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Why it pays for young people to create an investment strategy early

By investing strategically, young wealth accumulators can continue to grow assets as they progress through life. Investment recommendations will obviously vary depending on the individual. Portfolios are compiled to meet an individual’s needs, preferences and goals, and no two portfolios are likely to be the same.

Investment over the long term can have the potential to allow the investor to manage the risk of the investment, this could be through portfolio diversification, investing in appropriate mix of assets, such as equities and fixed interest. As a high net worth individual or high earner with a large income, there could also be a higher capacity for loss whilst in receipt of income, allowing the investor to sustain and manage any investment volatility in the short term.

Greater risk capacity

Although the level of risk depends on the individual, young wealth accumulators are often more inclined to take this risk.

There are notable differences between the financial needs of young wealth accumulators and those outside this bracket. You may find you are often cited as the target market for the latest ‘flavour of the month’ financial products - products that may not necessarily be the best fit for you. You are also more likely to either seek or be given advice from many different people. While this has its obvious benefits, it increases the likelihood you are not following a coherent strategy - therefore hindering opportunities to get the best returns.

Targeted investment strategy

It is essential you follow an organised, coherent and targeted investment strategy, making the most of the assets at your disposal. Although you may have more opportunity to take on greater risk, your strategy needs to account for your personal tolerance for risk, how much risk you need to take and how much you want to.

As a young wealth accumulator, you are therefore advised to seek assistance, ensuring your strategy has the right mix. When constructing a strategy, emphasis also tends to be placed on spreading risk - a tactic aimed at protecting you from any sudden changes in the markets.

Diversification

But what is the best way to spread risk? One of the most common methods is diversification. This involves investing in different areas, many of which have no connection to another. It is important to remember, however, that there are two different types of risk, and diversification only helps to counter one.

Unsystematic risk

This can be lessened through diversification, and relates to value changes in a region or sector. One example of this could be news that is specific to a selection of stocks, for instance a strike by employees of that company.

Systemic risk

Cannot be reduced through diversification, and relates to major events such as interest rate fluctuations or inflation.

There are various ways to diversify a portfolio, and these include:

  • A mixture of assets - There are various assets in which you can invest, including equities, fixed interest and property, while you can also opt for more ‘independent’ asset types, such as commodities and property
 
  • Different sectors - Investing in different sectors can offer a more secure safety net, as movement in some industries will have little effect on others
 
  • A spread of companies - You can delve a little deeper by investing in individual companies either within the same or across different sectors. Again, risk can be spread further by investing in multiple businesses
 
  • Consider different regions - To maximise your portfolio diversification, consider investing in different regions. This has value for many reasons, such as improving returns and reducing overall risk.

 

Among the main considerations are personality and objectives. Your investments, for instance, are based on your level of risk, while they must also meet your goals. It is therefore important to devise a coherent strategy with multiple factors in mind, such as investment and tax planning. These are particularly important for young wealth accumulators, keen to both safeguard what they already have and to continue making money in order to meet their longer-term financial objectives.

The information provided through the Equilibrium website is based on our opinion and is for general information purposes only. It is not, and should not be construed as financial advice.