How to best mix your Investment options

As an investor, the greatest concern is growing your investment to deliver higher risk-adjusted
returns. Risk-adjusted return hones an investment’s return by measuring how much risk is
involved in producing that return, the risks could be as a result of prevailing economic
environment brought about by the cyclical nature of investments markets due to varying
macroeconomic factors like politics, inflation and country growth. It is therefore important to
know how to determine an asset allocation that best suits your personal investment goals and
needs.

Your portfolio should thus be constructed in a way that guarantees you can meet your
future financial needs while delivering the best returns. In today’s financial marketplace, there
are various investment options which range from Fixed Income, Equities, Real Estate,
Structured Products to others such as Derivatives and Private Equity investments.
Discussed below are 8 key factors to take into consideration in determining the best mix for
your investment options:

Risk
This is the probability that an investment may not earn its expected rate of return. For
investors, it is of paramount importance to figure out your risk tolerance level i.e. your capacity
to take on risk, and not just your willingness to bear risk. Generally, the approach is usually to
conform to the lower of the investor’s ability or willingness to take on risk. To gauge your risk
profile, it would be highly encouraged that you take a risk profiling test from your investment
advisor to avoid subjectivity,

Return
This is the expected earnings from an investment; they include dividend, interest, rent, capital
appreciation etc. Getting returns is the core reason for investing. Generally, the higher the risk
an investor takes on, the higher the expected return, and the lower the risk, the lower the
expected return,

Liquidity
This refers to how quickly an asset can be converted into cash without a significant loss in value.
An investor who requires regular cash flow to fund possible expenditure needs may require
liquid assets to be held in their portfolio,

Volatility
This refers to the amount of uncertainty or risk about the size of changes in a security’s value. A
higher volatility means that the price of the security can change dramatically over a short time
period in either direction. A lower volatility means that a security’s value does not fluctuate
dramatically, but changes in value at a steady pace over a period of time. Other than risk, the
return on an investment is also influenced by its level of volatility,

Investment Horizon
This refers to the period that an investor intends to hold an investment, and it is dependent on
the investors’ income needs and risk profile. In general, the longer an investor’s time horizon,
the more risk and less liquidity (especially in case of alternative investments such as Real Estate
and Private Equity) the investor can accept in the portfolio,

Sophistication of the Investor
This refers to how knowledgeable an investor is in terms of investment products and their
capacity to invest. Usually, investment products are classified into retail investment products
and institutional investment products, with some investment products being suitable for all
classes of investors, while others are tailor-made to target a specific class of investors. The
more knowledgeable you are about an investment product the better the chance of you making
the right decision in respect to your portfolio,

Tax situation
The tax treatment of various types of investments is also a consideration in portfolio
construction. Some investment accounts like pension accounts may be tax exempt; hence
investors with such accounts can choose fully taxable securities to hold in their portfolios. For
accounts that are fully taxable, investors may opt for investment securities that are taxed at
lower rates, e.g. investing in equities for capital gains that are usually tax exempt or taxed at
lower rates,

Unique circumstances
Each investor may have specific preferences or restrictions on which securities and assets that
they can invest. These can range from ethical preferences, religious preferences or restrictions
placed on investing in rival companies.
After analyzing an investor’s investment constraints, the next step is to construct the
investment portfolio, taking into account the importance of diversification to minimize risk in
the portfolio.

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