Page 244 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 13: Strategies of putting together a Complete Financial Plan

is relatively low, although it may occur in times of severe market downturns in more than one Notes
asset class.

Balanced

This portfolio provides a balanced exposure to a range of asset classes and aims to produce an
appropriate mix of both income and capital growth over the medium to long term. Investors
must be prepared to accept moderate fluctuations in the value of the portfolio with negative
total returns likely to occur, on average, at least once every 10 years. The income from this
portfolio should be reasonably high because of its exposure to shares.

Growth

This portfolio has an emphasis on growth in asset value rather than producing income for
expenditure requirements. The relatively high exposure to shares and property will mean frequent
fluctuations in the value of the portfolio with negative total returns likely to occur, on average,
at least once every five to seven years.

Aggressive Growth

This portfolio aims to maximise total returns over a period of more than five years, preferably
closer to 10 years. It has a high exposure to growth assets such as shares and property and it will
experience considerable fluctuations in capital value in response to changes in market conditions.
Investors must be prepared to accept these market fluctuations as the price which has to be paid
for superior long-term returns.
The portfolio is likely, on average, to produce negative total returns at least once every five years.

Selecting Investment Types

Once the financial planner has decided on the most appropriate balance of investments across
the various asset sectors, the next decision is to select the types of investments within each asset
sector. In matching a type of investment with a person, the following variables we have discussed
at various points throughout previous topics should be considered. These variables are:

1. Growth: What opportunity is there to achieve capital growth? How is it achieved?
Historically, what levels of growth have been achieved?
2. Income: Is this an income-only investment or is there opportunity for income and growth?
When is the income paid and how much can be expected?
3. Taxation: What are the taxation consequences with regard to capital gains, income tax,
commuted pension, property income, tax-deferred or tax-free income?
4. Risk: How volatile is this investment type in the short, medium and long term?
5. Liquidity: How easily could the investment be turned into cash? How is this done?
6. Manageability: Will this type of investment require infrequent or regular monitoring
and review? How can this be done? Are there switching options?
7. Asset allocation: Where does this investment type have its funds placed -— cash, fixed
interest, shares, property? What are the minimum and maximum levels of exposure?
8. Costs: What costs are associated with the investment — entry/exit fees, management fees,
trustees, administration costs, commissions?

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