Asset allocation – a popular and proven investment formula.jpg

Asset allocation – a popular and proven investment formula


Financial Correspondent

Blevins Franks

SOME PEOPLE dip their toes into the investment world with a one off buy, especially when they are younger. Perhaps it is a popular stock issue and they feel safe with a ‘household’ name as a way of getting into the stock market. Gradually, other similar equities may be bought, then a bond offer is advertised, which seems like a good investment.

Unfortunately, many people who start this way neglect their holdings over the years. The paperwork is stuffed away in a file and life gets too busy to review it. Then the time comes, usually in mid-life, when disposable cash becomes more available and they begin to think about investing to provide for retirement, or when they retire they realise they need to review their investments to ensure their savings are enough to last them through retirement. They get out their portfolio and realise that they have several investments in different pots and none are really working effectively. What to do?

Your first step is to have a discussion with a wealth management professional. An adviser based in your home country is unlikely to have the right level of knowledge or experience to advise about tax efficient investments in Portugal. Having said this, your Portugal based adviser should also keep up to date with changes in regulations in your home country so that your investment structure and tax planning is appropriate should you ever return.

Asset allocation

a good financial adviser will ask you questions to establish what level of risk is appropriate for you and what your goals and time span are. He will then recommend a portfolio based on a proven formula – asset allocation.

A portfolio that has a well chosen asset allocation can be skilfully balanced to ensure that it carries the risk level of your choice. It is likely to consist of equities, bonds, cash and possibly a property fund. A higher weighting of equities will mean higher risk, but the returns will be higher too. A heavier mix of bonds will counterbalance the more volatile stock selection and produce steady returns and income should you need it. A suitable property fund and/or guaranteed investment would add further stability. The mix of assets in your portfolio should reflect your circumstances, needs and objectives to achieve the result you are looking for.

Your choice of assets should be well diversified across different sectors, so that when one sector is performing disappointingly it is unlikely to affect another sector, which is probably doing well. Your equity selection, for example, should be spread across different styles, large and small companies, geographical areas, industries and currencies.

When one geographical zone is not performing so well, another is likely to be experiencing economic growth. It may also be appropriate to include emerging markets. The risk is higher here, but so are the returns. A low weighting of companies in developing markets, such as Asia or the expanding east European countries, could be placed in your portfolio.

Similarly, instead of selecting individual bonds, a bond fund will also spread risk and is likely to perform better overall. The fund would include corporate bonds, government bonds (gilts) and high yield bonds. Again, corporate bonds should be diversified across geographical areas, sectors and established and growing companies. Government bonds will introduce a safe element, while high yield bonds will increase the potential for greater returns when balanced by more stable bonds.

Your portfolio could also include a 100 per cent capital guaranteed investment to give you peace of mind and help lower the overall portfolio’s risk level.

Another way of lowering risk is to include a property fund like the new Real Estate Investment Trust (REIT), a portfolio of income producing real estate ranged across a spectrum of industrial, commercial and retail property from across the world. A REIT allows investment in property without the risks and work involved in owning individual property.

Skilled managers

As part of your asset allocation a well diversified portfolio should also include a range of different investment styles. An ideal way to do this is to use the Multi Manager approach, where your portfolio is managed by skilled managers from across the world that are expertly chosen and monitored. Just as you shouldn’t invest in just one market, having only one fund manager is not a good idea.

A range of top performing managers can keep risk under control. Your portfolio will be professionally maintained while the managers aim for the healthy rewards available.

To gain tax efficiency your investments should be “wrapped” in an appropriate life assurance bond, which will allow you to make asset allocation changes at little or no cost.

A well structured asset allocated portfolio can provide you with risk mitigation, capital protection, growth and steady income. My advice is not to let your investments get into a rut and don’t do it alone.

One danger in this is random buying – your asset investments should be carefully chosen so that they work beneficially together and are not a mismatch that could react negatively with each other.

Depending on your time scale, a medium to long-term investment will allow you to take some higher risk, as time will ride out any negative returns. An experienced financial adviser will be able to guide you along the way, and will help you to review and monitor your portfolio with you so that it doesn’t stagnate.

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