In developing an investment strategy, factors such as risk profile, objectives, time horizon, and taxation are key and should be the backdrop for all decision making. In building a portfolio one of the first considerations is asset allocation, which is concerned with how investments are spread between different asset types and regions. The second is fund selection, which is concerned with the decision of which fund managers and funds to use for each of the different asset sectors chosen. Both of these considerations are important although studies have consistently shown that in the medium to long term the asset allocation usually has a much larger impact on the overall portfolio risk and return than the individual funds selected.
The following are a sample of the type of questions we get asked regularly:
I've just inherited a significant lump sum how should I invest it?
There is no simple answer to that question as there are a lot of individual factors to consider. As a generalisation you should diversify your investments across a range of asset types (stocks, bonds, property, commodities, cash etc.) that make sense given your risk tolerance and investing time frame. You can do this directly or you can achieve it through using investment funds.
As a first step, before you invest a cent, you should ask yourself when are you likely to need to access the funds and to what extent? If you will need the money in a couple of years, then you shouldn't look beyond deposits as your objective is not to maximise your returns but more to ensure the funds will be there when you need them. You may also wish to consider wiping out any expensive loans you have as a first step.
Where you want to invest for the longer term , then you will need to assess what your risk tolerance is. Are you the keep it under the mattress type or the put it on a sure thing in the 3.40 in Leopardstown type? To get a feel for what your attitude to risk is why not click on our Risk Profiler tool.
Having determined where you fit in risk-wise the next big consideration is asset mix and this is a science in itself, Asset Modelling, with stochastic processes and probability theory thrown in for good measure. There are tools available which help to get a good mix of assets but a good measure of common sense comes into play in that it will depend significantly on where the market is when you come to invest as to what the mix should be.
Investment experts are always talking about risk & reward but what does it really mean?
Risk, in investment terms is the capacity to lose money over a period. Almost always, higher potential rewards are coupled with higher risks. Rewards are potential. Risks are real. However, it is almost impossible to insulate yourself from all risk; one of the biggest risks is to invest so conservatively that your investments don't even keep up with inflation. Different assets have different levels of risk associated with them. At the higher end of risk is company shares, particularly small cap shares, where the company you invest in is exposed to the risk of hard times and poor performance and is also exposed to market risk such as recession. At the other end of the risk scale are gilts where there is a government backed fixed rate of interest payable and the capital will be returned at maturity (but as pointed out earlier, there is still the risk that inflation is higher than the interest rate paid). This is why asset allocation and diversification are important strategies for investing in that they try to match the investor's circumstances and profile to a level of acceptable risk and consequent reward over time.
What are ETFs?
Although they've been around for a number of years in the US they're really only taking off now on this side of the world . Exchange-traded funds, ETFs for short, are an innovative addition to the range of options open to investors.
Firstly, what exactly are they? They trade as shares on the stock exchange but they are actually index funds which track the performance of a group of stocks or bonds. For example, if you wanted your investments to be exposed to Nasdaq 100 stocks, instead of buying Microsoft, Cisco, Starbucks etc., you could buy the Nasdaq 100
which is a composite of all the stocks on the index.
which track geographical regions, sectors,
that track mid-cap or large-cap stocks or ones that focus on almost any industry or market sector, from consumer staples to consumer discretionary stocks to energy or materials companies to health care, information technology or property.
Their main advantages are flexibility and lower cost, although for the smaller investor the stock-broking commissions may make them a little more expensive. While they are a step up from buying an individual share and a good way to achieve diversification, they still require investment decisions and should only be taken on if you feel you don't want or need the day-to-day management provided by professional investment managers under a broader based fund.
How are Investment Funds Performing?
Best & Worst Performing Funds (Click here to see the top performing funds over the last 3 months, last year & last 3 years)