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 savings accounts were only offering 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.
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In Module 2, 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’s main objective was to build capital. She didn’t need any immediate income, but she wanted to build capital appreciation. Ashley also wanted to build her knowledge and gain investor confidence.
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 on social media and read stock news stories on CNBC and Yahoo Finance to build her knowledge of equities. Ashley also started listening to the Financial Times daily podcast to gain an understanding of what factors affect markets and her overall portfolio performance.
Recommendations: As a medium risk investor, diversification was the key priority when putting together Ashley’s portfolio. This was achieved in a few different ways.
For stock diversification, capital was invested in a mix of blue-chip stocks, growth stocks, 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 are defined as stocks that 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 followed a disciplined investment approach and managed to safeguard Ashley from any major risks in financial markets. After the first year, Ashley was on her way to growing her capital.
*Names have been changed to protect client anonymity.