Successful investing requires an understanding of the fundamental risk and return relationship – the more risk you take, the higher your returns are likely to be in the long term. And the higher the long-term returns, the more volatility you may have to endure in the short term.
A PGFS financial advisor will help define your risk profile via an easy to understand series of questions. The answers to these questions are used to help determine your risk tolerance. From this, PGFS will recommend the most appropriate investment portfolio which is consistent with your risk profile and wealth creation goals.
Below is sample of the questions used by a PGFS financial advisor as part of the risk profile definition process.
How much of your income would be spent on servicing current debts eg: credit cards, rent or mortgage payments:
In the event of an emergency, how much cash savings would you have?:
Is your current state of employment:
Do you require any income from your investment portfolio?
Do you require access to your investment capital:
Would you change to another investment if:
Where do you currently invest most of your money?
Which statement best describes your investment objectives:
What type of return would you expect from your investment?
What is your investment time frame?
The two broad types of asset classes are:
Defensive: income-producing assets tend to be more appropriate for short-term investors or those who prefer safer, more secure investments with more consistent returns.
Growth: higher risk, higher-return assets tend to be more appropriate for long-term investors who are willing to ride out the peaks and troughs that their investment may experience.
Shares are easily traded, which makes them a flexible investment. However, with the potential for high returns comes higher risk. The value of shares can fluctuate significantly, so they should be monitored. They generally are suited to longer-term investing.
You can invest in property in two ways.
Property is typically best suited to investors who plan to keep their investment for more than five years.
Cash investments range from day-to-day bank accounts to short-term money-market investments. Whilst they offer no scope for capital growth, they contribute to a well-balanced portfolio helping to reduce your overall risk and allow easy access to money.
Fixed-interest investments mainly consist of tradeable government securities or corporate debt, known as ‘bonds’. Regarded as a relatively low-risk investment, fixed-interest securities historically provide lower returns than shares and property. However, like cash investments, you can sell them quickly if you need money. They help reduce the overall risk of your portfolio and pay a regular interest income, which may be appealing.
Shares, Property or Managed Funds
Shares are easily traded, which makes them a flexible investment. However, with the potential for high returns comes higher risk. The value of shares can fluctuate significantly, so they should be monitored. They generally are suited to longer-term investing.
You can invest in property in two ways.
Property is typically best suited to investors who plan to keep their investment for more than five years.
A managed fund pools the money of many individual investors. This money is then professionally managed according to the investment objective of each fund. By investing in a managed fund and pooling your money with other investors, you can take advantage of investment opportunities that you may not be able to access as an individual investor.
When you invest in a managed fund, you are allocated a number of ‘units’ based on the entry unit price at the time you invest. Your units represent the value of your investment, which will change over time as the market value of the assets in the fund rises or falls.
It is lilkely that a mix of all three of the above asset classes would be used to represent your investment objectives and align with your risk profile. A PGFS Financial Advisor can asssist in determining the appropriate weighting of each asset class.
Dollar cost averaging is a simple strategy investors can employ to smooth out market volatility.
It is almost impossible to time the market perfectly when investing. Not only is the risk that an investment is made at the “wrong time” but the greater risk is that in waiting for the “right time” you’re not invested in the market at all. The risk of getting the timing wrong can be minimised, however, if the investment is made over a set period of time.
Dollar Cost Averaging is most effective when investing in a volatile or falling market as your regular, set investment amount buys less when the market’s up and more when the market’s down.
This concept relies on the principle that capital wealth is best built over the long term by time spent participating in the market as opposed to trying to “time” the best moment to get in and out of the markets.
With dollar cost averaging, you don’t have to worry about where share prices or interest rates are headed. You simply invest a set amount of money on a regular basis over a long period of time.
Below is a simple example that illustrates how it works based on investing $100 per month into a managed investment that initially had a unit price of $10. Over the next few months, the market falls, (causing the unit price to drop) before recovering to its original value.
At the end of the 5 months you have 65 units each worth $10, so you have $650. You have invested $500, so your profit is $150 even though the unit price is the same as when you first invested.
Dollar cost averaging does not guarantee a profit but with a sensible and long-term investment approach, dollar cost averaging can smooth out the market’s ups and downs and reduce the risk of investing in volatile markets.
Understanding Investment Risk
There are an increasing range of investment options in the market today. These different investments pose different levels of risk. Generally, the riskier the investment, the greater the potential returns – and losses.
However diversifying your investments may help to reduce risk you could be potentially exposed to as well as increase earnings.
A financial adviser can help you determine the level of risk you’re comfortable with and can help guide you in your choice of investments.
Before making any investment decisions, you should understand the relationship between risk of loss and return (earnings).
What’s risk got to do with return?
Simply put, the riskier the investment, the greater the potential gains or losses.
For example, shares are one of the riskiest asset classes as their value can fluctuate dramatically either up or down.
Shares however, also offer the greatest potential to make returns or losses over the long term.
How does time affect risk?
Generally, by taking a long term investment view, you can reduce your exposure to risk by investing over a longer period of time. This is because over the longer term the short-term ups and downs in the market have more chance of being smoothed out or counteracted. Having a short term investment view does offer the opportunity for some fast gains but also fast losses.
While your personal risk outlook may differ, generally the following categories exist:
What level of risk are you comfortable with?
Understanding your risk profile can help make you feel more comfortable with your investment choices. It will also guide you find the investments that best suit you.
Helping to understand your risk profile, you should consider the length of time you’ll be investing for and the level of returns you’re hope to achieve.
It’s generally risky to put all your eggs in the one basket. Diversifying your investments can help reduce risk and may improve your returns.
How does diversification work?
Diversification is the act of spreading investment money over a wide variety of different areas such as:
Further more uou can also diversify by targeting different Fund managers for their particular investment style and also choosing from a range of managed funds sectors.
Fund managers also provide diversification through their managed funds. A PGFS Financial Adviser can assist you to determine
Why diversify your investments?
Not all asset classes perform as well as each other year after year. We all want to be able to pick the investment that’s going to perform best.
This is not an easy job. There are many investment options available and markets can be unpredictable. You must also consider that the best-performing asset class or sector can change each year.
By diversifying your investments, you have more chance of picking the best-performing asset class and therefore reducing the risk of low and poorer returns.
How do managed funds make it easy to diversify?
Managed funds allow you the benefits of diversification and with only the minimum investment amount. Managed funds invest your funds with that of many other investors there by creating ‘economies of scale’. This allows investors to invest in a larger range of asset classes and industries as well as open the doors to investment opportunities they would not normally have access to.
Remember: it’s important to keep in mind your appetite for risk and particular financial goals before choosing from the wide range of managed funds on offer.
