Investment portfolios may seem like a relatively simple concept to understand. For some, the idea is simply buying some investments and ‘bang’, you have a portfolio. While this may be technically true, it’s a bit like building a cubby house and expecting the family to move in. Chances are, it probably won’t best suit your needs. Here are some of the considerations which need to be taken into account when building an investment portfolio.
Investment Objectives
An investment portfolio is a plan for how you want to structure your investments. And you can’t plan for your investments if you don’t know what you want to achieve. Imagine jumping in the car to drive go on holiday without having decided on a destination. You may have the means to get there, but without the objective of where you are going, you have no direction in which to travel. Deciding on your investment objectives gives you a destination to drive to.
Risk Appetite
Everyone has a different appetite for risk. For some people, they are comfortable with larger levels of debt or higher market volatility. For others, the thought of losing even a small percentage of their investments keeps them awake at night. Understanding your risk profile will allow you to choose investments which are suited to you. There is a right and wrong level of risk. The right level is the one you are comfortable with, the wrong level is the one you are not.
Time Horizon
The time horizon of your investment goals will influence the make-up of your investment portfolio. If your investment timeline is short, then highly volatile investments, or even slow growth investments, may not be the best decision. This is because you may not have enough time to recover from losses, or similarly not enough time for slow growth assets to appreciate in value. Matching the right investments to your time horizon is crucial to maximising your returns.
Liquidity Needs
How much access you require to your invested capital at short notice is another major consideration for your investment portfolio. If you do not require access to you cash, then investments like property, term deposits and investment bonds may be a good option. The opposite applies to those who require a high level of liquidity. Achieving the balance between your liquidity needs and good levels of returns/growth is the key.
Tax
No one wants to put their hard earned money to work, earning good returns, only to have a large slice of it taken by the tax man. Managing the tax effectiveness of your investments is a great way to ensure that the majority of your returns stay with you. This is not only applicable to the returns you earn now. Tax implications when disposing of assets need to be considered when deciding what to purchase and under what ownership structure. How tax may effect assets which you intend to pass onto family members as part of your estate also requires focus.
Market Conditions
Not too many people go to the beach in the rain. Nor do a lot of avid snow skiers head to Perisher in January. And very few of us venture out for a 10k run in the 40 degree heat. We do these things when the conditions are right. Constructing an investment portfolio may not be as cut and dry as making these decisions, but market conditions require monitoring to ensure that the investments are being made into the right areas at the right time.
Legal and Legislative Requirements
Not all investments are as straight forward as they may appear. There are a multitude of legal and legislative requirements which must be adhered to across different investment. From investment bonds to direct property, superannuation to income and assets tests, most investments will have some legal or legislative requirements which govern them. Understanding how these may affect you when you buy, hold and dispose of the investment could end up saving you a significant amount of money.
Do you need help building an investment portfolio that is right for you? Give the team at Steve May a call and start a conversation today.
You need to consider with your financial planner (or adviser), your objectives, financial situation and your particular needs prior to making an investment decision. Sensibly Pty Ltd and its authorised representatives (or credit representatives) do not accept liability for any errors or omissions of information supplied on this website
Nick Shanley, Steve May, Luke Styles and Shanley Financial Planning T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Sensibly Pty Ltd, AFSL 533923. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guides.
