Developing an Investment Strategy

An important objective of the financial planning process is to ensure your financial growth and security over the long term. This can be achieved by identifying your personal goals, assessing your current financial position and determining your attitude to investment risk. Once these have been determined, an appropriate investment strategy can be developed as a key component of your financial plan.

Another vital part of the financial planning process is to monitor the performance of your investment strategy against your objectives, and make ongoing modifications which may be required to keep the plan on track. This is necessary because your investment needs are likely to alter over time. For example, changes to your level of income or wealth, lifestyle and other personal circumstances can affect your investment requirements. With this in mind, every financial plan should be flexible enough to ensure alterations can be made as your needs and objectives change over time.

Developing Your Investment Strategy

Step One: Determine Your Investor Profile

Your investor profile categorises your need for income or growth from your investments, your preferred investment time frame and your attitude to investment risk. Subsequently, it influences the investment sectors (eg. shares, fixed interest) into which your money is placed and in what proportions.

Financial planners recognise that there are a number of different investor profiles, ranging from ‘highly conservative’ (lower risk, lower return) to a ‘growth’ investor (higher risk, higher return). There are additional investor classifications that fall in between these profiles which generally reflect individuals’ varying approaches to investment risk and return.

While every financial plan is unique and formulated to meet individual needs, most investors fit into one of the specific investor profiles. Individuals that fall into the various profiles generally have different requirements of their investments. For example, as a ‘conservative’ investor, you may require a regular, stable income stream and prefer a relatively low level of fluctuation in your investment performance. On the other hand, a ‘growth’ investor may not necessarily require an income stream. They may prefer to concentrate on obtaining capital growth from their investments and be prepared to accept the additional fluctuations in return associated with a ‘growth’ strategy. Your financial planner will be able to assist in determining your investor profile.

After the identification of your investor profile, taking into account your personal circumstances, needs and objectives, your financial planner can now begin the preparation of your investment strategy as part of your financial plan.

Two critical aspects that need consideration when developing an investment strategy are asset allocation and diversification. These concepts are important as they will ultimately determine the performance and volatility (fluctuations in return) of your investments.


Step Two: Asset Allocation – One of the Keys to Successful Investing

After the identification of your investor profile, the asset allocation process is the single most important factor in determining whether you achieve your investment objectives. Put simply, asset allocation is the distribution of your investment dollars amongst different asset classes (eg. international shares, property, Australian fixed interest).

The proportion of funds invested in each asset class for any investor will depend on several factors including: your desired returns; preferred investment time frame; long term income earning ability; tolerance to risk (ie. fluctuations in return); the need for cash flow from your investment portfolio; and general market conditions.

Step Three: Diversifying Your Investments

Diversification means spreading your funds across various investment markets and/or fund managers to manage investment risk – that is, not putting all your eggs in the one basket. It works on the principle that different investment markets (such as shares, property, fixed interest and cash) perform well at different times. In fact, over the past 10 years between 1990 and 1999, most investment markets (or sectors) have been a top performer in at least one year*. Therefore, it is preferable to construct your portfolio using an appropriate mix of funds with exposure to investments across all or most markets. This approach helps to manage the highs and lows of economic and investment cycles by balancing the returns of lower performing markets with the returns of higher performing markets.

It is also important that your investment portfolio is diversified within as well as across investment sectors. For example, investing your money in Telstra and Commonwealth Bank of Australia alone would not be considered a diversified share portfolio. You would need to spread your money across several other companies outside the telecommunications and finance sectors to truly diversify your portfolio. This is also true for investments in other sectors, such as property and fixed interest.


Step Four: Placement of Your Investments and Ongoing Review of Your Portfolio

After you accept the recommended investment strategy presented by your financial planner, they will arrange the placement of investments as suggested in your investment strategy or financial plan. To ensure that your strategy continues to meet your objectives in keeping with your changing personal circumstances, your financial planner will also review your investment strategy at least annually.

The processes involved in developing your investment strategy as part of your overall financial plan is a complex and strategic process. It is therefore important to get professional advice from a qualified financial planner before making investment decisions that may affect your financial security.


*Source: Morningstar

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