How to Plan your Investment Portfolio

Whether you have a small KiwiSaver balance or a huge fortune, it is important to plan your investment portfolio so as to get the right balance between risk and return.

Low risk generally means low returns and, conversely, high returns usually imply high risk. Being too conservative with your investment portfolio can lead to disappointing returns, while being too aggressive may result in losses you can’t afford.

The first step in planning your portfolio is to get a good understanding of how well you tolerate risk and how much risk you can afford to take without jeopardising your standard of living. Your own perception of your risk tolerance is not always accurate.

When investment returns are high and markets are buoyant, it is easy to be a confident investor and take risks. When investments fall in value, confidence is shaken and there is suddenly less tolerance for risk. Attitudes towards risk and return are determined by many factors including your personality, your previous investment experience, your current financial situation, your age bracket and the length of time you wish to invest for.

Assessing clients’ tolerance of and capacity for risk is something a good financial adviser will spend considerable time on before recommending an investment portfolio.

This can involve completing a questionnaire, which will give an objective assessment of the probable risk profile for a client, followed by an in-depth discussion with the client to confirm or modify the questionnaire results.

If you do not have a financial adviser, the new Investment Planner tool which is available on the Sorted website (www.sorted.org.nz) will help you determine your risk profile, as well as give guidance on the right mix of investments for you and the sort of results you can expect. This is a useful starting point before seeking professional advice.