Did You Know - New Year 2006 Previous Did You Know
Asset Allocation
When considering investments and investing, one of the first decisions must be which types of investments you wish to buy. Typically the assets in which we can invest include cash, bonds, equities and property. Some may invest only in cash, some only in UK equities (shares) and others may buy a mix of UK equities, overseas equities, bonds and cash. These investments do not include the same security of capital which is afforded with a deposit account.
Next, investors must decide in what proportions they wish to invest in each of these investments.You should always seek Independent Financial Advice before entering into any type of investment as it is vital that you consider your attitude to investment risk and the suitability to your own personal circumstances of the proposed investments.
To generalise, and for the purposes of this article, we will assume that the higher the equity content, the higher the expected risks and returns – at least over the very long term (in excess of 5 years) . Whilst equities may offer greater returns to investors over a long timeframe they also other the greatest risk of loss in the short-term. Investors should consider carefully the level of equity exposure they are willing to hold. Some investors might assume a 50% holding of cash and bonds and a 50% holding of domestic equities and overseas equities.
This decision must be made on the basis of expected returns and expected risks and involves a complex set of decisions based on equally complex estimates.We should also consider whether you would be investing for growth or income as this must be determined before a portfolio is constructed for you.
The value of an investment can go down as well as up. Past performance is not a guide to future performance. The level of income you receive is not guaranteed and can go up or down
This early decision – identifying which investments and the proportions to invest in is known as ‘asset allocation’. It is one of the most important decisions an investor will make.
Spreading investments over a number of asset classes, known as diversification, can be, in our opinion, usually beneficial for most investors. In some circumstances, through careful monitoring of your investments, it is possible to actually reduce the risk of capital loss without necessarily reducing potential returns, although this is in no way guaranteed.
The most important benefit from diversification is the potential to reduce the level of risk of capital loss, although this again is in no way guaranteed. We cannot be sure of when and where assets will fall or rise, so it is prudent to maintain several investment areas at the same time. The allocation to each asset should reflect an investor’s tolerance of risks and expectations of future returns.
Finally, investors should decide (usually with their adviser) how they wish to manage the asset mix over time and ensure that advice is taken on a regular basis to review the initial and subsequent investments to maintain their objectives.
For guidance and information purposes only. Please seek Independent financial advice before proceeding with any changes/new contracts. The Financial services Authority does not regulate taxation advice.
