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Do
you really need an IFA?
We
pay advisors and managers a lot of money to construct
portfolios for us. Investmentinternational.com investigates
whether you could do it yourself.
Talking
about asset allocation and portfolio management is a bit
like a philosophical discussion. There appears to be no
right answer.
There are as many asset allocation models as moments in
the day; as many philosophical opinions as people in the
world.
Every fun manager, each financial expert, all manage funds
and investment portfolios in different ways, using different
strategies and models which themselves vary depending
on the wider economic environment, underlying risks, currencies,
and factors such as time, the size of a portfolio, and
how actively a particular portfolio is to be managed.
Investment house Fidelity, for example, uses different
asset models compared to HSBC or Credit Cuisse.
Depending on how much or your hard-earned cash you are
investing, your portfolio can be constructed around your
specific investment goals, your time-scale and your attitude
to risk. But, you can bet your bottom dollar that this
portfolio will differ widely between different firms.
Simply put, the higher up the money tree you go –
as portfolios start to be constructed not from ‘off-the-shelf’
funds and standard investment vehicles but individual
stocks and shares – the more differences become
pronounced.
There are essentially six basic asset classes in all,
though four are the most common for retail investors:
cash; equities; bonds; property; commodities; and ‘alternatives’,
such as art, motor cars, and wine.
Significantly, however, most of these categories are usually
sub-divided with regard to risk.
Under equities, for example, you find emerging market
equities – which are high-risk – UK or developed
country equities branded as middle risk investments; and
low risk categories such as blue chip equities or index
tracker funds.
Most asset allocation models are simple, and for a good
reason. It’s easy to get swamped by the number of
asset classes to choose from – in other words, easy
to diversify too much.
Usually, but not always, portfolios are designed around
three basic risk profiles: Growth, Balanced and Income.
Bank von Ernst, the Swiss banking subsidiary of Royal
bank of Scotland, runs it’s mid-net worth Global
Portfolio Management Service, a funds-based portfolio
service, around four models: Conservative; Balanced; Dynamic
and Equities. It’s high-net worth Individual Portfolio
Managememt service, is based on five models.
Many leading fund houses market asset allocation funds,
including Fidelity; JP Morgan, AXA Isle of Man, GAM INVESCO
and Credit Suisse.
So, there are a number of easily available asset allocation
models out there that you could, in theory, lift odd the
shelf to construct yourself a portfolio.
The key question here is, ‘which one is best for
me?’ The professional asset managers will assess
your needs and risk profile against factors such as time,
size of the portfolio, the currency and what, indeed,
you are investing for.
If, for example, you have 25 years to go before you intend
to retire most professionals and financial advisers will
argue that you should be investing primarily in equities.
If you have got 10 years or less to go, you should think
about a more conservative portfolio, and under five years,
a very low-risk portfolio of cash and blue-chip or sovereign
bonds is an absolute must.
The last thing you want to do is put your pension pot
in Japanese smaller company shares, hedge funds, or, like
many did in the 1990’s into technology stocks, only
to watch all that investing go up in smoke.
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