With many investment portfolios having experienced losses in recent months, a combination of increases in the cost of living (inflation), interest rate rises, energy shortages and more recently the conflict in Ukraine it is worthwhile reflecting upon the steps taken to arrive at a suitable investment strategy.
When considering an investment and assuming you take advice, the timeframe will invariably be in excess of five years. Step one will often be to complete and discuss a risk profile questionnaire. Often, this will deliver a score, one to ten or one to five. As an example, one being very cautious and ten, very adventurous. It is helpful to be able to attach a range of investment outcomes. A potential upside return for the risk that you are prepared to accept and more importantly the possible downside that you could tolerate. Equally, just because the questionnaire delivers a particular risk rated number (e.g. a 5/10) does not mean that it must be adhered to.
Having other assets and investments, being an experienced investor or having secure streams of income may influence your risk score. More importantly, how you would cope with an investment that is falling in value, would it cause you sleepless nights or anxiety? Would you feel compelled to cut your losses and switch to perceived safer investments. These factors will influence what is the correct risk score or profile for you to adopt.
It is crucial to understand what an appropriate level of money is to hold in cash, usually banks and building societies. The correct level of cash is a very personal decision, amounts can vary from one person to the next; what is your “comfort level” of cash? However, we would expect that short term fluctuations in the value of an investment would have little effect on an individual’s standard of living if the appropriate level of cash has been determined at the outset of the investment process.
Once an appropriate risk rated strategy has been determined, the makeup of the investment needs to be considered. How will the investment be directed towards cash, shares (UK and overseas), fixed interest (loans to governments and big corporations) and commercial property? Depending upon the amount of risk that you are comfortable to accept will drive the mix of the portfolio.
An appropriate investment manager is then recommended to run the investment. Regular reviews will ensure that the portfolio remains on track and continues to match your attitude to risk which can of course alter over time.
In volatile markets, it is useful to remember that you will have been through a process or number of steps to arrive at an agreed investment approach.
Investments very rarely move in a consistently, positive straight line. Investments need to be considered as a longer term (5 year plus) journey and there will be bumps in the road in terms of performance. Whilst falls in the value of the portfolio can be unsettling, if a robust process has been adopted at outset, it is usually best practice to remain invested and focus on your longer-term financial planning goals.
If you have would like to discuss your investments or review your approach to investment risk please speak with one our professional advisers at Wingate.