The investment answer

Five key decisions every investor needs to make

The good news - today we expect to live much longer, healthier lives. The life expectancy of a newly retired 65 year old couple in Australia is around 20 years (AIHW, 2016).

The bad news - many of us will run out of money in retirement and be left to rely on social security.  Consequently, the need to invest wisely is more important now than ever before; not only with retirement in mind but also if saving for a deposit on a house, or your children’s education.

In their book The Investment Answer, Daniel C. Goldie and Gordon S. Murray help to demystify the investment process by asking readers to make five basic but key decisions to help guide their investment strategies.

These decisions relate to the following questions:

1. Should you invest on your own or seek help from an investment professional?Investing on your own can be difficult, time consuming, and emotionally taxing.  Most individual investors don’t have the skills or disposition to manage their own portfolios.  However, even for those that do, this may not necessarily be a good idea. In today’s world of global markets and complex financial instruments, professionals have access to an array of tools and resources to help individuals effectively construct and manage an efficient portfolio that is appropriately diversified, tax effective, avoids unnecessary overlapping of assets, minimises fees and costs, whilst managing risk.Also, our own natural instincts can be our own worst enemy as we tend to want to buy assets after their prices have risen when we feel comfortable and confident.  Then when markets experience a decline, fear sets in and we often want to sell. This behavior is illustrated in the graph below and can lead to below-market returns.

(Russel Investments, 2015)

2. How should you allocate your investments among cash, fixed interest (ie bonds), property and shares?We refer to this as the Asset Allocation question, and a thorough understanding of the relationship between risk and return is vital to get this right. An understanding of each asset class’s liquidity, growth and income characteristics is equally important.  Research shows that the primary driver of investment returns is asset allocation, rather than stock picking and timing of purchases.  The graph shows the relationship between risk and return of each asset class.

(Bridges, 2016)

3. Which specific asset classes within these broad categories should you include in your portfolio?Once you have decided on the asset class mix that is right for you, and taking into account your investment timeframes, it is time to choose the specific investments needed to fulfill the chosen asset allocation.  This is where effective diversification comes into play by considering the correlation of each asset class.  The important concept here is to focus on the performance of your portfolio as a whole, rather than the return of each individual investment.

4. Should you take an actively managed approach to investing, or follow a passive alternative?Active managers attempt to outperform the market by utilising analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell.Passive investing is based on the belief that markets are efficient and extremely difficult to beat, especially after fees and taxes.  Therefore, passive investment managers seek the returns of a particular sector of the market.  The most well-known passive investment strategy is known as indexing and is where the manager purchases all of the securities in a benchmark index in the exact proportions as the index.Choosing the right strategy depends on your individual investment objectives and circumstances.

5. When should you sell assets and when should you buy more?

There will be times when minor adjustments or investment switches within your portfolio will be beneficial. Overtime, the asset allocation of your portfolio will drift away from the initial specified allocation. Bringing it back in line is referred to as rebalancing.  Generally speaking, growth assets such as shares and property, will outperform defensive assets like cash and bonds over the long term. Taking profits from these growth assets and rebalancing into underperforming asset classes will maintain your chosen level of risk. This is because periods of high returns of an asset class are often followed by periods of low returns.

Each of the above questions will have a significant impact on your overall investment outcomes.  Whether intentional or not, you are making these decisions on a daily basis, even when you decide to do nothing with your investment portfolio.  If you would like more information on these five important investment decisions, or would like to discuss your personal circumstances, please contact Orbis Wealth Management on 1300 067 247, or email simon@orbiswealth.com.au.

Goldie, Daniel C. & Murray, Gordon S. The Investment Answer. New York: Grand Central Publishing, 2011

Australian Institute of Health & Welfare, accessed 3 November 2016, <http://www.aihw.gov.au/deaths/life-expectancy/>

Russel Investments, accessed 3 November 2016,https://russellinvestments.com/au/insights/library/the-cycle-of-market-emotions

Bridges Financial Services Pty Ltd, accessed 3 November 2016,http://www.bridges.com.au/pdf_flyers/ed_flyers/investing/investment_risk_and_return

Important information and disclaimer

This publication has been prepared by Simon Dundas-Smith.  Simon Dundas-Smith and Orbis Wealth Management Pty Ltd are Authorised Representatives of Consultum Financial Advisers Pty Ltd ABN 65 006 373 995 AFSL 230323.

Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information.

Information in this publication is accurate as at the date of writing (Nov 2016). In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way.

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