For several years now an concept known as “liability-driven investing” has been trendy for skilled investors such as pension funds. Essentially, it’s a complicated way to express a very simple idea. Hence, the investments you hold should reflect the reason you make them.
It’s really just common sense. If you’re saving for a specific reason, it’s reasonable to select the assets that you keep based on whether they’re ideal for that purpose. At least we can all apply the fundamental principles of that approach to our own financial planning.
1. Focus on Your Goals
In practice, this means that you need to prioritize savings and investments based on the targets you plan to achieve. That’s not to say there’s no room for investment decisions based on your opinions about stocks, fund managers and other factors likely to have an impact on performance; but these should be secondary considerations.
You need to think about your financial needs, the length of your investments and your risk tolerance. It should provide you with a clear framework for your portfolio.
It considers how much you will keep in equities versus fixed-income securities or other asset types. In addition, you can start filling in the context by making choices about how you to accomplish this asset allocation.
Academic research suggests that up to 50 per cent of your portfolio’s output can depend on asset allocation, which is much more important than individual security selection or market timing.
2. The Right Fund for the Occasion
What you’re looking for is efficiency that meets the unique financial needs you have. Supposed you’re 35 and putting money into funds that you’re planning to use to produce retirement income within 30 years. It seems daft to think about, say, a six-month streak of negative income.
Such as the experienced investors, you need assets that suit your liabilities well. Of course,your needs will change over time or you might find that your initial choices don’t offer what you hoped for. On that basis keep your investments under control.
3. Theory into Practice
The investment firms market has a lot to say, with a variety of funds offering very different features. The industry has a good story to tell about profits, as investment firms are required to hold back some dividends in good years to pay out in leaner times.
The record of growth is remarkable too, outperforming comparable open-ended funds over longer periods on average.
Writer: Irly Nurvitasari