Three phases of growth in financial assets
How to Choose an Investment Portfolio
Finding a strong asset allocation can help mitigate risks and position your portfolio for growth. It is critical to select a smart asset mix that meets your objectives over time, and to adjust your asset mix when your circumstances and ambitions change. Generally, there are three asset classes, being: Equity, Debt and Cash. There are also derivatives of which the underlying asset is one of the three asset classes mentioned.
Depending on your investment behaviour, you might choose assets ( or securities) which are purely Equities, Debt or Cash, or you might choose funds ( a combination of different financial assets in one basket) which combine all three. Such funds would, however, always lean more towards one financial asset or the other depending on the fund manager’s objective.
Here is what you need to know when choosing financial assets for your portfolio.
The single overriding factor on choice of financial assets is your risk appetite. Asset allocation is not a one- sizefits- all exercise because we have different risk appetites, each of which are borne of many things. The major factor affecting risk appetite is age, and we must take this into consideration, because asset allocation ideally changes according to the life stages of an investor.
In a strictly financial definition, we go through three phases in our life.
ACCUMULATION PHASE
We go through the accumulation phase when we are younger and beginning our careers. This stage usually goes on until we reach middle age. Because we are younger with little to lose ( few assets, perhaps no families as well), we tend to have a higher risk propensity in this stage than any other. We also have fewer financial obligations hence our risk capacity ( the ability to take on risk) is higher as well. In this phase, our asset portfolio should contain more equity- based instruments than any other asset class. Equities are usually higher risk and outperform other assets. Having a higher equity mix at a young age ( if done by a professional) can lend a lot of growth
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to our asset portfolios. Growth is an important aspect of this stage of life. A good rule of thumb for deciding what
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proportion of equities goes into your portfolio is 100 less your age. For example, at 25, your portfolio would consist of 75percent ( 100 – 25 years of age) equities and equity
UPON HEARING based instruments. This rule applies to all your life record; stages. This is also the best stage to get a life cover for the cheapest premium possible and to start your retirement provision.
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This stage usually occurs around your middle ages, say from 40 ( or even late thirties). Usually when you are in this
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stage, you start to worry more about retirement. Your risk propensity is significantly lower because you have more financial obligations ( children, mortgage, etc.). Your 3. risk appetite is lower and your asset mix should reflect this. You reduce on equities and increase on debt instruments
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( bonds) as these are generally lower risk. A good balance is 50/ 50 but this differs from individual to individual. Your
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Investment Advisor can help you choose an appropriate mix. Again, the rule of thumb is this is a good starting
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point to determine your asset mix.
CONSOLIDATION PHASE SPENDING PHASE
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In this stage, you are more concerned about income than you are about growth. This is the stage nearing re6.3
tirement and thereafter. Because you are retired or about to, you want an income that will allow you to have a
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comfortable retirement without giving you any proverbial gray hairs, worrying about how financial markets are performing and whether your money is at risk. You ought to
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invest more in fixed income securities ( bonds and related
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instruments) so that they give you the income you need to survive your retirement. Some even purchase annuities that take up your capital in return for a fixed income. Now that we have looked at the lifestyle stages in your
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career, we need to consider physical cash versus money market instruments, and which are a good fit and when.
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Money Market accounts are ideally an important feature of any investor’s portfolio regardless of their life stage. Money Market accounts are ideal for emergency 3. funds, to keep a portion of your portfolio liquid so that the longterm funds are not tampered with in the short- term. A
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good principle to follow is to ensure you have at least 6 times your monthly income in your savings or Money
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Market account. With the above in mind, you should be well on your way towards responsibly investing in
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financial assets for your future.
Happy Investing! 6.1
This article was authored by Kgori Capital, a leading asset manager.