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Five steps to creating a successful investment portfolio

If you’re working towards long-term financial goals, exploring the investment market can offer excellent opportunities to make your money go further.

However, it can also seem like a daunting experience, particularly for first-time investors. With the current low interest rate environment investors who are ready to take a long-term view, may seek the potential for better returns by investing in alternative instruments rather than keeping their money held in savings accounts or term deposits. By following the key steps outlined in this article, you should be well prepared for the journey ahead.

Assess your risk tolerance

Risk tolerance is your ability to endure the volatility you might experience when holding an investment. Not all of us will have the same attitude to risk, and your tolerance will depend on your individual circumstances. You may wish to take a very cautious approach, sacrificing the potential returns from a higher risk investment, for a low risk investment with a lower probability of experiencing major losses. Others might be willing to accept a higher risk in favour of a strategy with the potential to deliver higher levels of growth.

Assessing your tolerance to risk is crucial to ensuring that the first step you take is the right one. To gauge it, you should start by thinking about your investment horizon. 

In general, the longer your investment horizon is, the higher the level of risk you can accept, because this strategy assumes that you can afford to wait out a market cycle that may include periods of growth and decline.

On the other hand, if you’re looking at a shorter investment period, you might want to stick to lower-risk products, as you are less likely to have time to recover your losses should your investments suddenly decrease in value.

Your risk tolerance is also likely to be closely tied to your life goals. Are you hoping to set aside some money for your child’s education, climb the property ladder or make a major purchase? All of these factors will have an impact on your decision making because they will determine your timeline for reaching your goals, and how important it is to you to safeguard them.

Diversify your investment

Striking a good balance between risk and return is the key to any long-term investment strategy. All economic cycles have their ups and downs, and even the most experienced investment experts can’t predict how an investment will perform with total accuracy. 

A smart way to mitigate this uncertainty is through diversification; a strategy that involves splitting your investment across a range of asset classes, economic sectors and geographies. This means that a weak performance in one area can potentially be mitigated by a stronger outcome in another.

You should think very carefully about how you allocate your investments in this way. The best diverse investment portfolios should generally include assets that are complementary and likely to react differently to the same economic conditions.

For example, a negative element in the market might cause a particular asset class to decline sharply, while posing little or no threat to another in your portfolio. These pairings are known as lowly-correlated assets, and when employed wisely they can be a very effective way of balancing the risk and return of your full investment portfolio.

Have a plan for asset allocation

Once you have identified your tolerance to risk and explored your diversification options, it’s time to allocate your cash into a portfolio of different asset classes. These classes - such as equities, bonds, cash and other investment tools – come with different risk-return profiles, meaning you can make an asset allocation plan that reflects the level of risk and potential return that you feel comfortable with. 

Assess investment performance

Over the course of your investment journey, economic and financial events can – and will – affect the market. These can be major global shifts or progressive growth or fluctuations within individual markets and industries. All of this will have an impact on the different asset classes within your portfolio.

For instance, central banks around the world will occasionally take action to control the global money supply. This can result in interest rates rising or falling, which will affect the prices of equity, bonds and other instruments to varying degrees. As the economic landscape and market conditions change, a fund that was expected to perform well might start to fall behind, while another that was performing less well might see a significant boost.

It is therefore important to regularly assess the performance of your portfolio against your investment goals. Think of it like a health check-up – only through regular assessments can you maintain an accurate view of the well-being of your investments. 

Rebalance your investment portfolio

As the value of your assets changes over time, you might wish to rebalance your portfolio to ensure that you retain your portfolio positioning in order to achieve your long-term goals.

For example, there may be a period where the price of equities rises – sometimes referred to as a ‘bull run’ – while other asset classes remain stable or even drop. Such instances may tilt the weighting of your portfolio towards equities while also increasing the associated risks, causing deviations from your original investment strategy. 

If you don’t make adjustments accordingly, the balance between your assets can be lost. The key to a long-term investment strategy is therefore to rebalance your portfolio regularly to ensure that your preferred risk levels and your long-term investment goals remain aligned. 

The benefits of financial advice

When you invest through HSBC Bank Malta, you’ll have access to a dedicated financial planning adviser. The adviser will work with you to develop a strategy based on your current financial situation, your long-term goals and your attitude to risk. They will also be on hand to guide you every step of the way, including regular progress reviews and advice on how to keep your investments on track. 

To book your initial consultation, call us on +356 2380 2380 or fill in our contact form to book an appointment with one of our advisers. Premier customers should reach out to their relationship manager in the first instance. 

This article was written by Konrad Borg Myatt, CEO of HSBC Global Asset Management (Malta) Limited. It first appeared in The Times of Malta on 3 August 2020.

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