Building Your Investment Portfolio

29.07.11

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

Many readers who have retired abroad or are planning to do so will have worked hard to achieve their dream of living abroad. They will want to know that their savings and investments

Many readers who have retired abroad or are planning to do so will have worked hard to achieve their dream of living abroad. They will want to know that their savings and investments are on the right track to allow them to be financially secure throughout their retirement years. It?s understandable if they keep a close eye on stockmarket movements and economic news and how their investments react to them.

Some people, however, can keep too close an eye, for example by worrying about daily market news and wanting to check their valuations all the time. Although it?s obviously good be informed, it?s important not to react to all the news you see or read. You want to safeguard your retirement, but worrying about temporary falls in the stockmarkets won?t help. You?ll be tempted to change your investments which could lead to speculative decisions based on timing and not your long term objectives. This is a risky approach which could lose you more money in the long run.

Markets do go up and down. That?s their nature, but history shows that over the longer term you get more ups than downs. It?s the difference between the two which allows you to protect your capital from inflation while generating income. You need to set up your investments so the downs do not matter so much.

The primary purpose of most investment strategies is the long-term accumulation of money so you can meet specific goals, such as buying a property; ensuring sufficient income to support your lifestyle; maintaining the value of your savings; planning to leave your heirs a decent inheritance etc. These goals involve basic human needs and aspirations – not quarterly rates of return. Investing is about using today’s resources prudently to achieve future goals.

The portfolio construction described below will help to keep your finances on track without having to watch them continuously or try to predict market movements.

Stage 1: At the drawing board

For this exercise you should sit down with a wealth manager and discuss your goals, situation and risk tolerance. You need to look at your finances, including investments, savings, property and pension plans. With a clear picture of your entire finances your adviser can recommend strategies appropriate for your specific circumstances.

?Portfolio construction? means properly diversifying your money across a range of investment assets and management styles, obtaining the lowest risk exposure for the potential return you are seeking. You want to obtain the lowest risk available for a targeted return. Risk and return aren’t always proportionate – you can easily expose yourself to more risk than you need to, and more than can be justified by the return potential of your portfolio. Portfolio construction aims to avoid overpaying in risk.

Stage 2: The foundation

The foundation for any investment strategy is asset allocation. Traditionally the four main areas of investment are equities, fixed interest holdings (government and corporate bonds), property and cash. For a broader spread you can include assets like commodities and real assets.

By combining all or some of these elements in your portfolio, it is possible to reduce risk and improve prospective returns. This is because the risk in the mix of the asset classes is less than the risk of the individual components. This leads to lower volatility and therefore less risk of negative returns.

Followed consistently, monitored asset allocation can help you avoid pitfalls that are detrimental to your success, such as reaching for the hottest stock or selling at the wrong time.

Stage 3: The frame

The key factors here will be your risk tolerance, time horizon and to what extent you are looking for income and/or growth.

Amid the allocation to equities and bonds, and possibly even property, you reduce risk by diversifying over a range of assets. For example, if you invest in funds you will have exposure to shares or bonds in a range of companies, rather than being reliant on just a few companies? fortunes.

You should have a spread of sectors, countries and company capitalisation (size). When it comes to equity funds, you can go further by diversifying over money managers and investment styles.

Stage 4: The roof

In this case, the roof is a long-term time horizon. With this shelter you can be comfortable taking some short-term risk. Even if you have negative returns for a while, you can survive it with a reasonable expectation that markets will bounce back and your overall investment experience will be productive. Without a long-term horizon, some investors panic at the first sign of negative returns, lock in losses near the bottom of the market and don’t participate in the gains of the next upswing. If you can’t ride through negative returns, you are sacrificing the potential return on the upswing that justifies your risk.

Stage 5: Storm proofing

Just as you wish to protect your capital from depreciation from stockmarket volatility and inflation, you also need protect it from being eroded by taxation. While planning your portfolio strategy you need to consider your local tax implications and arrange your investments in the most tax efficient manner.

Stage 6: Maintenance

Once the construction process is concluded, your portfolio will require maintenance in future. The balance of your investments may have shifted or your goals and time horizon may have changed. While you don?t want to be constantly tinkering with your portfolio, it will need reviewing every so often and at least once a year. If you have used the services of a wealth management firm to set up your portfolio, they would normally schedule this in themselves, though you should still advise them any time your circumstances change significantly.

Just as you?d consult with an engineer when planning a building, you should consult with a qualified wealth manager like Blevins Franks when planning your portfolio strategy or reviewing current investments to see if they are still appropriate for your circumstances and objectives.

By Bill Blevins, Managing Dirctor, Blevins Franks

26th July 2011

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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