As we get into our 50s and 60s, our goals, expectations and income needs change; yet we have a portfolio of investments that was built around different needs when we had a growing family, a family home and perhaps a different perspective on life. For this reason, it is a good idea to re-evaluate what type of asset you are investing in, and whether it matches your life circumstances. A common investment that people consider is shares.
We asked George Beyrouthi Managing Director of stockbrokers FS Securities, and Shane Langham Senior Wealth Adviser at Phillip Capital, to explain some of the factors when deciding how much of your total wealth to allocate to share investments as opposed to other classes of assets such as bricks and mortar.
George explains, “There are a few variables that determine how much of one’s wealth could be allocated to equities or stocks investment as opposed to the other classes: Age, short term versus long term view on investment, tax liability level, employment situation, family situation and risk appetite will change the percentage allocated to each asset.”
“Diversification is the most important factor when making this decision. Your readers who are perhaps in a cash-rich position can choose several types of asset classes. They are equities, stocks, bonds (government or corporate) and/or fixed-income assets. Diversification reduces the risk by spreading investment capital across those asset classes. There is, however, a certain risk that affects the whole market and diversification may not cover it.”
Shane agrees that “Asset classes generally move in different cycles at different times. You don’t want all your eggs in one basket, so being too committed to any one class like property or the share market can increase your overall risk depending upon where in the cycle the asset class is at the time.”
However, being diversified by not putting all your eggs into one basket does not mean that you should ignore the better performing investments for the sake of diversification. Shane explains that you need not cast things in stone with your investment allocations. “You want to be flexible enough to move the greater weighting to an asset class that is on the rise and reduce those that are on the decline. This allows you to stay ahead of the curve in the best way and also keep your money working for you as hard as it can.”
We use a strategy where investors with a portfolio of shares that can be collaterised can produce additional income over and above the dividends and the possible capital growth.
Consider Volatility And Speed To Sell
George continues, “There are two more factors to consider: how liquid and how volatile the instrument is. Liquidity refers to how easy it is to place an order to buy or sell quickly. Volatility is the rate at which the price of the asset moves up or down. The faster the price moves and the amount it moves the higher the volatility and therefore the risk. For instance, options trading offers greater return but greater risk.”
According to George, formulating a portfolio is not an easy task and outlines his company approach to the complexities involved, “We assess all new clients relative to their risk appetite.” A person may get classified as an investor – somebody wanting to hold shares long term and expecting appropriate dividend yields. Typically, such an investor according to George may, “Limit their investment portfolio with properties (income generation) and blue-chip shares with average dividend yield from the portfolio around 5.5 to 6%.” At the other end of the scale, George explains that “Aggressive and very aggressive traders will need a quick return of nearly 10% per annum with obviously higher risk.”
More Complicated Investment Strategies
Additionally, there are strategies that take your exposure to shares beyond the pure vanilla investments in order to provide a better return. By way of example, George explains, “We use a strategy where investors with a portfolio of shares that can be collateralised can produce additional income over and above the dividends and the possible capital growth. Strategies such as covered calls on owned shares can provide additional profit if the share gets exercised and sold at a higher price. Alternatively, the trader receives an income that he keeps if the price of the underlying stock does not reach a level determined by the strike option.”
Get Some Help
Clearly there are a lot of technicalities involved. Shane also points out that there are other ‘less technical’ but important risk factors that don’t tend to receive as much airplay and include things such as the level of knowledge and experience the investor has and the more personal growth/emotional attributes such as your ability to follow through on a plan, how you handle fear and greed and why you got into the share market in the first place.
Everybody recognises that there are risks involved with any kind of investment and decisions such as ‘how much to invest in shares’ should not be taken without understanding the risks involved, or in isolation of your full circumstance and objectives.
Help from a professional experienced adviser can be a great ‘sounding board’ to run your ideas past and they can help to keep you accountable and on track with your goals and they can also give you ideas, strategies and education above and beyond what you might otherwise have.
The comments in this article are by way of general information only and may not be relevant to your personal circumstances, the comments are not advice and it is not intended that readers act on the general comments made. Each reader should take professional advice in relation to their personal circumstances before making financial or other decisions.