"We can, and do, rest easy, secure in the knowledge that our financial interests are in good hands..."

G & J

Successful Portfolio Management

Successful portfolio management using an authorised financial adviser should always start with the investor. To be most effective, the adviser needs to identify a full understanding of the investor’s objectives, their investment time horizon and most importantly, their attitude to investment risk.

It is not unusual that there be major differences in objectives between clients who expect to retire in 20 years’ time compared to one who is retiring in two years’ time. The client retiring in twenty years’ time has time on his or her side to save, and will experience good and poor investment markets. The client retiring in two years’ time most likely will be more cautious.

Just because an investor is retired it does not mean that they have a short investment horizon. Often it will be around twenty-five years. It means that it is not desirable that they use up all their capital by drawing too heavily on their portfolio. There should be some exposure to growth investments to mitigate the loss of spending power that inflation brings. Realistically, we are not really cognisant with inflation except on housing because inflation rates have been historically low for most of the past decade.

Identifying the most appropriate long-term mix of assets is the basis of portfolio construction. It is considered that 80 percent of an investment portfolios return is determined by the asset allocation that is used. Asset allocation is all about carefully balancing the expected returns and potential risks of each asset class to build a portfolio that has a high probability of meeting the investor’s long-term objectives without taking unnecessary levels of investment risk.

Some advisers will use a strategic asset allocation, and stick to it, irrespective of market conditions. This can have consequences as different markets perform differently. For example, New Zealand shares are currently considered expensive relative to Australian shares. Because of this, it may prove to be advantageous to have a greater allocation to Australian shares than New Zealand ones.

There is also the argument that fixed interest investments are expensive relative to shares. But there is a reason to include fixed interest in a portfolio and that is to moderate investment risk to levels that are acceptable to the risk profile of the investor.

There can be the temptation to chase high yielding fixed interest. Invariably the reason that it is high yielding is because it is high risk. Any allocation to this should be considered as being a component of the riskier portion of a portfolio, in a similar manner as shares. This lesson should have been learnt from the financial disaster of the finance companies several years ago in New Zealand.

Regardless of designing a portfolio that meets the risk profile needs of the investor, the portfolio needs to be sufficiently diversified. The use of low cost well managed investment funds can provide a suitable investment solution.


Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Whakatane based Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.