Whether you’re looking to invest new capital or refresh neglected savings and investments, how should you establish a successful investment portfolio?
If you’ve recently moved here, reviewing your investments to ensure they remain suitable for your current life as an expatriate in Portugal is crucial. Do they still meet your needs and objectives? Are they in the right currency? Is the risk level appropriate for this stage of your life? Do they work well together as a cohesive portfolio? Are they tax-efficient in Portugal?
Key questions
A successful investment plan should be built around the answers to some key questions:
- What stage of life are you at? What is your time horizon?
- What are your circumstances and future plans?
- What are you trying to achieve?
- What assets do you currently own?
- How much risk are you comfortable taking?
You need these answers before you start navigating today’s complex marketplace and building a suitable portfolio to suit your circumstances and objectives.
Investment principles to follow
We recommend following a series of proven investment principles. The first three below are behavioural principles, basic attitudinal approaches that need to take place in the mind of the investor. The following three are successful methods of managing a portfolio.
Faith in the future: Put simply, this is the only worldview that squares with the historical record. You need to have optimism to maintain your long-term perspective and stick with your investment plan. Long-term pessimism is counterintuitive and rarely profitable; it’s unlikely that a pessimist will make money on a continual basis.
Patience: We live in an age of frequent breaking market news, placing the investor under constant pressure to react. This can be detrimental. The more an investor gives into the fads and fears of the moment, the more they lose sight of their long-term financial goals, leading to more mistakes and diminished long-term returns.
Discipline: While patience can prevent you from making poor decisions, discipline enables you to continue making the correct decisions. The undisciplined investor reacts, for example, to news, market sentiment, events, comments from a friend, etc. They allow their long-term investment plan to be derailed and it inevitably fails. Disciplined investors are not swayed by sentiment and keep their plan on track to achieve their long-term goals.
Asset allocation: Some investors believe that the returns of a portfolio are primarily influenced by the investment decisions they choose and the timing of these decisions. However, in the long run, both timing and selection play a relatively minor role in shaping returns. The most significant factor in determining portfolio returns is asset allocation. This crucial investment principle involves distributing an investor’s capital across different asset classes, such as money market, fixed income (bonds), equities and ‘real assets’ such as listed property. The strategy is vital for risk management, maximising returns, achieving financial goals and inflation protection. The stark difference in long-term returns of bonds and equities highlights the significance of asset allocation for different investment objectives.
Diversification: The next step is to get broadly diversified, which involves the spreading of risk and reward within a portfolio. For example, your portfolio allocation will be spread across different asset types and geographical markets. Essentially, while disciplined diversification means you will never hold a significant amount of any single asset to achieve extraordinary gains, you mitigate your exposure to significant losses by not holding a large proportion of a single asset.
Rebalancing: Finally, you should then review your portfolio annually and rebalance it back to the desired original weightings if necessary. Those who are disciplined about rebalancing will secure a better return than those who neglect their portfolios.
Taken together, following these six principles should ensure that investors earn the returns they will need to fund their important lifetime goals, with the minimum expenditure of time, energy and stress.
Choosing investments
We live in a world where the number of investment choices is rising exponentially. To put this in perspective, in 2002 there were around 30,000 managed investment products to choose from, but over the following two decades, this grew to around 740,000 products.
Today’s investors have access to more information than ever before. Data and research that were once almost exclusive to financial professionals are now readily available to everyone. However, this abundance of information means some investors might follow advice from unqualified sources.
Without personalised guidance, having too many investment options can be detrimental rather than helpful. This is one reason why we strongly recommend seeking specialist financial advice. Having a trusted financial adviser on your side helps you avoid ‘decision paralysis’, preserve your wealth and maximise financial opportunities.
These views are put forward for consideration purposes only as the suitability of any investment is dependent on the investment objectives, time horizon, and attitude to risk of the investor. The value of investments can fall as well as rise, as can the income arising from them. Past performance should not be seen as an indication of future performance.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
