Our client Ashley* was two years into her first job after completing a masters but still living at home because she wanted to save money for the long term. After building up her savings and an emergency pot, she decided she wanted to make her money work harder. As these accounts only offered low returns, she decided to learn about investing and how to build a diversified wealth portfolio. Ashley set aside an amount that she could afford to lose to get started.
In our beginning your investment journey video series, we learned about how stocks work and the importance of diversifying your capital. Ashley was aware that she could potentially lose some or all of the money that she invested. She was briefed on the risks, but happy to continue her investment journey.
Objective: Ashley wanted to gain investor confidence and build capital appreciation.
Risk Tolerance: Ashley filled in a questionnaire with an advisor to profile her risk tolerance, which was calculated to be medium risk.
Investment Strategy: Ashley was best suited to a diversified portfolio to spread her capital between stocks and bonds. Investing entirely in equities was too high risk, therefore some capital was invested in government bonds and investment-grade corporate bonds.
Education: Ashley started to follow stocks she was interested in online to build her knowledge of equities.
Recommendations: Diversification was achieved in a few ways.
For stock diversification, capital was invested in a mix of blue-chip, growth and value stocks. Blue chip companies are defined as large stable companies with excellent reputations, and they often include household names such as McDonald’s, Coca Cola and Microsoft. They have reliable returns and sometimes pay rising dividends. They are seen as a haven for investors during market downturns or economic uncertainties but it’s important to note that they will still encounter market volatility.
Growth stocks have the potential for above average capital appreciation over time. In Ashley’s portfolio, they were mainly from the tech and healthcare sectors who were spending large amounts on research and development. To minimise risk, a small allocation was given to value stocks. These are stocks that are considered solid but currently undervalued by the market for many reasons.
And for bond diversification, capital was put in government and investment grade corporate bonds. Government bonds provide a small but reliable return, while investment grade corporate bonds are slightly risker with a higher potential return. The selected bonds provided a balance between risk and return while aiming for stability and income.
The portfolio was reviewed regularly to rebalance all assets keeping Ashley’s risk tolerance and main objective in mind.
Outcome:
The portfolio managed to safeguard Ashley from any major risks in financial markets, so that after the first year she was on her way to growing her capital.
*Names have been changed to protect client anonymity.
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