asset allocation

Lessons in Investing – Asset Allocation

Posted on Posted in Finance

Investing can seem like a dark art, especially when you look at the market volatility we have seen this year, and not just as a result of Brexit. To help you decode the complex world of finance, here is an investment lesson on spreading risk and maximising return through asset allocation.

What assets can you invest in?

There are five main classes of asset, from which your financial advisor will put together a portfolio:

  • Equities – companies which you can buy a stake in
  • Bonds – you can buy gilts, which are government bonds, or corporate bonds
  • Commodities – funds supporting basic goods that underlie a product or service
  • Property – this includes property purchased by you and property funds supporting the purchase of other buildings
  • Cash – easy to access accounts that pay regular interest

With each asset class, the level of risk and return will differ, and it’s up to you to decide how bold or safe you wish to play it. For example, cash is a very low risk investment asset, but the returns are also relatively low.

Here are some key questions to ask yourself, in order to make the right investments:

What’s your financial plan?

Ultimately, the areas in which you invest will be determined by your overall financial objectives, which directly impact your attitude to risk. If you have a short-term plan, your investments are likely to be much more conservative, as you need a guaranteed result. However, if you’re looking at a long-term plan, you can afford to take more risk.

Equally, you might find yourself reaching retirement, and the investments you have made to date have not generated the income you had hoped for. Therefore, you may choose to allocate some money to a riskier asset, that can accelerate your investment total in a short space of time.

Market timing will also play an important role, as some assets will be riskier than others, depending on when you decide to invest. It’s important to keep abreast of changes in the market, as you will likely need to adjust your portfolio as conditions change – particularly with long-term investment plans.

How much do you want to invest?

Your attitude to risk should also be determined by the volume of money you have to invest in. For example, if you only have a limited fund, you should look for a moderate asset that is likely to deliver a solid result – even if it doesn’t set the world on fire.

If you’ve got more money to play with, though, then consider making a few higher risk investments. A diversified portfolio is a good way to combine steady investments with higher yield ventures, so that you have a base level of security along side high stake investments.

These multi-asset portfolios are growing in popularity, as more and more people begin to value their investment as a sum of its parts, with steadier assets offsetting more volatile endeavours.

Have you got the right financial support in place?

Asset allocation really is the most important decision you’ll make when it comes to your financial plan; 90% of the returns generated by your investment comes down to the selection of assets in your portfolio.

To feel secure in your choices, work with a financial advisor that’s prepared to spend time with you, listening to your goals, attitude to risk, and concerns, to create a diversified portfolio to match your objectives. Don’t be afraid to ask them to explain complex investments or processes in greater detail, and to make sure they regularly keep you updated on the success of your assets, along with any changes that may impact their value.

If you need help with your investments, our professional team can help you to develop a portfolio right for you.

The value of investments can go down as well as up and you may not get back the amount invested.