Investing - made easy

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The key to a meaningful investment strategy is that you need to know yourself and what you want to achieve. You need to determine the following: 

  • Your net worth (assets less liabilities).
  • Your liquidity needs, including emergency fund and potential sources of emergency liquidity.
  • Your risk appetite (how much are you willing to lose / how much risk are you willing to take on to get your desired returns) and your risk ability (how much can you afford to lose without significant impacts to your lifestyle). Your financial circumstances (are you generating income or living off your capital).Your investment horizon - how long are you planning to invest for? Read more... 


I will give an example for each characteristic in terms of decisions you may want to consider.

  • Net worth - if you are a high net worth individual, generally you should have further capacity to take on risk - this implies you can benefit from specific asset classes like private equity or hedge funds that may carry a liquidity premium or that may prove to be highly volatile in the short term - but provide stable and high long term returns.
  • Liquidity - if you have high liquidity needs (e.g. a need to invest in your own business) you may want to limit your portfolio to highly liquid investments - like bonds so that you can sell them quickly without a significant loss.
  • Risk appetite - individuals with a high risk appetite can weight their portfolios to risky investments with larger potential returns - equities, private equity, commodities, etc.
  • Risk ability is similar to risk appetite - if you have a large risk ability - you can weight your portfolio to risky assets.
  • Your financial circumstances - if you are dependent on income from your portfolio - you would want to tilt your portfolio to income producing assets.
  • Investment horizon - the longer the horizon - the more risk you are able to take.

Strategic Allocation

This will drive your strategy asset allocation - this means what type of asset classes you will invest in and how much in each. Different Asset classes have different risks and return profiles. Generally bonds are less risky, but offer lower returns than equities. Private equity is generally less liquid than equities but promises higher returns. The type of portfolio you construct should be optimized based on your particular circumstances, needs, risk appetite and risk taking ability.


Types of common portfolio strategies usually consist of conservative and liquid (cash and safe bonds), Income (primary bonds that pay regular coupons), balanced (equity and bonds), equity (as the name implies - equity) and growth (equity and potential private equity and commodities).


An alternative view is to construct an optimal portfolio by constructing a highly diversified portfolio consisting of all asset classes (excluding the risk free benchmark (Treasuries). This would be then adjusted for your risk - return profile by the degree you hold the risk free asset (Treasuries or equivalent). Low risk would imply a large holding of risk free assets and a small holding of the diversified portfolio.  High risk would imply leveraging the diversified portfolio (borrowing to invest in the diversified portfolio).


An example of a typical portfolio for illustrative reasons:

  • Government bonds 5%,
  • Hield yield bonds 10%,
  • International Equities 45%,
  • REITS 10% ,
  • Private Equity 20% ,
  • Hedge funds 5%, and
  • Commodities 5%.

Now you can start to consider specific investment themes and how you would like to invest in them.


Examples include:

A key consideration of all investment strategy is cost. How much you are paying your investment advisor (brokerage and custody fees, performance fees on funds, etc). Cost can quickly eat away at your investment return and with compounding - can significantly reduce your overall gain. 


Passive strategies via index funds or ETFs, especially combined with automated asset allocation advice "robo advise" (asset allocation strategy for minimal fees) are efficient ways to invest. 


If you are familiar with the basic concepts that we have discussed above and on the related links - a do it yourself approach could be rewarding. By utilitising a discount broker you can develop a diversified and efficient portfolio that reflects your expectations, preferences and values.



Managing Liquidity

Financial Risk Appetite