When it comes to global investing, investors have two choices to make. The first is where they invest. The second is – in which assets? Choice is a good thing, but too much can be overwhelming. Here’s how to decide what investment solution is best for you, and why.
Investments are divided into asset classes. Asset classes are groups of securities which have similar characteristics. For example, all equity investments have fundamental similarities: they have to be openly traded on a stock exchange; provide partial ownership of the company; and have the ability to pay dividends.
A quick guide to asset classes
Traditionally, investors have accessed just three asset classes when investing: cash, bonds and equity. Portfolios were set up so cash could provide investors with safety and liquidity; bonds offered income with low volatility; and equity promised capital growth and dividends.
Investors today have more options than ever. ‘Alternative’ asset classes include commodities, such as precious metals, oil and agricultural products; infrastructure and property funds; and hedge funds, which can invest in a number of ways, depending on the management style and investment objective. Alternatives also include collectible investments such as fine wine and art, and newer opportunities such as virtual currencies.
Most alternative asset classes are well-regulated and easy to access. But with all this extra choice, how do investors know what asset allocation is right for them?
Finding the right solution for you
All things being equal, it’s usually a good idea to choose simplicity over complexity. The same is true when selecting an investment solution.
The simplest way to invest is to buy an investment which already exists and has been designed for someone with your requirements. Investment managers provide a diverse range of solutions for investors with certain profiles. These diversified funds contain different mixes of asset classes and invest in different geographies, tailored to specific goals, needs and risk profiles. That means you won’t need to worry about blending and diversifying assets: it’s already been done for you.
3 helpful what’s to guide you
Selecting which investment solution is best for you requires a deep understanding of your situation, capabilities and needs. This is where a financial advisor can be immensely helpful: they have the tools, insight and objectivity required to guide investors towards the solution most suitable for their personal circumstances. They can help you clarify the following:
- What are your goals? Any investment solution has to be aligned to your goals for it to be useful. So it’s a good idea to start here when deciding what to invest in.
- What’s your risk profile? Once you know what you want from your investment, the next step is to understand your personal risk profile so you invest at a level of risk that’s appropriate for you.
- What are your personal investment preferences? Do you like active or passive investment styles? What about sector- or geographic-specific investments? How do you feel about including alternative investments into your portfolio?
The answers to these broad questions will give you the direction required to select an investment solution based on your needs.
Don’t let the tail wag the dog
What you invest in will determine what return you receive and the investment risk you face, so it’s well worth taking the process seriously. Remember: your requirements, needs and circumstances should drive the investment solution you select, not information about the product.
Choosing a product because of its higher recent return, new lower fee or exclusive tax saving is like the tail wagging the dog: the input and the output are the wrong way around. You wouldn’t buy a pair of shoes without first deciding what you needed them for. If you need shoes to go mountain-climbing, it doesn’t matter how snazzy new sneakers look!
Similarly, selecting the right investment solution begins with understanding yourself and your needs. Only then can you determine which specific product best fits your requirements. So first determine ‘the why’ – and ‘the what’ will follow logically!
This article is not financial advice. Please consult with a financial adviser for financial advice.
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