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OUT OF ADVERSITY COMES OPPORTUNITY
by Sam Hulson of First Equitable
Three years on from the 2016 referendum, and with ongoing
political wrangling, the eventual outcome of Brexit is still
uncertain. Brexit-related uncertainty and the challenging
domestic backdrop mean investors need to be smarter about how
they invest, which is why it is essential to obtain professional
financial advice. As Benjamin Franklin once said: ‘Out of adversity
comes opportunity.’
REFLECTING YOUR FUTURE CAPITAL OR INCOME NEEDS
As the uncertainty around Brexit continues, the need for asset
allocation has never been more important. This is because most
investment returns are explained by asset allocation, which means it
matters more about how you divide up your pot than it does whether
you pick the best or even worst funds in each of those asset classes.
Uncertainty is a fact of life when it comes to investing and should not
be a reason to put off investing. The important thing to remember is
not to let your investment decisions be driven by your emotions. This
means that your overall asset allocation needs to reflect your future
capital or income needs; the timescales before those capital sums are
required; the level of income sought; and the amount of risk you can
tolerate. Investing is all about risk and return.
INDIVIDUAL ATTITUDE TOWARDS RISK
Not only does asset allocation naturally spread risk, but it can also
help you to boost your returns while maintaining, or even lowering,
the level of risk of your portfolio. Most rational investors would
prefer to maximise their returns, but every investor has their own
individual attitude towards risk.
Determining what portion of your portfolio should be invested
into each asset class is called ‘asset allocation’ and is the process of
dividing your investment/s between different assets. Portfolios can
incorporate a wide range of different assets, all of which have their
own characteristics like cash, bonds, equities (shares in companies)
and property.
COMBINING A NUMBER OF DIFFERENT INVESTMENTS
The potential returns available from different kinds of investment,
and the risks involved, change over time as a result of economic,
political and regulatory developments; as well as a host of other
factors. Diversification helps to address this uncertainty by
combining a number of different investments.
When putting together a portfolio, there are a number of asset
classes, or types of investments, that can be combined in different
ways. The starting point is cash – and the aim of employing the other
asset classes is to achieve a better return than could be achieved by
leaving all of the investment on deposit.
DIVERSIFICATION
If we could see into the future, there would be no need to diversify
our investments. We could merely choose a date when we needed
our money back, then select the investment that would provide the
highest return to that date. It might be a company share, or a bond,
or gold, or any other kind of asset. The problem is that we do not
have the gift of foresight.
Diversification helps to address this uncertainty by combining
a number of different investments. In order to maximise the
performance potential of a diversified portfolio, managers can
actively change the mix of assets they hold to reflect the prevailing
market conditions. These changes can be made at a number of levels,
including the overall asset mix, the target markets within each asset
class and the risk profile of underlying funds within markets.
As a rule, an environment of positive or recovering economic growth
and healthy risk appetite would be likely to prompt an increased
weighting in equities and a lower exposure to bonds. Within these
baskets of assets, the manager might also move into more aggressive
portfolios when markets are doing well and more cautious ones when
conditions are more difficult. Geographical factors such as local
economic growth, interest rates and the political background will
also affect the weighting between markets within equities and bonds.
In the underlying portfolios, managers will normally adopt a more
defensive positioning when risk appetite is low. For example, in
equities, they might have higher weightings in large companies
operating in parts of the market that are less reliant on robust
economic growth. Conversely, when risk appetite is abundant,
underlying portfolios will tend to raise their exposure to more
economically sensitive parts of the market and to smaller companies.
TIME TO DO MORE WITH YOUR MONEY?
Whatever your level of confidence, we can help you make better-
informed investment decisions. We’ll demystify a complex subject
and provide professional advice to enable you to build an investment
portfolio that meets your investment goals, whatever your risk level.
Please contact us to discover your options. You can also email me
at: [email protected]
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