Our Investment Approach
Before undertaking any form of investment, it is important that you have an understanding of:
- Volatility and risk versus return;
- Diversification of investments, and
- Investment time horizon.
Having an understanding of these issues will help you to gain an idea of your attitudes and preferences towards investment. Each of these issues is discussed in detail below.
Volatility and Risk Versus Return
Volatility is often used to describe risk. It is the measure of how much the value of an investment moves up or down over time. In general, investments with higher volatility carry greater risk of fluctuation in value, whereas investments with lower volatility will have less fluctuation in value.
Over the medium to long term (5-7 + years) more volatile or risky investments (eg: shares) are likely to achieve higher rates of returns than those forms of investments (eg: fixed interest) with a lesser degree of volatility. This in effect compensates investors for taking greater risks with their investment funds.
Diversification
Whilst it is not possible to eliminate all investment risk, a key strategy of managing risk is through diversification of investment capital. Diversification involves spreading funds both within investment sectors, ie: to reduce specific, credit and liquidity risk, and between investment sectors, to reduce market risk. Furthermore, diversification can be applied to investment managers, to reduce the impact in the event of under-performance by a particular manager.
Investment Time Horizon
Time is a major factor when considering the suitability of investments. One of the most important aspects of understanding risk, is understanding your investment time frame. Movements in the value of your investments are of more concern over the shorter investment time frame. However, if you have a time frame of 5, 10 years or greater, then shorter term fluctuations should not be of great concern as long as the overall trend in positive.
Asset Allocation
Before recommending a specific investment asset allocation that matches your risk profile and objectives, it is important to understand the nature of various investment classes.
An investor who seeks higher returns and is prepared to accept a higher degree of volatility, will generally have a portfolio with a high proportion of Australian and international shares. On the other hand, a risk adverse investor, prepared to accept only low investment risk, would have a portfolio with a large proportion of fixed interest and cash investments, which offer lower risk but also lower returns. This structuring of investment classes to meet a clients risk profile and financial objectives is referred to as asset allocation.
|
