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I am often asked about managed funds and how to manage risk. There are many ways to manage risk and the most obvious it to diversify your holdings into different asset classes and investment philosophies, including:
Equities
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Local |
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Asian |
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BRICS |
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Dogs of the DOW |
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Index contrarian |
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Property
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Family home |
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Investment |
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Superannuation |
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Residential |
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Commercial |
Cash/Bonds
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Equity |
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Property |
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Cash |
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Domestic |
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International |
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| Commodities |
| Forex |
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| Art, antiques |
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A few of these should carry the warning: ‘Do not try this at home!’ Some strategies are better left to the experts but sometimes I am not sure who these so-called ‘experts’ are.
I am not trying to bamboozle you with this list. While it is quite long as it is, there are actually many more investment options. If you want to be a full-time investor, you need to be conversant with a wide range of asset classes.
When I served my time as a financial adviser, the basic adage was ‘a third, a third, a third’. That is, a third in cash, a third in property and a third in equities. This was ridiculously simplistic and these days financial planners tailor asset allocation to individual circumstances. There is no such thing as ‘one size fits all’.
For example, if you are close to retirement you may want a higher proportion in cash. It is often suggested that retirees should have two years income requirements in cash to allow for market fluctuations and allow time for equity investments that have gone south to recover.
I included Commodities and FX in the list because investors may want to focus on these when equities lack leverage. These are potentially profitable sectors but a high-level of training, discipline and skill is essential.
My experience in investing tells me that most people lack the discipline to manage a significant portfolio. A lack of training and discipline is a toxic mix that can lead to disaster.
Even if decide to use a Financial Advisor, you should still seek to educate yourself. You MUST be comfortable and satisfied with your financial adviser and education will help. It is ‘caveat emptor’ out there and you should at least possess enough knowledge to ‘manage your manager’.
One question I am often asked is about choosing a Fund Manager. I will cover this and the related topic of diversifying direct shares in a future article.
Enjoy the ride
Tom Scollon
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