balancing act Planning your investments with a financial adviser, rather than taking an ad hoc approach, has the potential to help you more closely reach your investment objectives. The purpose of the following information is to introduce you to the basics of constructing a portfolio and selecting funds and fund managers. This understanding will help you to work with your financial adviser to construct a portfolio with the best chance of meeting your investment objectives.
THE INVESTMENT PROCESS IS AS FOLLOWS:
Determining one's risk profile and objectives
The following three components make up the definition of one's risk profile: • Psychological willingness to take risk, sometimes called 'risk attitude'. • Financial ability to take risk or 'risk capacity'. • Need to take risk, including the need to accept risk to meet an objective and avoid falling short of a goal or having wealth eroded by inflation. Your personal risk profile shows how ready you are to potentially lose money in return for the prospect of rewards. Your profile depends on your attitude to risk and your reason for investing. It also depends on your financial situation and how long you have to invest. Matching the risk profile to the risk characteristics of a portfolio is one of the most important steps in constructing an investment portfolio. Glacier divides the client risk spectrum into five bands, namely Conservative, Cautious, Moderate, Moderately Aggressive, and Aggressive.
13 ISSUE 15 2018
There are many different processes and approaches to constructing a portfolio of unit trust funds. Some approaches follow the process of first screening the unit trust universe with the aim of eliminating factors and others create financial models to identify appropriate asset allocation, with regard to the client’s unique investment needs and objectives. The following investment process will address a much simpler way of selecting unit trust funds (fund manager selection) for inclusion in an investment portfolio. The first critical step, which is often the first step in most approaches, is to determine and understand one’s risk objective and risk profile. This process basically determines the level of risky assets to hold in a portfolio (asset allocation), and addresses one’s individual circumstances which inform the formulation of investment goals and objectives. Step two involves the understanding of ASISA fund categories and classification which will help you understand the different types of funds available, where they are allowed to invest, what they are allowed to invest in as well as their respective risk classification. This
INVESTMENT STEPS EXPLAINED
• Determining one’s risk profile and investment objectives. • Understanding ASISA Fund Classifications and determining strategic asset allocation. • Researching and selecting fund managers to incorporate into a portfolio. • Portfolio construction and blending of complementary funds. • Understanding costs of the portfolio and the effect on returns. • Monitoring and rebalancing the portfolio. • The investment process.
understanding will help you to determine and identify which funds best suit your risk appetite and return objectives, given your investment time horizon. The understanding of the fund categories and risk classification will help you formulate your long-term strategic asset allocation. For example, there are two main types of collective investment scheme (CIS) portfolios, namely; multi-asset funds and building-block funds or single asset class funds. Each of these funds have their own risk profiles, some being more aggressive and volatile over shorter time periods than others. The strategic asset allocation serves to achieve a portfolio’s objectives over the investment time horizon and is the percentage that should be invested in the various asset classes to realise long-term returns. Step three involves the researching and selecting of fund managers with the emphasis on understanding their fund’s objectives and investment philosophies. The fourth step involves portfolio construction and the blending of complementary funds. The second last step involves the understanding of costs associated with a portfolio, and the final step in the investment process is monitoring and rebalancing the portfolio.
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