Environments change continually
As discussed in part one of this article (Market View, March 10), there are certain factors to consider when you plan your investments.
The first four points, which were what to invest in and where; the amount to be invested; income, capital and taxes; and attitude towards risk, were discussed in my previous article. We shall now go on to see other considerations one has to keep in mind.
Age
Normally, the older a person is, the shorter the investment horizon. The ideal balance between bonds and equities varies with the age of the investor. Personal preferences, and the location of the investment, are also likely to vary with age. Seniors generally prefer income derived from local securities while younger people tend to be more adventurous.
Personal circumstances and future needs
A bachelor tends to look at life differently from a married man with a family. An investor has to carefully consider his financial obligations and responsibilities, present and future, before investing. Personal circumstances also change over time. Unfortunately too, accidents do happen. The tax regime may also change depending on family circumstance and residence. One has to see whether an investor's main source of income is stable or not.
Investment horizon and timing
A long-term view of one's investments should not be confused with the term of the investment.
In general, locking your money for long periods of time should be avoided unless this appears truly beneficial due, for example, to special incentives.
On the other hand, in general, one should take a long-term view of one's investments. This does not mean that one forgets about them. Investments must be continually monitored. Are they performing? Has their quality been impaired?
What I mean by investing with a long-term view is that, in one's mind, one should expect investment to fluctuate due to normal market cycles. One should not let the normal ups and downs of markets to make one unduly anxious. The longer an investor's investment horizon, the more fluctuations s/he can afford.
Still, this long-term attitude should not prevent you from selling, if you feel that the market is in for a long and steep fall, or to buy, if you feel that there is a major up-trend.
Getting out at the very top and getting in at the very bottom is just a matter of luck. What an investor may wish to do, depending on circumstances, is to average his entry or exit by buying or selling in lots, rather than at one go.
Do not assume that the day you happen to meet your investment adviser is the best day to buy all your portfolio, or even to make changes to it. Your portfolio may need some equity investments to be in balance but your adviser may well advise you to buy in future.
Involvement
The economic, investment, tax and legal environments change continually. Some investors wish to take the trouble to keep up to date, others do not, or cannot, due to time pressures in their own career. The role of the investment adviser can range anywhere between being an occasional consultant to managing the portfolio with full discretion and without referring to the client. It all depends on what the client wants and what can feasibly be provided.
Existing investments
A portfolio must be looked at as a whole, including real estate. One must not just look at the lump sum which is to be invested now, but, rather, at what assets already exist, what the lump sum permits one to do, and likely future cash inflows.
Necessities and partners
Adequate housing, income for consumption, life assurance, emergency money, these are all important requisites which should be provided for before one starts investing in longer-term investments. Indeed, one's own house is often one's major investment.
One should also consider other people one shares life with. The preferences and needs of other people very often impinge on what type of portfolio one invests in. Usually, the closer the relationship, the greater the influence.
An investment plan, no matter how happy the client and his adviser are with it, is unlikely to survive if the other persons with control over it are not convinced of its usefulness and suitability.
Where an investment portfolio is concerned, an important partner is one's investment adviser. There has got to be compatibility, trust and value.
These 10 factors provide a framework within which potential investors can prioritise their needs, become aware of possibilities and opportunities, and formulate appropriate investment plans.