2019 was an unprecedented environment for financial markets and, by most measures, was one of the best years for the local share market since the aftermath of the financial crisis a decade ago. Coming back from the Christmas break and reflecting on 2019, we spoke to experienced JMI Wealth advisers Lynette Ball and Shameema Shameem about some of the considerations for client portfolios heading into the new year.
Lynette summarises the year that has been, explaining that “without going into too much detail, very low interest rates, on and off again political risks, reasonable growth and risks to global trade were some of the key factors which characterised a year of uncertainty and, somewhat paradoxically, strength in financial markets.” However, Lynette is careful not to set expectations too high, as “while many of these factors, such as low interest rates, continue to be supportive for share markets, we caution clients not to assume that 2020 will enjoy the same kind of returns as 2019.”
Uncertainty about the future is one thing that never changes, so how does one prepare for this uncertainty? Shameema discusses the importance of the investment concepts ‘asset allocation’ and ‘portfolio construction’. To start with, she emphasises the importance of asset allocation. "It is one of the most important decisions that investors make. It attempts to create an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon. The three main asset classes [equities, fixed-income, and cash] have different levels of risk and return, so each will behave differently over time.”
Shameema continues by explaining that having an appropriate asset allocation mitigates the risks associated with investment uncertainty because it “creates a framework or plan that an investor is more likely to stick with”. After setting an appropriate asset allocation it is important to ensure that a client’s portfolio remains within established limits via a process called rebalancing. “Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk,” Shameema explains.
Security selection and portfolio construction are other important tools to manage uncertainty and investment risk. “There are many strategies and philosophies which can be relied upon when choosing the investments which make up a client’s portfolio, but first and foremost we believe that it is important that client portfolios have sufficient diversification.” Shameema continues by explaining that “maintaining a diversified portfolio of securities reduces the risks associated with exposure to any one business, sector, or geographic region. It’s the financial equivalent of not putting all your eggs in one basket.”
In addition to managing risk, choosing suitable investments is also likely to help clients better achieve their goals. In a previous issue of this column we spoke to advisers at JMI Wealth about some of the strategies for generating retirement income in a low interest rate environment. Lynette discusses how this can work in practice. “Some investments and strategies favour income over growth. For example, consider choosing to invest between two quality New Zealand companies Meridian Energy and A2 Milk. While of course they are very different businesses, they also offer different propositions for shareholders from an income perspective. Meridian distributes company earnings to shareholders via a dividend while A2 milk reinvests its earnings for growth.”
To summarise, one cannot predict what 2020 has in store for investors with any certainty, but with an appropriate asset allocation and a diversified portfolio, investors can take comfort knowing that there is a considered plan in place. If you have any questions about your investment portfolio please feel free to contact the team at JMI Wealth.
Contact: Lynette Ball, M: 027 569 8694, lynette.ball@jmiwealth.co.nz
or Shameema Shameem, M 027 201 2877, shameema.shameem@jmiwealth.co.nz
www.jmiwealth.co.nz
