INSIGHTS

2017 INVESTMENT TO DO LIST

Michelle Perkins, 7 December 2017

What a year it has been. 2016 will go down as a year when the impossible happened (twice), with the UK electing to leave the European Union and reality TV star, Donald J Trump, being elected President of the United States. Given the anticipated lift in volatility for markets as the implications of these surprise outcomes unfold, it is timely for investors to review portfolios and, if they haven’t already, adopt some investment resolutions for the new year.

I will…invest in installments and not try to time the markets

Consistently trying to pick the best time to buy and sell a share is inherently difficult and investors run the risk of missing some of the best days if they constantly move in and out of the market. This can have a significantly adverse impact on portfolio returns, as can be seen in the adjacent chart.

When it comes to investing for the long-term, it makes sense to enter the market gradually. Avoid the risk of investing at a market peak by dividing your capital into equal amounts and investing in installments over a period of time.

I will…focus on quality in both my equity and fixed income portfolio

There is no need to consider sub-standard investments simply because they enhance diversity. Stick to quality for core holdings and only buy investments that meet your quality and income requirements – just aim to own as many of those as you can.

I will…invest for the long-term

Although markets can be highly volatile over the short-term, over the long-term they have produced strong results. If you are buying quality companies with good long-term earnings prospects, then you will likely be better off in 10 years time than if you had persistently tried to time your entry and exit into the market.

I will…invest for income growth

Income growth is a key element of share investing and portfolios should always generate an income stream. Build a portfolio of companies that have sustainable dividends and the potential to deliver a growing income stream. If you do not require any additional income, then these dividends can be reinvested back into the portfolio for future growth.

I will…not ignore quality fixed income because interest rates are low

Fixed income forms the bedrock of a portfolio. In times of volatility, as we have seen in recent weeks, it is the high quality fixed income part of the portfolio that helps to provide stability in a portfolio, offsetting

the volatility that can beset equities at times. Even if the prospect of higher rates is just around the corner, this is likely to be a drawn out process and maintaining a laddered portfolio of fixed income maturities to protect your income from changes in interest rates remains paramount.

I will…consider risk

Investors must take into consideration the level of risk associated with any investment. Remember, if you are not getting paid an appropriate return for the higher level of risk assumed, then the potentially lower return (but lower risk) investment is the better option on a risk-adjusted basis. Minimising losses is far more important than maximising gains. Not only is it important for your psychological wellbeing, it will also improve returns as any strategy that can dampen short-term losses will boost long-term returns.

I will…review my investment objectives and re-position my portfolio if necessary

People have very different reasons for investing. Some may be building up retirement savings or saving for a specific goal. Others may already be in retirement and investing to generate an income. For most people, the key objective of investing is to generate an income stream, either for today or for some time in the future, while protecting the future purchasing power of capital.

Whatever the reason for investing, we all need to set some objectives and put in place a plan to achieve those goals. However, changing individual circumstances, the differing performance of various markets, sectors within markets, or holdings can tilt portfolios away from their intended purpose. Therefore, periodic portfolio readjustments or the rebalancing of a portfolio should be undertaken to help ensure long- term investment goals remain on track.

I will…review my asset allocation

Determining your asset allocation (exposure to the different asset classes) is a very important step in portfolio management as it determines, more than any other factor, a portfolio’s risk and return profile. Your portfolio’s asset allocation needs to be continually monitored, rebalanced and reviewed to ensure you remain comfortable with the level of volatility that could potentially arise.

I will…review the holdings in my portfolio

Establishing a portfolio by buying a selection of investments to meet your investment objectives and asset allocation requirements is not a set and forget process. A holding’s fundamentals, its place in the portfolio and the reason the investment was purchased need to be monitored and reviewed, at the very least annually. It is important that you are willing to sell problem holdings and replace them with higher quality alternatives, and to take profits on stocks that have rallied hard and now dominate the portfolio. Also ensure your portfolio is sufficiently diversified via issuer/company name, sector, and geography. Most investment disasters are caused by a lack of diversification.

I will…maintain an exposure to equity markets outside New Zealand

Global equities are a vital component of any portfolio. They provide diversification away from New Zealand, access to global economic growth, industries and companies not available here, and also the potential for higher levels of income growth than generally found on our market. Don’t forget the New Zealand market comprises just 0.2% of the total market capitalisation of global equity markets and it is therefore prudent that clients have a proportion of their portfolio invested outside our country.