A new year financial review
January 2008
As recent economic events have demonstrated,
the world of finance and investment is an increasingly volatile and
complex environment. With the longer-term effects of the
much-publicised credit crunch still to be revealed, financial
indicators are pointing to a challenging year ahead in 2008 and, as
a result, we have seen a significant move to a more risk-averse
culture.
Many people see the start of a new year as an
ideal opportunity to review their financial affairs, and this year
the importance of controlling the risks involved has never been
more relevant. Traditional heavy reliance on equity investments is
like putting all your eggs in one basket and can be a high-risk
strategy. As a consequence, many investors are now turning to a
more diversified multi-asset class approach to achieve more
consistent performance.
The key is to manage the delicate balance
between risk and reward. Shrewd investors recognise it is necessary
to take some risk to achieve a reward, therefore it is essential
for an investment advisor to ascertain their client’s attitude to
risk before recommending an appropriate strategy. Clients who
cannot contemplate losing any capital or are looking for a short
term investment would be best advised to go for cash based
products, such as high interest savings accounts, capital protected
products or certain bonds. Those clients who are prepared to take a
longer-term outlook, or a greater risk with a view to potentially
enhanced returns, could consider a wider range of assets including
hedge funds, equities and property.
Research over the past thirty years has
established that the determination of asset allocation is the main
driver and contributor to overall investment gains. Ideally,
a portfolio should be split, or diversified, across all the major
asset classes, including: cash, bonds, property, equities and
alternative investments.
Diversification is probably the traditional
way to reduce risk because it minimises the impact of a negative
performance of any one asset on the overall performance of the
portfolio. The approach works because investments do not all
respond in the same way to changes in economic conditions. For
example, when one asset type is falling in value it is possible for
another to rise.
The asset allocation process should aim to
maintain the best performing asset classes based on your own risk
and return expectations, and the prevailing market
conditions. So with the current climate of market volatility,
the use of a discretionary asset allocation service can offer you
peace of mind by passing responsibility for allocation decisions to
a qualified investment professional. At the same time, it can
provide an opportunity to gain exposure to less traditional asset
classes.