Many portfolio managers break down their investment options into classes of risk appetites, such as “conservative”, “balanced”, “growth, or “aggressive”. But what do these classes mean? Who are each of the classes tailored towards?
Each of the classes is likely targeting a different level of risk, reward, and investment horizon; the different investment classes are therefore targeting investors at different stages of their investment journeys.
Shorter-term investments
A shorter-term investment horizon might be a period of 1-3 years. Due to the shorter investment period, a “conservative” portfolio balance is most suitable – this is because a bad period (such as a declining year) could do a lot of damage to your portfolio. The assets in a conservative, shorter-term portfolio are therefore predominantly lower risk, lower volatility assets, such as cash, and bonds.
Typically, a conservative portfolio would be composed of around 75 percent cash, bonds, or like assets, with the remainder in shares, property, and other riskier assets. According to ASIC, such a portfolio might expect a loss one every twenty years invested.
Medium-term investments
A medium-term investment horizon might be a period of 4-6 years. A suitable option for this investment horizon might be the “balanced” option – which aims to find the middle ground when weighing up risk and reward.
A “balanced” portfolio option might hold around 70 percent of its assets in property and share exposure, whilst keeping 30 percent in cash or fixed interest assets. According to ASIC, such a portfolio might expect three losing years for every 20 years invested.
Longer-term investments
A longer-term investment horizon might be a period of 7 years or more. Given the greater period of time invested, you may wish to be more aggressive with your asset selection, as the longer you’re invested, the greater chance that periods of bad returns are averaged out by periods of good returns. You may therefore wish to go with an “aggressive” or “growth” portfolio option, which would usually be constructed of 85 percent or more exposure to property or shares, with the rest in cash or fixed interest. However, you may still wish to go for the balanced option, if there is a chance that you may need to withdraw the money during the investment horizon, or if you have a lower risk tolerance in general.
According to ASIC, you could expect about four or five losing years every twenty years invested.
Taking into account your investment horizon is just one of the important questions you must ask yourself when considering a portfolio investment decision. One of the best things that you can do when considering investment is to consult an independent professional.