If it’s your first time investing it can be easy to get overwhelmed by the amount of different investments available to you. Not only the investments themselves but also the number of platforms you can use to trade on the stock market. Then on top of this, how do you structure your portfolio to achieve your goals and reflect you as an investor.
Let’s look at how you can navigate the choices available to you and develop your own portfolio which fits your risk appetite, timeframe and financial goals.
At a basic level there are two types of investment classifications, defensive investments and growth investments.
Defensive investments
Defensive investments provide you with a low level of risk. They generally come in the form of cash and fixed interest investments. Defensive investments are best used for short term investing and to provide a level of diversification and security to your portfolio. Defensive investments will periodically pay a fixed rate of income and help to preserve your money.
Growth investments
Growth assets have a higher level of risk and offer greater potential growth of capital. These investments can give investors capital growth and provide a level of income through dividends paid by either the shares held, or property rental income. While this all sounds well and good there is a downside to growth investments, which is volatility.
Asset Allocation
Now that we understand the two major types of investments that make up a portfolio, we need to understand how you decide what percentage of your money goes into each one. This is called your asset allocation and can be calculated by these three factors. Your financial goal, the level of risk you’re comfortable in taking and the amount of time you have to invest.
What’s your goal?
Firstly, decide on what your investing goal is. Are you trying to maximise your wealth and grow your money as much as you can? Are you trying to use your money to support your lifestyle by providing an income stream through dividends? There are many possibilities, and each can dramatically affect what you invest in. Someone who is in their early sixties and looking to retire soon will have a vastly different portfolio to someone in their early twenties and new to the workforce.
What’s your risk profile?
Identifying your risk profile is an important step in structuring your portfolio as it indicates your tolerance to risk. If you have a high-risk tolerance, then generally you can take on a greater amount of risk in your portfolio by having a greater exposure to stocks. There are multiple risk profile questionnaires available to determine you profile. However, these are not always entirely accurate and only through a discussion with an adviser can you get a more accurate and true understanding of your risk-profile.
What’s your time horizon?
Your investment time horizon is the period you will hold your investments for before needing that money back. The amount of time you have to invest, directly affects the assets you invest in because some assets are more volatile than others. If you need your money in 2 or 3 years, buying a large number of shares exposes you to a lot of volatility risk. If the market was to drop, you may not have enough time to recover and may be forced to sell your shares at a loss.
Putting all of this together will help guide your first step into the investing world. As always, we are here to offer any help. If you would like to learn more about what types of investments and strategies you can use or if you would like an analysis of your current portfolio, please contact our office to speak to one of our advisers.
Any advice given in this article is general in nature and does not take into account your personal situation.