Choosing your investment strategy
With the wide choice of investment options available today, choosing your investment strategy becomes a difficult task. You can choose from single sector funds like Australian share and international share funds, or diversified or multi-sector funds that include a mix of sectors like shares, cash and property.
Here are some factors to consider before choosing your investment strategy.
Investment types and risk
All investments carry some level of risk. The type and degree of risk will vary depending on the investments you choose. The trade-off for higher risk is usually a higher potential return.
Risk is typically measured in terms of the likelihood of achieving a negative return in any one year – the higher the risk level of an asset class the higher the likelihood of achieving a negative return.
Higher risk asset classes like shares are long-term investments, which means the longer you invest the less likelihood of your investment value falling. Not taking sufficient risk can be a risk in itself. For example, cash investments are less likely to grow over time and may not meet your long-term objectives.
Spreading your money across a range of investments is one of the best ways to reduce your exposure to market risk. This way you are not relying on the returns of a single investment. Investment markets move up and down at different times. With a diversified portfolio of investments, returns from better performing investments can help offset those that underperform.
Holding a broadly diversified portfolio can also improve your performance potential and increase your chances of achieving market growth.
Getting your asset allocation right
Research confirms that how you allocate your assets to each asset class is more important to long-term performance than the individual stocks you choose.
Some investors prefer to leave the asset allocation decision up to a fund manager and invest in a diversified fund so they don’t have to worry about monitoring and rebalancing their portfolios.
Investors who want more control over their investments may decide to make up their own asset allocation by selecting individual asset class funds. If you decide to use this approach, you will need to be disciplined and monitor your investments on an ongoing basis and rebalance your investments in line with your asset allocation targets. Alternatively, you could ask your financial adviser to do this for you.
Your investment profile
Before choosing your asset allocation you will need to consider factors such as your:
- Short, medium and longer-term investment objectives.
- Investment timeframe.
- Attitude to risk and return.
- Current circumstances, limitations and future prospects.
The above factors will help you, or your adviser, identify your investment profile so you can determine the most suitable asset allocation for your needs.
Risk/return profiling is a tool used by professional and novice investors alike when determining investment profiles. It can be a detailed and individual process, so it is best completed under the guidance of a professional financial adviser.
Sometimes life doesn’t go to plan. So, it’s important to review your investment strategy if there are any major changes in your circumstances. If you need help, our professional financial advisers can determine the best investment strategy for your investment timeframe, objectives and personal circumstances.
Learn more about our Islamic investment products here.