Maintaining an investment portfolio

IVAN is a 35-year-old marketing executive. He is single and plans to get an apartment in two to three years' time for his wedding. He was referred to me as he wanted to invest some excess cash. The first thing I recommended was to go through a Financial Needs Analysis.

Ivan has an existing portfolio of insurance policies purchased from his previous insurance adviser. I suggested that we review the insurance needs in our next meeting.

After ascertaining his short-term liquidity needs (generally for six months) given current conditions such as a stable job, the amount available for investment is $40,000.

"What is your goal for this sum of money?" I asked. Most people have no specific objective for their investment and like most people, Ivan's answer was to make higher return.

One important part of investment planning is to educate our clients that for any investment return, there is always a proportionate risk involved with the investments.

There should be a goal for any investment, be it a general one such as wealth accumulation or a specific one such as retirement planning. Setting the goal helps to determine the time horizon of investment.

With the available amount to invest, we can determine the risk that the portfolio money should be exposed to in the long run. This is to ensure we would not be taking unnecessary risk for the objective we wish to achieve.

In Ivan's case, the investment capital of $40,000 is for retirement needs, with a goal to grow this to $120,000 in 20 years when he is 55 years old. This translates to an average portfolio return of 5.7 per cent per year for the next 20 years. With these requirements in mind, my recommendation for Ivan is to consider Avallis's Portfolio Asset Management (PAM).

The PAM series of portfolios seeks to align clients' investment and financial planning objectives with their risk profile through:

Clients' objectives are achieved through investing in both equity and fixed income funds. Diversification is further extended across geographical regions, industries or sectors. These investments are intended as medium to long-term holdings. Whenever possible, PAM selects more than one manager for each asset class.

This is another important feature of PAM. Avallis's PAM comes with a six-monthly review and rebalancing feature. A report together with an action plan, if recommended, will be sent to Ivan for his review and action. Should the composition of this portfolio change due to movements in the financial markets, rebalancing will re-align Ivan's portfolio risk to the initial risk level of the portfolio which was determined at the Financial Needs Analysis.

Regular review of funds

On funds selection for our PAM portfolios, the investment committee within our Investment Advisory Service (IAS) team selects the appropriate funds in the different asset classes using our in-house criteria, and reviews their performances quarterly. Should the need arise, which may be due to poor performance or other factors, a change of funds will be recommended during the review and rebalancing process.

At this point, Ivan shared that the funds he previously invested in were selected by his adviser and for some years, reviews were requested by Ivan and not initiated by the adviser.

Our firm has a dedicated committee to oversee portfolio strategies and select underlying funds. We seek to bring consistency to our clients. As a consultant, my role is to review the portfolio regularly to ensure that we do not deviate from the plan. Should there be changes in Ivan's circumstances, the investment allocations will be adjusted accordingly. The six-monthly review and rebalancing is one of the main reasons why our clients stay with us. They are kept up to date regularly and their portfolios reviewed in a systematic way.

Ivan has now decided to invest in one of our portfolios. Given that the outlook is volatile, I recommend a cautious portfolio consisting of 30 per cent equities and 70 per cent bonds. As Ivan has some existing investments in the US and European markets, our Asian portfolio is recommended for diversification purpose.

In six months, Ivan will be receiving his first Review and Rebalancing Report. Recommendations may include a change of fund(s) due to the investment committee's performance review; rebalancing of the current portfolio due to volatility in the market; or no action at all. Since this is a long-term investment, six months are a good interval for periodic review to ride out the effects of very short-term market volatility.

How will Ivan's decision work out? Will his portfolio grow? All these are subject to the market conditions then.