Wealth management is the process of investing your current assets and planning a strategy so that you reap maximum benefits from your resources whether it is for long or short term. People who practise a proper wealth management strategy will generally fare better financially in their lifetime in comparison to individuals who do not follow a strategy.

This week we will help you discover what type of investor you are – Conservative, Moderate or Aggressive – and the best portfolio for your financial needs.

• Conservative/Risk-Averse Investor

This may be an older individual saving for, or already in retirement whose main investment objective is income.

• Moderate Investor

This may be an individual who may be in the Consolidation phase and is prepared to generate moderate returns with a reasonable level of risk.

• Aggressive Investor

This may be a relatively young person, for example, someone who is now starting a career and is willing to take a high level of risk.

The mix of assets should match the client's risk appetite, goals, and investment horizon in an attempt to enhance overall returns. The phase you are in your financial life cycle will also provide some guidance on which portfolio is best suited for you.

• Stage 1 - Accumulation, the focus is on building wealth. Risk tolerance is high as you build your assets

• Stage 2 - Consolidation, the focus shifts to the process of preserving and increasing the wealth accumulated. Financial needs peak during this time as dependents such as children come in to play.

• Stage 3 - Spending, the focus turns to the process of living on (and, if possible, continuing to grow) one's saved wealth. Expenses are typically lower and risk tolerance decreases.

Each of these stages is characterised by different life events and at each stage there are recommended changes in the focus of the individual's financial planning.

The Conservative Portfolio

This is for investors nearing retirement whose main objectives at this stage in life are income and capital preservation. Retirement funds typically maintain a balanced asset allocation in order to preserve capital while generating some income. Exposure to USD will assist in protecting against depreciation of the TTD and help to generate higher returns as yields on the local market remain depressed.

A model portfolio was constructed to reflect the returns an investor would experience if invested in a conservative portfolio. If TT$100,000 was invested at the start of 2009, those funds would have grown by 52.48 per cent at the end of 2012 to reach a total of $152,475.72.

The Moderate Portfolio

This is suitable for investors with a moderate risk tolerance desiring a mix of safety and capital appreciation. It is usually preferred by those in the accumulation stage as it reflects a tempered risk appetite in light of higher expenses but still has equity exposure to increase wealth.

A TT$100,000 portfolio at the start of 2009 would have grown by 55.60 per cent at the end of 2012 to reach a total of $155,604.24. The annual returns can be seen below.

The Aggressive Portfolio

This portfolio is geared toward investors with higher risk tolerances. This portfolio allocation is best suited for a young investor with a greater time horizon to maturity and minimal expenses. The longer time horizon an investor has the better their portfolio will be geared to recover from any volatility and market shocks that may occur.

A TT$100,000 portfolio at the start of 2009 would have grown by 57.13 per cent at the end of 2012 to reach a total of $157,134.37.

Notes on model portfolio:

The benchmarks used were as follows:

– Domestic equities - TT Composite Index

– US Equity - S&P500

– Asian Equity - iShares Asia ex Japan

– International Fixed Income - JP Morgan Emerging Market Bond Index

– Local Fixed Income - Working Paper - Developing Central Government of Trinidad and Tobago Bond Indices

– Savings rate - Commercial banks deposit rates

– Alternative Investments - Thomson Reuters Commodities Index

In a recessionary environment, the conservative mix would outperform more aggressive mixes, while in periods of economic growth, more aggressive strategies will prosper.

STAGES OF EFFECTIVE WEALTH

MANAGEMENT

Stage 1: Identification of your needs and risk tolerance level

• Determining your investment objectives such as investment goals and return requirements. Detail legal, liquidity, time horizon, taxes, and other special circumstances.

Stage 2: Development of Investment Strategy & asset allocation

• Dividing the investment portfolio among asset markets, or categories of assets, to achieve appropriate diversification or a combination of expected return and risk consistent with the portfolio's objectives and risk tolerance.

Stage 3: Execution of Investment Strategy

• Selecting and acquiring investments based on the asset allocation guidelines in your investment strategy.

Stage 4: Reporting & Monitoring of Investment Strategy

• Monitoring and re-balancing the portfolio according to the investment strategy and asset allocation guidelines.

• Review adherence to asset allocation and security guidelines and the performance relative to established benchmarks.

STARTING YOUR PORTFOLIO

Investors may not have the time and/or the necessary knowledge to manage their investment portfolio efficiently and effectively. When looking for someone to assist, look for a reputable and long standing brokerage house such as Bourse, who will be able to execute on the local, regional and international exchanges on your behalf.

As can be seen from the figures and charts above, any one of our model portfolios has far outperformed any savings account or fixed income product available. The key to a successful porfolio is asset allocation, security selection and diversification. To ensure that your portfolio performs to the best of its ability, it is recommended to maintain the portolio for a minimum period of 3-5 years. Next time we shall examine security selection.