Investment Portfolios are for everyone
Whether saving for retirement or investing in an ARF post retirement, one of the most important factors is having the appropriate investment portfolio. An “investment portfolio” sounds glamorous and perhaps sounds like something only the rich and famous have, however in fact, an Investment Portfolio is simply the collection of different assets across which the money you have invested is spread.
It’s not just for your retirement assets; you may also need an investment portfolio for savings or an inheritance.There are a number of factors that will determine if your investment portfolio is the most suitable for you and the following is a guide for what to look for when reviewing your portfolio.
Risk Appropriate
Risk has many different meanings, however when we talk about an investment portfolio, the risk level of that portfolio is determined by the weighting* of high volatility asset classes within the fund. Traditionally, Equities, or stocks and shares as they are also known, are the most volatile. They can bring significant positive growth to an investment portfolio and conversely, they have the ability to reduce the value significantly.
There are many factors that determine what an individual will consider as a risk appropriate for his or her own investment portfolio. You may be investing with a view to making big returns or you may simply wish to beat inflation over a period of time. Either way, it is important that you understand your investment portfolio and its risk rating, to ensure that it is appropriate for your needs.
*that is the % of your money exposed to each asset class
Diversification
Diversification is the very reason we even talk about investment portfolios. If diversification were not required, we would not require an investment portfolio; we would simply invest in one stock, or one asset class. There is much documented investment theory that demonstrates the importance of diversification, but simply put, diversification means “not putting all your eggs in one basket.” If you spread your investment portfolio across different assets classes (Bonds, Cash, Property & Alternatives), you will reduce the risk of serious financial losses. Modern portfolio construction theory is evolving; a good investment portfolio will not just offer diversification across asset classes, but also within the asset classes meaning that the weighting of the spread across these asset classes is no longer the only factor providing diversification in your portfolio.
Life-styling
The majority of Investment portfolios’ constructed for retirement savings will offer Life-styling, either as the default or by choice. This investment portfolio strategy assumes that younger investors can afford to take greater risk in expectation of greater returns and that as older investors approach retirement, their appetite for risk reduces. Life-styling usually kicks in between ages 55 and 60 and translates to a reduction in risk within the older investor’s portfolio. This happens automatically by reducing exposure to Equities in favour of an increased weighting in either cash or bonds, or both. This may be a suitable strategy for the investment portfolio of a person who wishes to buy an annuity (pension) at retirement, but not necessarily for a person who wishes to start a new investment portfolio by way of investing in an Approved Retirement Fund (ARF).
Cost of Cash
Deposit rates are at an all-time low, meaning we are nearly paying the banks to hold our money, instead of the traditional way, where they pay us a modest amount of interest to reward us for allowing them to hold our money. DIRT (Deposit Interest Retention Tax) is 41%, meaning much of the small growth available through interest is eroded through tax. If deposits aren’t paying us, holding cash for long periods of time, may mean, that you are actually losing money. If you are not keeping up with inflation, your purchasing power is reducing, which equates to a loss in real terms. This highlights the need for a well-diversified, risk appropriate investment portfolio.
If you are unsure about your own investment portfolio, you should consider taking impartial, independent financial advice to ensure that your retirement savings or other assets are working for you in a way you are comfortable with.
Here to help you navigate your way to financial security.
The Milestone Advisory team are qualified financial services consultants. We specialise in helping professionals in the construction sector and related industries. Our team will work with you to review your finances, explaining your options in clear English.
No jargon – just the facts.
For further information please contact Susan O’Mara via email or phone: (01) 406 8020. Milestone Advisory DAC t/a Milestone Advisory is regulated by the Central Bank of Ireland.
