Tuesday, 19 March 2013

Managing an investment portfolio

Following a comment in another post i'll try to summarise how i manage my investment portfolio.  Whilst this certainly won't cover all the options available, i'll try to cover how i personally went about it and what i considered.

I'll break this down into 3 sections:
1) What markets / risk do i want exposure to
2) What products offer that type of exposure
3) Which service providers offer access to these products


Firstly, with respect to the markets & risk categories to target, this is very much a question of an individual's risk appetite.  In my case, i have been targeting broad geographical & industry diversification, with a focus on high yield.  However, the options i've looked at were almost limitless, for example:
Developed, Emerging;  Large cap, Small cap;  Yield, Value, Growth;
Country, Regional, Global;  Individual names, Broad sectors;
Companies, Commodities, Currencies and so on.


Once i had a clear idea of the markets i wanted to target i moved on to choosing suitable investment products.  In my case, the priority here was to minimise fees, hence increasing the proportion of income/growth returned to me.  I personally try to avoid products such as managed funds, unit trusts, insurance linked investment products etc which have all traditionally come with high fees, either at opening, closing or on an annual basis.  I recall looking at a bond fund prospectus that charged something like a 4% upfront fee and a 2% annual fee. It would need to perform very well before the customer started to benefit.

My preference for achieving low cost diversification is currently Exchange Traded Funds, which come with annual fees typically in the 0.2-0.6% range.  ETF ranges have been steadily growing for a few years now and there is almost always something suitable for my needs.
In addition to the appeal of lower costs, ETFs also offer the lazy option to diversification, allowing easy access to track an index without needing to hand-pick individual companies.  This is ideal for me as I don't have a lot of time to manage the portfolio.

If pre-packaged diversification isn't required, the obvious options include but are not limited to direct equities, bonds, buying physical assets, or more complex structured/derivative based products.

Service providers

In some respects I found that this flowed from the choice of market & product.  I found the simplest option to be a broker through a high street bank, many of which now offer dedicated online services.  This is good for those trying to keep personal finances clean & easy to manage, but for those looking to build more complex or active portfolios, a dedicated brokerage may be preferable.

Again, a key consideration for me is fees, i try to avoid quarterly/annual holding fees, inactivity fees or preferential terms for a higher frequency of orders, simply because i don't think they will suit my infrequent buy & hold investing style.  I would always recommend shopping around for the best deals though, as there are many options out there.

Again, another appealing factor of ETFs to me is that these can cover equities, bonds or commodities all via the stock market, which can make market access simpler if a basic online brokerage/bank provider is chosen.

(Disclaimer:  every post on this blog is a personal opinion and in no way should be interpreted as professional or financial advice.  Please consult a professional adviser if advice is needed.)

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