The new year has commenced with a lot of uncertainties and differing views on where the economy is headed, and the subsequent impact on share and property markets. It is easy to get caught up and be drawn into the latest trends and lose focus on what you are trying to achieve and the strategies that you need to follow to achieve them.

Having a well thought out investment strategy is a key element of helping you achieve Your Why in Life.  The following are 7 important considerations in establishing your own investment strategy.Investment-Strategy-Considerations

  1. Life-stage
    Your own particular circumstances and life-stage has an important impact on your investment strategy.  If you are 20 years out from retirement, you may choose to invest all your money in growth assets and ride the ups and downs of share and property markets to make sure you capture maximum returns. If you do not have a lot of money to invest, you may choose a completely low cost diversified, fully implemented strategy that focuses on saving, debt reduction, building your income and leverage to create wealth.As you approach retirement and your wealth has accumulated, you may choose a more sophisticated approach that requires active management to keep the strategy on track and higher cost as you segment your portfolio.Alternatively if you have already achieved financial independence, you may seek out other investment opportunities that are less liquid and have a longer time frame to realise the potential higher returns. If you are approaching retirement or have retired, you may focus on liquid investments that generate a higher income return and less on growth assets as the impact of downturn in the share market will reduce your capital.
  2. Long Term Investing
    The time you have to invest should always be taken into consideration regardless of your risk profile. If you are only investing for a short period of time and need to draw down on the funds, your investment strategy should be tailored accordingly. Conversely, if you are able to invest for the long term – say for example to build a family legacy – less liquid investments with longer lead times and  prospects of higher returns can be considered. Investing for the long term also allows for the benefit of compounding to take place.
  3. Asset allocation
    Investing in the right asset classes is a major factor in the returns you will receive as can be seen from 2014: Year In Review from MLC Investment Management. An investment strategy comprised solely of Australian shares and cash would have performed very poorly in 2014. Your asset allocation should be reviewed annually and rebalanced to account for the returns from various asset classes and their future forecast.
  4. Diversification
    Once you have decided which asset classes to invest in, it is important to diversify within those asset classes. Frequently I see investment portfolios with a narrow range of large Australian companies providing very poor diversification – and leaving the overall investment portfolio heavily reliant on the fortunes of one or two companies. Self Managed Superannuation Funds (SMSF) set up for the benefit of control, frequently lack diversification with an over reliance on property, Australian shares and cash.
  5. Fundamentals
    Once you have decided where and when to invest, you should only follow – or choose managers that follow – the investment fundamentals. Investment fundamentals include:
    – analysing the performance of the company over several years;
    – understanding the financial ratios such as return on equity, cash flow per share;
    – understanding the long term economics of the industry the shares operate in;
    – reviewing the performance of management.Once all this information is obtained, a comparison should be made of the current share market valuation of the company with your valuation. If there is a margin of safety, then it is appropriate to invest. By following investing fundamentals, you are ensuring that you minimise the risk capital losses and maximise the probability that you will achieve your financial goals.
  6. Risk
    It is generally accepted in the finance industry that risk is associated with volatility. The greater the volatility of the asset, the higher the risk. It is also generally accepted that the greater the risk of an asset, the greater the potential returns. Whilst this is good in theory and helps to simplify the investment process, assets with greater volatility do not always translate into higher returns. It is important to define what “acceptable risk” means to you so that you can still sleep at night with your investments in place and avoid irrational decisions when there is a fall in investment markets.
  7. Tax
    Last, but not least, rule of investing is to consider tax. The amount of tax you pay on investment has a major impact on your investment strategy. For example, there is no tax on your principal place of residence in Australia. As such Australian properties are very high on a world scale (source: Sydney pads costing more than NY spurs RBA rethink by New Zealand Herald). Tax is a consideration and an understanding of the tax impacts which you purchase your asset in, and the tax payable when you dispose of the asset, are very important but should not come at the expense of all the other 6 elements of your investment strategy.

It is important to update your investment strategy on an annual basis to make sure you are maximising the probability of achieving your financial goals whilst reducing the risk of capital losses.  Please contact us on 0499976058 if you would like to review your investment strategy, or need assistance in preparing an investment strategy that matches your life stage.

Follow My Footprints – Geoff

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Disclaimers & Disclosures

Geoff Ivanac is a Sub-Authorised Representative (No. 000309751) of Barsden Private Wealth Pty Ltd ATF The BPW Trust (ABN 41 153 930 799) trading as Barsden Private Wealth. Barsden Private Wealth is a Corporate Authorised Representative No.416315 of BPW Licensee Services Pty Ltd (AFSL 484 198).

The information provided on this website has been provided as general advice only. We have not taken into account any particular person's objectives, financial situation or needs. You should, before acting on this information, consider the appropriateness of this information having regard to your personal objectives, financial situation or needs. We recommend you obtain financial advice specific to your situation before making any financial investment or insurance decision.

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Geoff Ivanac is a Sub-Authorised Representative (No. 000309751) of Barsden Private Wealth Pty Ltd ATF The BPW Trust (ABN 41 153 930 799) trading as Barsden Private Wealth.

Barsden Private Wealth is a Corporate Authorised Representative No.416315 of BPW Licensee Services Pty Ltd (AFSL 484 198).