Investment goals

Investment time horizon

One of the most important considerations when building a portfolio is the timescale over which you are able to invest. It is widely accepted that the longer period of investment, the less likely you are to lose money.

Naturally, your investment time horizon will largely depend on your age. For example, a person in their twenties can afford to take a greater risk with the investments within a SIPP compared to someone in their fifties.

Growth, income or balanced

The return on a portfolio will come from two sources – income (through dividends) and capital growth (through rising prices), and a portfolio should reflect the individual’s relative needs for income and capital. For example, younger investors are invariably less concerned with deriving an income from their portfolio and will seek the bulk of their return through capital growth. Older investors are more likely to require an income stream to supplement pension income, in which case portfolios with an income bias will be more appropriate.

From an investment point of view, it is ultimately an individual’s capital that determines an individual’s investment income. In bear markets (ie when prices are falling), capital preservation is the priority and an active investor, even one for whom dividend income is not required, will wish to take a more defensive stance. This may involve re-balancing the portfolio away from growth stocks towards income stocks.

Risk tolerance

An individual’s risk tolerance is the degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio, and will vary according to age, income requirements, financial goals, etc.

For example, a 70-year-old retired widow will generally have a lower risk tolerance than a single 30-year-old professional, who should have a longer time frame to make up for any losses incurred on his or her portfolio.

Understanding your investment time horizon, risk tolerance and income/growth requirements will determine what asset allocation is most appropriate.

Comments are closed.