| Bérangère Salembien Hassenforder | Février 2021 |
It has been a very challenging year and we are hopefully close to there being a vaccine available for COVID-19. This in turn could bring some semblance of normality back to us all. As this happens perhaps it is a good time to be reviewing where we are financially and how do we create some “Peace of Mind” for our present and future financial needs.
The Financial Markets and as a sub set of this Investment Management are full of complexities and buzzwords; discussing, equities, Bonds, ISA’s, rates of return, etc if it is not the industry that you work in or have significant knowledge of can be scary to even think about. There is so much information out there to potentially assimilate and analyse from the impact of quantitative easing to the financial scare mongering carried out by certain publications in order to increase circulation numbers. All of this need consideration.
Focus on objectives
What is the objective or the objectives you are working towards as an individual or a family? Are you about to buy a house? Will you need to pay for school and University fees for your children? What are your pension needs and requirements?
It is important to have clarity around these. Each of the answers to these questions has a different time horizon when it comes to investing and your need to have a certain amount of money available at a moment in time.
While planning for longer term, we get clarity through some cash flow modelling, although some assumptions on inflation, returns and spending progression may vary. It is an enlightening exercise that brings a lot of information and generates necessary family discussions. Each individuals or family’s circumstances and objectives are different and therefore this 1st stage is an essential part of defining peace of mind investing.
Having looked at and agreed objectives we move onto defining an individual’s risk profile. Risk can be thought of as the trade-off between risk and return, which is to say the trade-off between earning a higher return and accepting higher variations or volatility of the portfolio or having a lower chance of losing money through investment whilst accepting lower returns.
Are you happy to take risk and if so, how much? Do you need to take risk in order to try and generate greater returns?
There are many tools to assess the three components of risk profile assessments which are: an individual’s capacity to take risk based on age, nature of income, amount of savings and dependents; the individual’s risk appetite which measure one’s psychological attitude towards risk and losses often based on knowledge and past experience; the need to take risk, as an example later in life an individual who has reached his financial goals may have no need to take any more risk.
In looking at an individual’s appetite for risk detailed questioning is carried out aimed at:
- The individuals focus on risk
- Self-assessing the individuals own appetite to risk
- Questioning around previous investments and knowledge of how risk impacted them
- Establishing an individual’s reaction in given situations through scenario setting
The above coupled with close statistical analysis provides us with a risk profile which is then reviewed and once agreed by the individual, is then used to drive the parameters of investment.
Parameters of investment
To help create that “Peace of Mind” and dependant on your objectives and risk profile it is important to consider the diversification of any investment portfolio. We talk about Asset Allocation i.e. what different asset types should we invest in to create a balanced portfolio to help you meet your objectives in the defined time horizons.
Establishing an appropriate asset mix of stocks, bonds, cash, real estate, funds etc in your portfolio is a dynamic process. As such, the asset mix should reflect your objectives, time horizon and risk profile at any point in time. An asset allocation strategy sets targets and will require some rebalancing every now and then. This rebalancing may form part of a regular review process to monitor any variation of the individual’s objectives, time horizons and risk profile, adapt the portfolio to these and to the financial and evolving legal environment. Overall, ensuring the investment remains fit for the purpose it was set up for.
Through a thorough and proven initial and ongoing review process it is still possible to invest in this ever-changing world with peace of mind.
Bérangère Salembien Hassenforder
Chartered Financial Planner