Investment journey into the future

Have you ever planned for a long trip with various during-the-trip destinations? Successful investing is like a journey, not a one-time event, and you will need to prepare yourself as if you were going on a long trip. In each individual’s life, the cycle of objectives keeps changing and so does the investment style.

You should begin firstly by defining your destination, then plan your investment journey accordingly. We are here to help you take through the waters of investments.

Are you planning to build a new home or renovate your existing one? Will you initiate the project without first thinking through your vision, drawing up architectural plans, selecting the right contractors and tradespeople, and planning ahead for possible budget overruns and surprises? Yet many people approach their long-term investments without any plan at all. Having a plan will ensure that you stay on track and achieve your financial goals.

Investment planning is the process of aligning your financial goals and objectives with your financial resources.

The process of investing allows you to maintain and grow your savings for greater financial rewards in the future. Investment planning requires the analysis of different available investment options to choose the right vehicles for your assets. There are thousands of different investments. The most commonly used options by investors are cash, equities, bonds, and property. Each of these has different characteristics and a good investment plan will usually contain a combination of these vehicles.

Asset classes consist of a group of securities with varying levels of risk as given below:

•  Equities
•  Fixed Income
• Cash
•  Commodities
•  Real Estate

Each asset class has different investment features, for example, the level of risk and potential for delivering returns and performance in different market conditions.

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A balanced portfolio uses the different characteristics of each asset class in an attempt to smoothen fluctuations in performance and balance risk.

Equities

Equities are shares of ownership in a company. When you buy equities, also known as shares/stocks, you are effectively becoming a part-owner of that business. Historically, investing in equities has the potential to generate potentially higher returns in the longer term than other investments, such as bonds, helping you meet your long-term investment objectives.

The value of investments will fluctuate, which causes fund prices to fall as well as rise and you may not get back the original amount you invested.

When the company performs well, the price of your shares may go up. When it does poorly, that price may fall. A good fund manager essentially identifies a good company and the best time to invest in it.

By investing in equities you can earn a return in two ways:

•  When you sell the shares for a higher price than your purchase price, also known as Capital Gain
•  When you receive dividends from the company whose shares you own, also known as Dividend Income

Dividends are paid out to a company’s shareholders at certain set times of the year. They generally represent a part in the profits of the company and will vary depending on the company’s business strategy and how well it is doing. The board that runs the company’s affairs will decide how much profit to pay out as a dividend to its shareholders and how much profit to reinvest into the company to drive future growth.

If you hold the shares directly, any dividends will be paid to you as the shareholder, but if you’ve invested in equities via a mutual fund, the dividends are paid to the fund. The managers of the fund may decide to pay an annual dividend to its investors.

As a mutual fund investor, you can choose whether you want to:

• receive any dividend distributions as a regular income; or
• have your distributions reinvested into the fund

Fixed Income Securities

Fixed income securities, also known as T-Bills and bonds, are loans, usually taken out by a government or company which normally pays a fixed rate of interest over a given period of time time period, at the end of which the principal amount is also repaid.

They potentially offer a more predictable income for investors when compared to riskier asset classes, such as equities, and could help to bring an important element of diversification to your investment portfolio. Fixed Income Securities are generally considered to offer stable returns, and to be lower risk than equities – and hence deliver lower returns than equities. The value of investments may fluctuate, which will cause the investment value to fluctuate.

When you buy this type of securities, you’re effectively extending a loan to the issuer. T- Bills/Bonds can be issued by governments or companies. Government securities are generally issued to fund public spending on projects like new roads and schools, while a company may issue corporate bonds as a way of financing new business opportunities.

You can earn a return from investing in Fixed Income Securities in the following way:

• You receive an income through pre-determined regular interest payments from the bond issuer known as the Coupon.

On the day that the bond expires, known as the ‘redemption’ or ‘maturity date, you usually get back your original investment also known as the Principal. After buying a bond, you don’t have to hold onto it until the maturity date. Just as a company’s shares can be bought and sold on the stock market, bonds can also be traded throughout their lifetime.

The amount borrowed by the issuer that must be repaid to the holder of the bond is known as the ‘principal’. This is also known as ‘face value’ or ‘par value’ and is set when the bond is issued. The price of the bond will change between the date of issue and the maturity date, as the bond is bought and sold on the open market.

Cash

Cash tends to be normally held within a bank account where the interest can be earned. Among investment instruments, cash funds use their market power in an effort to get better rates of return on deposits than you would get in an ordinary bank account. They usually invest in very short-term bonds commonly known as ‘money market instruments, which are essentially banks lending money to each other.

Commodities

The exchange of commodities characterizes one of the most primitive forms of trade in human history. Markets for goods trading have existed for centuries. Commodities are a distinct asset class with returns that are largely independent of traditional asset classes like stock and bond returns. Today investors have an option to choose from a variety of vehicles for investing in the commodities futures markets including mutual funds, exchange-traded funds or notes, covering the wide spectrum from single commodity-based exposure to sector-based and broad-based commodity exposures.

Commodities markets today can offer quite attractive opportunities to investors. Commodities’ low correlation to traditional assets illustrates what may be the most significant benefit of broad exposure to commodities: diversification. Asset classes tend not to move in sync with each other, which tends to reduce the volatility of the overall diversified portfolio. This lower volatility reduces portfolio risk and should improve the stability of returns over time. However, diversification does not ensure loss. Given their impact on consumer goods prices, commodities can also offer inflation-hedging.

Real Estate as an asset class in a portfolio can offer stable income, partial protection against inflation, and good diversification with other investments in the portfolio.

Modern portfolio theory proposes that the most effective way to maximize returns while at the same time minimizing risk is to add uncorrelated assets. Within the context of a multi-asset portfolio (composed of stocks, bonds, and other asset classes), real estate may provide significant benefits, as correlations with stocks and bonds over time have been low. Another benefit of investing in real estate is a hedge against inflation. With inflation increase, your potential rental income and property value increase considerably. With the increasing cost of living, so does the cash flow.

The value of investments in property, a physical asset, and the income from them, will fluctuate. Property investments can be harder to buy and sell when compared to investments in fixed-income securities and equities. An investment in the real estate fund may be linked to those risks normally associated with an investment in company shares or fixed-income securities.

Considering the Risk

‘Risk’ denotes future uncertainty about deviance from the expected outcome. Whenever you make a decision – in daily life or in investment – you are exposed to an element of risk. Risk is part and parcel of investing, but if you understand the risks, you can begin to manage and mitigate them.

There exists a close relationship between Risk and Reward. Generally, investments carrying a higher risk have a higher return potential, whereas lower-risk investments usually provide lower returns. The more risk you are willing to take on your investment, the more your investments could grow.

You can manage your investment risk in the following four key ways:

A fund manager manages the fund who will invest your money across different companies, sectors, and/or regions according to the investment objectives of the fund. Holding a well-diversified, carefully chosen portfolio of securities can help to reduce investment risk. Professionally managed funds will aim to achieve a specific objective, with an approach to risk that may align with your objective.

You might want to build a portfolio that includes a mix of asset classes such as equities, bonds, property, and cash, which will all offer different levels of risk and return.

Take a look at ABL Funds’ range of funds and asset classes to find out more.

A balanced diversified portfolio is made up of a mix of various asset classes based investments. Your portfolio might include higher-risk investments such as equities, together with lower-risk ones like bonds, or even cash or some tangible assets like property or precious metals.

Different types of investment respond differently to the prevailing economic situation and will rise or fall in value at different times and at different rates. Therefore, having an unconnected asset class’s diversification can help to generate a consistent level of performance over a period of time. Your own portfolio’s balance will depend on your attitude to risk, your age and your financial goals.

Take a look at ABL Funds’ range of funds and asset classes to find out more.

Markets rise and fall all the time. Usually, financial markets can experience short-term instability, brought on by a specific event or sometimes simply unpredictable investor sentiment, and it can take some time for them to balance out again. It is therefore sensible to plan for the long term.

Markets usually fluctuate over the short term but, over the longer term, the peaks and troughs may be smoothed out. However; it should be noted that there is no guarantee that this will always be true in the future.

Investing at regular intervals can also be a good idea. When you Invest at regular intervals, rather than in a lump sum, you would not be investing all of your money when the market is peaking out. Rather the average price you pay can be lower than if you had made one lump sum investment. Over time, regular investments can help smooth out the peaks and troughs.

Regular investing is easy with ABL Funds. Get in touch with us today so that we can help you get started.