Do you have a properly prepared investment plan for your retirement? Such a plan should provide you with a portfolio investment strategy and an action plan which you can follow. That way you will be investing your savings wisely to realize the returns necessary to achieve your financial goals while remaining within your risk comfort level.
Our philosophy of investment is based largely on the principle of asset allocation. Much has been written about this strategy and some controversy about its effectiveness does exist. This is our interpretation of asset allocation in a nutshell. By putting all your eggs into one basket you run the risk of disaster should that basket be smashed. However by putting your eggs in several different basket then should one basket be dropped the other baskets will still be safe. That way you preserve the balance of your eggs. And of course the same is true of your money.
They call this diversification. This is just a fancy word for putting your investments into different asset classes such as cash, bonds and stocks. Researchers have also discovered that most of the increase in value of investments in pension funds came from the asset class that they were invested in not the individual security. This is important because choosing a successful asset class is easier than picking a winning stock. So firstly by diversifying your investments you lower the risk of loss and also you improve the chances of having some investments in assets classes which increase in value. This is a simplified explanation of asset allocation.
Another principle of the strategy is to re-balance your portfolio periodically. Say you start out with one third in cash, one third in bonds and one third in stocks. At the end of the year you will find that the value of each class has changed. Some have decreased in value. While some have increased. So you sell the assets which have increased and you buy the asset classes which have decreased bringing them back to one third of your total portfolio in each class.
A more sophisticated methodology is used in practice. But this serves to illustrate the basic principles of asset allocation which is the investment strategy we recommend to our clients.