We came across this chart just recently and it prompted conversation in our office as a great example of why financial advice and investments go hand in hand. Diversification is more than splitting cash and property and shares; it is also important to understand where we sit in Australia regarding the world stage.
Now it is hard to fully diversify all asset classes, and reality is we don’t want to be holding property in some countries, but in principle this map of where people live in 2023 prompts some tips on themes that we carry forward into our advice for our clients.
So, what are the key factors that we and our asset consultants consider when giving advice to our clients?
It starts with an understanding of
- Asset Classes and Investing in a mix of investments such as shares, bonds, real estate, infrastructure, commodities, and cash equivalents. Each asset class reacts differently to market conditions, so having exposure to multiple classes can help balance out your portfolio’s performance.
- Industry Sectors within each asset class can have distinct growth patterns and respond differently to economic cycles.
- Geographic Regions and countries can have different economic and political factors that can affect them differently. Having a global exposure can help mitigate risks tied to a single country’s performance.
- Company Sizes such as small-cap, mid-cap, and large-cap can have an impact. Smaller companies might have more growth potential but can be riskier, while larger, established companies might offer more stability.
- Risk Tolerance is where Financial Advice is critical and part of the 101 of Financial Advice. Diversification should align with your risk appetite. If you’re risk-averse, you might have a more conservative mix of assets.
- Correlation of investments is when assets that move in opposite directions under different market conditions can help stabilise your portfolio’s overall performance.
- Time Horizon is important for us to understand, as short-term goals might require a different diversification strategy than long-term goals. Longer time horizons might allow you to take on more risk.
This then leads in to:
- Investment Goals tie into the Investment conversation with your adviser as we need to know whether we should be focussed on growth, income or asset preservation. This also ties into tax implications and what entities line up with what you want to achieve.
- Rebalancing as the markets grow and fluctuate means that your asset allocation does not drift too far from your original plan. It includes rebalancing through selling over-performing assets and buying under-performing assets to maintain your desired asset allocation and reduce risk.
- Individual Investments within your portfolio need to be understood and to avoid over-concentrating into a single investment unless it is a strategic move that might align with your Goals, Purpose or Legacy needs. Having over-exposure could expose you to significant risk if that investment performs poorly.
- Risk Factor considerations include what is happening with interest rates, inflation, credit and market risk. The aim of diversification is to try and mitigate some of these risks.
- Economic Outlook is generally left to the economists, but we all have a view based on what we see going on with local property and business. It is important to stay informed about the current and projected economic conditions and adjusting your diversification strategy based on economic indicators and forecasts if appropriate.
- Tax Implications of investing is where a lot of people go wrong and don’t put in place the solid foundations that are required to get the best family tax outcome. Different types of investments have different tax treatments, and tax-efficient investing through structures when appropriate can enhance your overall returns.
And finally:
- Professional Advice allows you to keep on track to make sure that your investments align with your Goals, Purpose and Legacy needs. Having a financial adviser that can help make sure your wealth management aligns with your Life Plan, and you can get you to where you want to go quicker!
To talk to a financial adviser contact the team at Boutique Advisers.