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Investment portfolios | The Principles of Success

By Mark Quinn - Topics: investment diversification, Investment objectives, Investment portfolios, Investment Risk, Investments, investments in Portugal, Portugal
This article is published on: 18th May 2022

The world of investments can be intimidating, even for the most seasoned investor. Here, we will put aside the jargon and push past the hype of ‘the next big thing’, and instead focus on the key principles that every investor should know when building a portfolio of investments; irrespective of how engaged or involved you wish to be.

Ideally, you should look at your assets as a whole – your pensions, property, savings and investments, rather than at each area or structure in isolation. This way you can apply the principles to your wealth as a whole and be in the best position to potentially meet your financial objectives.

Asset allocation is key to investment success
Asset allocation is the percentage of each type of asset class making up your overall investment portfolio. In turn, asset classes are groupings of similar types of investments such as cash, equities, commodities, fixed income, or real estate.

The key principle behind asset allocation is to include asset classes that behave differently from each other in different market conditions to reduce risk and generate potential returns. For example, if equities are falling in value, certain fixed income assets may be rising.

The goal here is not solely to maximise returns but to blend your holdings to meet your goals, whilst taking the least amount of investment risk. The right allocation for you will depend on several factors such as your willingness and ability to accept losses, your investment time frame, and your future needs for capital – unfortunately, there is no one size fits all.

Many studies have shown that asset allocation is the most important driver of portfolio returns, so getting this first step right is critical.

Diversification to reduce risk
Once you have decided on the right asset allocation for you, you must then pick the individual types of holdings or investments within each asset class. Each asset class is broken down into subclasses, for example, fixed income includes holdings such as fixed deposits, gilts and government or corporate bonds.

It is not enough to simply own each type of asset class; you must also diversify within each asset subclass. For example, taking corporate bonds which is a type of fixed income asset class, you can hold them in many different types of companies, industries, currencies, countries, or long or short term.

Rebalancing
As assets perform differently over time, the initial percentage asset allocation will deviate over time. A typical example is the huge increase in the US stock market over the last couple of years which, whilst good for investors’ returns, will have increased the level of share exposure. This increase in the value of equity holdings because of the sustained rise will lead to increased risk across the portfolio as a whole.

This can be solved by regular rebalancing to ‘reset’ the portfolio to your original asset allocation. This involves selling holdings that are overweight and buying ones that are undervalued.

Rebalancing also provides the ideal opportunity to revisit your financial goals and risk tolerance, and to tweak your asset allocation accordingly.

investment portfolio

Long term perspective and discipline
As humans, our emotions can lead to poor decision making when it comes to investing. Decisions that seem logical in daily life can result in poor investment returns, with many retail investors selling through fear at the very point they should be buying at lower prices, and conversely, buying at much higher prices during a gold rush.

It is vital for most investors to keep a disciplined approach as it is easy to get caught up in the daily noise of the markets.

Minimise costs and maximise tax efficiency
Einstein described compounding as the 8th wonder of the world and the effect of compounding applies to fees. A charge that might seem small at the beginning can turn into a significant cost over time and research has shown that lower-cost funds tend to outperform in the longer term.

As a simple example, assume a €100 investment and no growth. After 10 years, an annual charge of 2% will result in €82, a 0.2% charge would result in €98.

Focus on minimising fund, structure and adviser fees. In the world of investing, more expensive does not necessarily mean better.

Tax is an often-overlooked cost, which if minimised can lead to the same positive compounding effects over time. This is done by ensuring that your investment portfolio is structured correctly for your resident status, and it might be different planning for normal residents, Non-Habitual Residents, or depending on if your move to Europe is for the rest of your life or if you intend to return to your home country in the future.

Withdrawal strategies
If you are taking income from your investments, you should consider the way in which you do this and the order. Not only will this affect the type of investments you hold within your portfolio, but it could also affect how you hold your portfolio and provide tax planning opportunities or pitfalls.

Focus on total return
With interest rates at historically low levels, it is difficult to rely solely on income returns in this investment environment. The total return is a truer picture of performance and takes into account the capital appreciation as well as the income received.

Be boring!
To quote Warrant Buffet, one of the world’s most successful investors: “Lethargy, bordering on sloth should remain the cornerstone of an investment style”.

Do not try to chase returns or the trends in investments – stick to tried and tested assets. At Spectrum, we only use investments that have worked over the long term, are easy to understand, daily tradable and transparent.

Article by Mark Quinn

If you are based in Portugal or are thinking of moving to Portugal, you can contact Mark at: mark.quinn@spectrum-ifa.com for more information. If you are based in another area within Europe, please complete the form below and we will put a local adviser in touch with you.

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