Achieve the right risk / reward balance for you: Part 3 of MR MONEY MAKER’s guide to building a long-term savings portfolio
None of us have the gift of foresight, although some egos would claim such powers. So rule 1 of investing money, as hammered out at me by influential City character Richard Durlacher, is simple: “Justin, don’t waste that shit stuff.
It might sound trite but too easy to ignore for those who follow the siren call of star investment managers parading across the sky, only to explode like a meteorite – taking your money with them.
The good news is that we have a very wide range of investments to choose from. Unfortunately, this is also the bad news. Investments can be broken down into distinct asset classes, and you’ll often hear the term “asset allocation”.
Share tranche: The main class will be stocks but also bonds (public and corporate), real estate, commodities, gold and cash.
It sounds complicated, but it isn’t – it’s just a matter of making sure you don’t put all of your eggs in one basket.
What to include?
We have a wide choice of different types of investments, from individual stocks and bonds to funds.
For now, however, let me focus on the central issue, which is achieving the right balance of risk and return for you by combining different asset classes.
The main class will consist of equities but also bonds (government and corporate), real estate, commodities, gold and cash. To this we can also add some alternative investments like wine, coins, antiques and more recently the fashion of cryptocurrencies like bitcoin.
What can I learn from it?
All of these types of assets vary in value, volatility and return. So to answer the key question of what investment, the answer is – most of them. Investing is a long-term game and it’s the difference between having a volley and growing your portfolio steadily and securely over time.
So what can I do?
Let us return first to our assessment. What assets do you and your family already own? It is very likely that this will include property but also a repo that will contain a mix of asset classes.
Then most of us will have a jumble of other things, including deposit accounts, premium bonds, and maybe the odd gold coin left behind by your favorite aunt. So now is the time to do proper housekeeping and take inventory of your assets.
You will already have made a plan for how much you will need in the future. So you will know the target number you need to reach by a certain date. Next week, we can start selecting the mix of asset classes you will need to achieve this goal.
PS: If you are wondering what is Rule 2 of investing, it’s simple: refer to Rule 1.
Justin Urquhart Stewart co-founded fund manager 7IM and is president of investment platform Regionally.