, and by no means an exhaustive list of factors to consider when reviewing the suitability of your asset allocation. Guidance from a Financial Planner can better help you explore all of the important considerations when formulating an investment strategy which is right for you.
Fixed interest—bonds for example—is one of the most common investment classes. Many investors -are attracted to lower volatility compared to equities and the consistent income these investments offer. Bonds and other fixed interest assets are traditionally an investment option which enjoys lower short-term volatility than equities, but like all investments, they come with their own set of risks. ¹ For example, interest rate risk refers to the risk that interest rate movements cause your fixed interest assets to lose market value. Other risks exist, but too often investors only associate risk with volatility, neglecting other potential risks.
Alternatively, some investors believe dividend-producing equities are a favorable income-generating investment. In this way, they believe they’ll capture stocks’ longer-term returns as well as earning dividend income over time. But a high-dividend equity strategy may not provide the best risk management if these equities are concentrated in certain countries or just a few market sectors.
There are many options when it comes to investment products and the optimal ones for you likely depend on your personal and employment situations. Some common investment products are pensions—such as workplace or personal pensions—stocks and shares ISAs, and investment bonds (life insurance contracts that are also investment vehicles). To explore which investment products might be best for you or how to optimise your use of these products, you may benefit from speaking with a trusted investment adviser.
Devising the right investment options for you usually means identifying your needs and long-term investing goals, estimating your potential investment time horizon and finding the right asset allocation for you. However, there is not one simple solution to suit everyone. What may seem safe, may not meet your other needs. Similarly, market volatility can make it tempting to make emotional trading decisions that could hurt your long-term returns. That’s why it may be in your best interest to find a trusted investment adviser who knows your personal situation, long-term goals, behavioural tendencies and other individual factors.
If you would like help with the complex business of identifying investment products suited to your goals and situation, Fisher Investments UK may be able to help you get started. Contact us today to speak with one of our qualified professionals or download one of our educational investing guides to learn more.
¹Source: Global Financial Data, Inc.; as of 20/10/2017. Average rate of return from 10/1/1969 through 31/12/2016. Equity return is based on Global Financial Data, Inc.’s World Return Index and is converted to GBP. The World Return Index is based upon GFD calculations of total returns before 1970 and are not official values. GFD used specified weightings to calculate total returns for the World Index through 1969 and official daily data from 1970 on. Fixed Interest return based on Global Financial Data, Inc.’s Global Total Return Government Bond Index in GBP. The GFD Global Total Return Government Bond Index uses 10-year fixed interest securities from the countries of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, New Zealand, South Africa, Spain, Sweden, the United Kingdom and USA. The Total Return Government Bond indices calculated by GFD are used for the index and are weighted by GDP.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.