You work hard your entire life, hopefully loving what you do along the way. At some point, you want to retire so you can try your hand at those hobbies you’ve been cultivating, finally spend more time with your family or focus on that non-profit that fulfils you. Maybe you even want that retirement to come at 35.
Whether you want more in retirement or fancy a substantial supplemental income, If you follow a few simple strategies, you will have a much better financial outlook both now and in the future.
What Is a Portfolio? A portfolio is a term that gets thrown around a lot but if you don’t know what it means it can be difficult to understand. A portfolio is a group of financial assets like stocks, bonds, currencies, cash equivalents and commodities. It can also include their fund counterparts like mutual funds, exchange-traded and closed funds.
Think of a portfolio as a pie with different sized pieces. Each piece represents different types of investments and asset classes. A portfolio can have many securities but cash, stocks and bonds are considered the foundation of most portfolios. Your wealth strategy will determine how big the pieces of the pie will be.
When you work with Forward360, we get to know you—your hopes, dreams and future plans. Our team will work with you to determine your investment strategy, understand your objectives and assess your risk tolerance to help you build a portfolio that’s aligned with your goals.
Understand the Importance of Diversification
When you think of diversification, think of not putting all your eggs in one basket. Diversifying your portfolio reduces your overall risk because it spreads your investments among various industries and financial instruments. If one area of your portfolio takes a hit for a quarter or a year, you have other areas that can make up for it because they won’t necessarily react similarly to the same event.
Investment professionals can agree that diversification is the most important factor in reaching long-term financial goals by minimising risk. Achieving diversification can be tricky. There are a few components to consider. We always suggest enlisting the advice of a professional financial advisor when considering how to allocate your investments.
Different Portfolio Risks You Face When you invest, you face two main types of risk. One is called undiversifiable, also called market or systematic risk. Every company you could invest in will face this same risk. These risks include inflation, exchange rates, war, political instability and fluctuating interest rates. It’s not specific to an industry or company, just a risk all investors have to face.
The second kind of risk is diversifiable or unsystematic. This risk is specific to an industry, company, market, economy or country. This is the risk that can be mitigated through diversification. Why You Should DiversifyIf you have all your investments in the auto industry and it’s announced that all auto workers are going on strike indefinitely and the production of cars stops, the prices of those shares will probably drop dramatically. So will your portfolio’s value.
If you have balanced those stocks with airline stocks, only part of your investment portfolio would be affected. In fact, there’s a chance airline stock prices would increase, and the value of your portfolio would too. The same would be true if the opposite happened because you’ve counterbalanced your investments.
It’s not enough to diversify within one industry because, for example, if the price of oil skyrockets, the price of both stocks could plummet. You’ll want to spread your investments across different, uncorrelated industries. Another important type of diversification is among asset classes. Asset classes can include:
These different asset classes will not react in the same way to adverse effects in the market and this lowers your portfolio’s sensitivity to market swings. The last type of diversification to consider is location. Volatility in Australia may not affect stocks or bonds in the United States or Europe so investing in other geographic areas may minimise the risk of only investing close to home.
What to Consider When You Plan Your Portfolio When you meet with a qualified financial advisor, one of the first things you’ll discuss is your risk tolerance. This is defined as the degree of variability or volatility in returns an investor is willing to withstand. When you and your advisor speak, you’ll talk about your ability to stomach large swings in the value of your portfolio. What you want to avoid is panicking over a large, albeit temporary loss, and sell at the wrong time.
There are several tools for you to help determine your tolerance. These can include:
1. Assessments Risk surveys Questionnaires
2. Reviewing historical worst-case scenarios
These can give you an idea of what you’d be willing to lose. The ability to withstand ups and downs depends greatly on your time horizon, future earning capacity and other investment assets you own. Typically, you can deal with more risk if you have stable sources of money available.
What Is Your Risk Tolerance?
There are three main risk categories we’ll review with you during our initial meeting to better get an understanding of the entirety of your financial goals.
Aggressive Risk Tolerance
People who fall into this category are generally market-savvy and aware. Investors will either understand markets or enlist the expertise of an experienced advisor who really understands the volatility of smallcompanies and markets. Aggressive investors will withstand maximum risk for the possibility of maximum returns and generally have a timeline of more than ten years.”
Moderate Risk Tolerance
Moderate risk investors are willing to accept some risk but want a balanced approach with a time horizon of five to ten years. For example, you may decide to include relatively stable bonds and low-risk securities along with moderate risk large-company mutual funds. A 50/50 structure is generally a good strategy for these investors.
Conservative Risk Tolerance
These investors are willing to endure little to no volatility in their portfolios. Retirees with a hard-earned nest egg want to minimise risk to their principal. These investors target guaranteed and liquid vehicles like certificates of deposit and money market accounts.”
Get the Right Advice
At Forward360, our financial advisors can help you work out your investment objectives, both long and short term. We partner with you to create an investment strategy you’re comfortable with and that fulfils your goals. To give you the right advice, we help you:
• Assess your current financial situation • Determine your risk tolerance
• Work through and determine your objectives and goals
• Recommend investment options to help you reach your goals
• Re-assess as time goes on and your circumstances change
You don’t need a specific amount of money or assets to receive our advice. Each situation is uniquely different and equally important. If you have financial goals, we want to help.
Our services are multi-faceted and comprehensive. Our team consists of Australia’s leading financial planning experts that can offer both individuals and businesses advice and solutions, including:
Whatever your financial needs, we’d like to help and we even offer a free consultation with a leading advisor and no obligation to move forward. Take control of your future today and contact us to schedule your consultation or initial meeting with one of our world-class advisors.
Co-founder and Managing Director at Forward360. Simon ensures all clients get the financial advice they need to reach and exceed their financial goals — both personally and professionally.
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