Investment Strategy Construction

People invest money to achieve the following objectives.

  • Create wealth
  • Plan for retirement
  • Provide investment income in retirement

In order to achieve these objectives, an investment strategy is developed. This is done by constructing a portfolio of assets which are diversified by asset class.

The success of the design of the investment strategy is therefore very important to the achievement of these objectives.

In constructing an investment strategy to meet the objective of the individual a number of factors are taken into account. These are:

1. Identification of the Strategy Objective

It is very important to determine what the objective of the individual is so that the investment strategy can be designed to achieve this objective. For example, if the main objective is to provide income in retirement then the investments that are selected need to have the achievement of income as their main characteristic. Similarly, portfolios with an objective of capital growth and tax reduction will be designed with a greater emphasis on assets that provide capital growth.

2. Risk Profiling

Determining the investor’s risk profile is vital to ensuring that the investor is able to cope mentally with the volatility and risk that a particular strategy may exhibit. The investment strategy therefore needs to cope with the constraints that the risk profile may place on achieving that objective. A thorough risk profiling assessment is therefore a very important element in investment portfolio design.

3. Portfolio Construction

Having determined both the objective of the investor as well as the investor’s risk profile, the investment portfolio Is customized to ensure that the objective is achieved within the risk tolerance level. In selecting the individual investments that make up the investment strategy, research and analysis is used.

4. Ongoing Appraisal of Performance

It is important to review the performance of the investment strategy on an ongoing basis to ensure that it is achieving the objective that was set for it. World markets are constantly changing and therefore constant review of the investment strategy is crucial. Adjustments to the strategy will take place at the portfolio review so that the strategy is fine-tuned to take into account the changes in market conditions and financial outlook.

5. Review Meetings

The review meeting not only examines the performance of the investment strategy relative to the objective but takes into account the changing needs of the individual so that adjustments to the strategy can be made in order to cater for these changing needs.