Creating an Investment Portfolio- Tips and Traps for Wealth Accumulators

Whenever I have a conversation with anyone around what I do for a living, most people think that I spend my time analyzing markets, researching investments and looking for the next hot stock tip that will make instant money. To be honest, when I first embarked on my wealth management journey I was drawn to the appeal of sexy investment portfolios and being responsible for making the decisions that would make my clients wealthy. Through my experience I have come to understand that even the best investment minds never get it right all of the time…

So what value does a wealth manager offer? Good question. 

I have been able to define my position with my clients as being the voice of reason, the trusted adviser who is able to ensure that each investment decision is able to link back to what they are trying to achieve and that my clients are not taking excessive risks in order to achieve the outcome. Portfolio construction does form a significant part of what we do but this all starts with understanding that each asset should have a purpose and as such, you should understand the potential pros and cons or risk versus return before making an investment decision that could impact your future plans.

What are the main asset classes you can invest in?

This generally comes down to two categories; defensive investments and growth investments. Defensive investments are part of a portfolio to provide downside protection or peace of mind and are generally associated with paying a rate of interest like a bank account or term deposit. Growth investments may still provide income but the primary objective of growth assets is to provide capital appreciation over time. The basic metric of investments is the risk versus return metric which basically states that the level of risk  is the potential for volatility or loss of funds and the return is the premium you could receive for taking the risk.

Defensive asset classes:

  • Cash
  • Bonds or Fixed Interest
  • Term Deposits

These types of investments are generally correlated to interest rates and as such, depending on interest rates the expected income can offer a lower return profile in comparison to what you may require to meet your financial objectives. In addition to this, these types of investments are generally capital stable to the likelihood for volatility of your investment are lower than what you would expect with growth investments.

Growth asset classes:

  • Shares- Australian & International
  • Property- Listed and Direct
  • Alternative- Private Equity/Hedged Fund
  • Infrastructure

These types of growth investments can be packaged up and presented under a number of different names but quite simply, in most cases these investments are unitized in the form of shares or an acquisition of an entire asset with the intent to achieve growth based on the performance of the underlying asset or company over time. Given that there are a number of external factors at play, these investments can fluctuate in value and are generally for longer term investments to provide the ability to weather any economic turmoil which could effect the underlying value of your investment.

So where should I invest?

There are no right or wrong ways to invest, only the right amount of due diligence you should complete before taking the plunge. When it comes to looking at an investment opportunity consider the following;

  • What is the future intent for the proceeds of your investment and when do you need to access the money? This should be in line with the duration of the investment opportunity
  • What are the previous returns and volatility of the investment in comparison to other similar investments? Look at benchmarking against the index/ local area/ industry if possible
  • What are the risks of the investment? Is the company currently profitable, does the suburb have high vacancy rates, etc
  • Where are you buying into the investment when comparing to historical performance? Are you buying in to the investment at the top of the market due to hype or has their been under-performance and ability to buy in at a cheaper rate?
  • Does the investment allow you to put money into it over time or does it require all money at the outset? Putting money into a portfolio over time can reduce the impact of market timing using a strategy called ‘dollar cost averaging’
  • Are you adequately diversifying to protect against volatility? Try not to lock up all of your eggs in one basket
  • What is the agenda of the person introducing the investment to you? Are they receiving a commission or is there potentially a conflict of interest that could mean the information you are receiving is biased

In summary, the idea of investing is to reap the rewards of the risks you are prepared to take. By making sure you are adequately educated around the investments before jumping in, ensuring emotion isn’t influencing your decisions and that you take your time when making decisions, you are able to minimize the likelihood of being the victim of a bad investment. At the end of the day, there will always be volatility in the market that we cannot foresee and we can limit the impacts of market fluctuations by diversification, not trying to time the market and ensuring we have enough time to ride the wave of the investment cycle. Beyond this, ensure you are getting quality advice from impartial fee for service advisers who are able to not only understand your personal circumstances but recommend a portfolio of investments with no bias towards any particular asset class.

If you wish to discuss your investment portfolio in more detail, please feel free to get in touch.

Thanks for reading,

Jackson | The Wealth Mentor

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