With the recent market volatility weighing on many an investors minds, investment platform Fidelity International warns that now could be the time for a portfolio MOT.
“Understanding the behaviour and characteristics of different asset classes can help you determine the right combination of investments to deliver a specific long term outcome,” says Maike Currie, investment director for personal investing at Fidelity.
She adds that equities, for example, can offer strong capital growth, while bonds tend to have more defensive properties that can be useful during periods of market volatility.
Her top tips for getting your portfolio’s blend just right are:
1. Think about how long you’ll invest for.
A younger investor planning to invest for the long term can afford to take more risks, for example, as their portfolio has more time to smooth out returns. So their asset allocation may be weighted more heavily to higher risk assets, such as equities.
An investor nearing retirement on the other hand will typically be looking to protect and preserve their capital pot and will prefer to lean towards safer assets such as bonds or cash.
2. Be clear about your investment goals.
If, for example, your aim is to achieve a steady stream of income, given today’s low interest rate environment, you may look to meet your income goals by upping your allocation towards income yielding assets such as equity income or property.
3. Know your appetite for risk.
A portfolio with a high proportion of risk assets such as equities, property and commodities is likely to provide a higher level of return for investors, while one which is skewed towards lower-risk asset classes, such as bonds and cash, will likely make you less.
4. Review and rebalance your portfolio regularly.
Once your portfolio is set up with the appropriate blend of assets, you can’t just ignore it. You need to monitor it. Market movements could mean your portfolio no longer matches your risk appetite, or goals.
A review once a year should be sufficient, as you don’t want to fiddle with your portfolio too often. Remember that buying and selling investments incur costs so be careful not to overtrade as this will chip away at the overall value of your portfolio.
5. Don’t have the time? Outsource to the experts.
Asset classes behave differently through time and returns can be difficult to predict. Take Japanese equities for example, in 2015, the asset class delivered an annual return of 7% while in 2014, the annual return was 2% and in 2013, returns stood at 26%.
An option to combat this is a multi-asset fund. If you don’t have the time to set this up yourself, you can ‘outsource’ this to the manager at the helm of the fund, who will invest in a mixture of assets to meet a certain outcome be it income, capital growth or both.