Page 242 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 13: Strategies of putting together a Complete Financial Plan

Whereas a conservative investment profile would see most of the funds invested in low volatility Notes
investments such as cash and fixed interest (debt), an aggressive investor would see most of the
funds invested in shares and property. Furthermore, an aggressive investor may also see a high
level of gearing recommended.
Over the history of financial planning, some financial planners have developed categories of
person investment risk tolerances and have identified appropriate underlying asset mixes for
each category of person. These categories form a spectrum from ‘conservative’ to ‘aggressive’.

However, as we stated earlier the principle of diversification should be followed — personal
circumstances, economic conditions and legislation can (and almost certainly will) change. It is
therefore inappropriate to place all the person’s funds in what might be considered the most
appropriate asset sector for the person. Reducing investment risk through diversification is an
important guiding rule.
Also, as we noted in a previous topic, as persons move through life, their attitude to investments
(and the inherent risks involved) can change. This can sometimes develop through increased
awareness and understanding of the various investment markets and their particular
characteristics. Such knowledge and awareness may see the person acquire a greater level of
comfort with investing generally. The planner may well find that they are instrumental in the
development of that increased awareness and knowledge. However, the point remains — a
person’s risk profile may also change over time.

Matching Strategies to Asset Sectors

The following table may be of assistance in guiding a novice financial planner when considering
asset allocation. The table indicates the relationship between strategies and asset sectors.

Table 13.1: Matching Strategies to Asset Sectors

Strategies Cash Equity Debt Property
Income 1 2 1 2
Capital growth nil 1 3 2
Dividend imputation 3 1 3 3
Medium to long term 3 1 2 2
Short to medium term 2 2 2 2
Risk averse 1 3 2 2
Key
1: Very good .
2: Fair
3: Poor

Portfolio Guidelines

The benchmark guidelines provide a range within which a current asset allocation should be
structured. The ranges are provided to take account of shorter-term outlooks for investment
markets as well as to accommodate the particular circumstances of individual persons.

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