Investment Strategy

Investment Strategy

Individual investors need to clearly understand their own attitude

toward risk and how this impacts on their investment style. 

Essentially, they need to explore their relationship with money and feel comfortable with the level of risk they've taken.  This means managing their own expectations and understanding what a reasonable return on their investment would be.

Understand volatility: It's not the big bad wolf that it's often made out to be, and if properly managed, can generate superb returns, provided you are appropriately invested, committed to sound investment time-frames, and prepared to ride out short-term market fluctuations.


Know your appetite for risk: Understand what investment risk really means to you, your relationship with money (and particularly the loss thereof), and translate it to the extent that you can stomach the market.  It's important that you ask the right questions to your Adviser to get clarity on these issues.


Manage your expectations: Know what's possible, based on long-term investing.  It would be wrong, for instance, to assume that stock markets will continue along the current state indefinitely.  They will eventually revert to the mean.  Also beware of treating stock exchanges as get rich quickly mechanisms, without careful consideration.  At worst your long-term objective should simply be to beat inflation.  Anything above that ought to be regarded as a 'free lunch'.


Take responsibility for the decision-making process: It's important that you fully understand what you're in for when a product is recommended to you.  It can be short-sighted to be brave upfront, but once serious short-term volatility arises, that you lose your nerve.


Establish your investment time-frame: Set realistic long-term investment objectives for yourself and be prepared to stick with them.  Various shocks will inevitably arise, and it's important that you're able emotionally to manage them.


Get your asset allocation right: This is imperative if you wish to optimally achieve your investment objectives.  Get this right, and choice of the best performing products becomes of lesser importance.


Apply discipline to your investing: Beware of dinner table conversations and pub talk that could lead you to selling out of tried and tested long-term investments.  Stick with what has been well thought out, objective and reasonable.  Currently, for instance, there are numerous equity fund investors in a state of panic and querying investment house call centres on whether they should sell out completely.  If your investment profile is right and sound asset allocation has been applied, you shouldn't have to be overly perturbed.


Over-cautiousness: Just as important as it is not to over-react to irrational situations, it's just as necessary that you don't become too cautious at the expense, for example, of sufficient exposure to equities required to generate long-term capital growth.  This phenomenon has tended to emanate after major stock market corrections such as in 1998 and 2001, as well as from investment advisers steering clients away from what they may consider as debatable risk.


Tax efficiency: Ensure that your investment is tax efficient.  There are several ways that a portfolio can be constructed in a tax-friendly way.  PIE’s (Portfolio Investment Entities) are a good example.


Avoid unsustainable withdrawals: Drawing down an investment like superannuation by anything close to 6% a year is an issue.  Your risk-free rating is only about 5%, so by drawing more than that, you're at risk of eroding your capital.  This can have major negative repercussions for the long-term.


Don't under-estimate longevity: Many people are retiring earlier and living longer.  This needs to be seriously factored into realistic investment strategizing and portfolio construction.


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