Investment decisions are often driven by opportunity — a company in the news, an offer with an attractive rate, a sector that is performing well. A more durable approach starts with the investor: what the money is for, when it will be needed and how much uncertainty can be tolerated along the way.
Start with objectives
Objectives give an investment strategy its purpose. They might include building long-term wealth, generating income, preserving capital, funding a future purchase or supporting family members. Many investors have several objectives at once, each with its own timeframe and priority.
Clear objectives make it easier to evaluate opportunities. An investment that suits a long-term growth objective may be quite unsuitable for money needed in two years.
Define the time horizon
The time horizon is the period over which funds are expected to remain invested. Longer horizons generally allow more capacity to ride out short-term volatility, which is why growth assets are commonly associated with long-term objectives. Shorter horizons typically call for greater emphasis on stability and access to funds.
Understand liquidity needs
Liquidity is the ability to access funds when needed. Before committing capital to fixed term or private investments, it is worth considering what funds may be required for living costs, emergencies or planned expenses. Holding an appropriate buffer of accessible funds can reduce the risk of needing to sell investments at an unfavourable time.
Assess risk tolerance and capacity
Risk tolerance describes how comfortable an investor is with fluctuations in value. Risk capacity describes how much loss an investor could absorb without affecting their financial wellbeing. Both matter. An investor may be emotionally comfortable with volatility but have limited capacity to absorb losses, or the reverse.
Consider existing investments
A strategy should consider everything an investor already holds — superannuation, property, shares, cash and any business interests. This complete picture helps identify concentrations, gaps and overlaps, and prevents new investments from unintentionally increasing exposure to the same risks.
From strategy to portfolio
Once objectives, time horizon, liquidity needs and risk profile are understood, the next step is asset allocation: deciding how the portfolio will be divided between broad categories such as cash, fixed income, shares and private investments. Individual investments are then selected within that framework.
Strategies should be reviewed as circumstances change. This article is general in nature. Consider seeking independent professional advice tailored to your situation.