Portfolio planning is a structured and intelligent way of spreading your risk through different investment products, such as Unit Trusts, OEICS, Investment Bonds and ISAs. You should also look to diversify your portfolio by investing in different types of asset classes.
There is no fixed rule on how to plan your portfolio but there are several ways in which your portfolio can be constructed. One of the most cost-effective ways of managing an investment portfolio is to use a ‘platform’ or ‘WRAP’. (See Choice Investment Portfolio Solutions).
The key to a successful portfolio is to ensure it is adequately diversified between different asset classes. The percentage of your money that you should invest in each of the key asset classes will depend on your investment objectives, term and attitude to risk.
The four key asset classes are Cash, Equities, Property and Bonds and these are detailed below:-
Cash and cash equivalents – such as savings deposits, certificates of deposit, treasury bills, money market deposit accounts, and money market funds – are the safest investments, but offer the lowest return of the four major asset categories.
The chances of losing money on an investment in this asset category are generally extremely low. The principal concern for investors investing in cash equivalents is inflation risk. This is the risk that inflation will outpace and erode investment returns over time.
Equities (or shares) have historically had the greatest risk and highest returns among the four major asset categories. As an asset category, equities are a portfolio’s greatest potential for growth. However the volatility of stocks makes them a very risky investment in the short term.
Large company shares as a group, for example, have lost money on average about one out of every three years and sometimes the losses have been quite dramatic. However investors that have been willing to ride out the volatile returns of equities over long periods of time generally have been rewarded with strong positive returns.
Property funds can include commercial, industrial, retail and residential property. They can invest in tangible properties or shares in property companies, or a combination of both.
Funds that are invested in physical property are less liquid than those that invest in property shares.
Bonds are generally less volatile than equities (shares) but offer more modest returns. ‘Bonds’ should not be confused with and ‘Investment Bond’ which is a ‘Product’. Instead, ‘Bonds’ as an asset class refers to ‘Corporate Bonds’, ‘High Yield Bonds’ and ‘Gilts’. As a result, an investor approaching a financial goal might increase his or her bond holdings relative to his or her share holdings because the reduced risk of holding more bonds would be attractive to the investor despite their lower potential for growth.
You should keep in mind that certain categories of bonds offer high returns similar to shares. However, these bonds, known as high-yield or junk bonds, also carry higher risk.
As well as being able to construct bespoke portfolios for clients we also offer a range of Model Portfolios that can be accessed via our WRAP Platform.
For more details on our WRAP Platform please see Choice Investment Portfolio Solutions.
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