Developing an investment strategy that works: AUI

Part two: Frequently asked media relations questions
June 25, 2013
EQT appoints Mercer as asset consultant
June 26, 2013

The ongoing discussion about investment strategies and the need for investors to ignore market volatility tends to assume every investor has a strategy, but some may still require help in developing them, says Edward Smith, head of portfolio management at Australian Unity Investments (AUI).

Mr Smith points out while all investment strategies will be slightly different according to the circumstances and objectives of the investor, the common ground should be that all investors have a strategy.

“The most important thing is that all investors have some kind of long-term strategy in place that helps them define what their goals are and what kind of investments best suit them.

“Investors can get distracted from their investment strategy by looking for fast-track investment opportunities and short-term considerations such as tax minimisation schemes.  This happened to many people in the lead-up to the global financial crisis.

“Indeed, following the GFC, many people abandoned any concept of a diversified approach by putting everything into cash.

“It’s easy to get sidetracked by what is happening in financial markets, but investors need to make decisions based on where they are, not on where the market is.

“Also, investors shouldn’t wait for a particular point in time – for example, for markets to return to ‘normal’ or to reach a certain level – before making investment decisions.

“In financial markets, it’s always ‘interesting times’ one way or another, so there’s no point waiting until things are ‘normal’ before developing and implementing an investment strategy.”

Mr Smith said while there is a wide range of investment strategies talked about, in reality there are just three key considerations in their design: the time frame; the objectives; and the personal circumstances and opportunities.

Time frame

Mr Smith says how long investors intend to keep their investments and what they want them for are obviously key issues in any intended approach.

“The compounding effect of returns being added to the principal alone adds a great deal of value over the years.

“While the age of an investor is usually an issue, it isn’t necessarily the overriding consideration, although it remains a fact the longer a person saves, the greater the benefit.”

Objectives

Objectives need to take into account the lifestyle considerations of the investor and tend to be linked with time frame.

For instance, if the strategy is to do with retirement, what sort of retirement is the investor looking for?

Using the example of a retired couple, Mr Smith says their objectives could include a higher level of income over the first 10 years of their retirement, with a lower level of income later, but with protection against inflation and the desire to have capital to leave to their children, grandchildren or other dependants.

“Objectives for younger people may need to take into account some medium-term aims such as saving for a deposit on a house, as well as objectives with a longer time frame – for example, saving for children’s education,” he said.

Personal circumstances and opportunities

While risk profile needs to be considered, it must be against the light of objectives and time frame, as well as other personal circumstances such as existing and potential earned income levels and the amount available for investment, Mr Smith says.

“Personal circumstances include the capability of the person to save and invest, and the level of risk investors are comfortable with.

“If you can’t afford to invest enough to reach your objectives, you may have to change them, or alter your time frame – for example, working longer if retirement savings are not going to meet needs.

“It may be that a couple approaching retirement will instinctively favour a very low risk investment approach as caution is a common characteristic as people grow older.

“However, depending on their particular circumstances and objectives, they may need to consider a slightly more aggressive investment approach than the one they feel most comfortable with to take into account a longer life expectancy.

“Apart from anything else, diversification is always needed in a sound investment strategy.

“Having developed a strategy, it is then important to review the progress of your investments against the strategy regularly, but to avoid knee jerk reactions according to market volatility and other short-term considerations,” he said.

“If an investor’s time frame is 20 years, then a bear market this year or next year should not concern them unduly, as long as the portfolio is assessed regularly against objectives and any rebalancing is undertaken against these objectives, not purely present market conditions.

“In fact, by simply having the discipline of a strategic plan which is reviewed regularly, you have much more chance of meeting your objectives,” Mr Smith said.

Australian Unity Investments is the funds management arm of Australian Unity, a national healthcare, financial services and retirement living mutual organisation. 

Australian Unity Investments offers a range of investment funds in domestic and international equities, fixed interest, and property.  Its investment approach is to use its established in-house expertise in property and mortgages while also forming joint ventures and strategic alliances with boutique asset managers.

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For more information please contact:

Edward Smith – Phone: 03 8682 4419

25 June 2013