Investment decision making has often been centred on which funds to choose.
However, investment research has shown that, in most circumstances, the asset allocation choice is by far the most important factor in determining investment returns over the longer term.
- Individual stocks in the same asset class tend to be highly correlated and tend to move together.
- Different assets behave in different ways, for example:
- Money market instruments (including cash) have less volatile market value, but normally provide the lowest return
- Bonds are relatively low-volatility investments but may give a comparatively low return and they are not good for protecting longer term purchasing power during high inﬂationary periods (the exception being Index Linked Government Gilts).
- Equities are relatively volatile investments but usually give a better return over the long-term and are typically good at protecting longer term purchasing power during inﬂationary periods
- Overseas equities add currency risk and are often even more volatile, but give the opportunity of investing in different markets
Past performance is not a reliable guide to future performance. If past history was all there was to investment, the richest people would be librarians.
Diversiﬁcation reduces risk exposure
“Don’t put all your eggs in one basket” is a good tip when it comes to investing.
You should therefore consider investing in a variety of asset classes and a range of investments within those asset classes. By investing in this way, you are not exposed to the risk that any one asset performs poorly.
Efficient portfolio diversiﬁcation
As you might expect, different portfolios will give different results. In fact, if you calculated all the different portfolios that gave you the same amount of volatility, some portfolios would have given a better return than others, and one would be the highest.
The portfolio which gives the highest return for a particular level of volatility is the most ‘efﬁcient’ – having given the highest return for the risk taken on.
Our Portfolio Planning takes such factors into account and we present a range of investment portfolios with different levels of risk and reward.
Getting the asset allocation right
Ultimately, the right asset allocation for an investor depends on:
- The ability to withstand market volatility (attitude to risk)
- Investment time-frame
- Investment goals
Our investment planning service combines all these factors.