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Wednesday, October 19, 2011

Investment Principles 101 (or Core Wealth Management principles)

Call it simplistic, even call it naïve – but at the end of the day, when investors place surplus funds there are some key issues that they are looking for: security, return and liquidity. We make the case that investors looking at the current market could do well to settle their emotions and take advantage of what might be perceived as a ‘buying opportunity’ (an under-pricing of a number of asset classes), mainly influenced by traders (who have a very different set of criteria driving their buy-sell decisions).

If it is that simple for investors they should be looking at the key elements to each of those identified characteristics to determine their investment timing; and what they should invest into. (Whilst it is a critical element in constructing an investment portfolio, diversification of a portfolio is a significant topic that has been covered in articles prepared by Continuum Financial Planners in the past and can be found in the Articles library on our website, using the search function – see


Whilst not an exhaustive expose on this matter, the key concept of security is to be satisfied that the capital that is being invested is going to be preserved, if not throughout the period of the investment, at least by the time the investment is to be realised. For many investors, the goal is to benefit from capital gain in the process – and a gain greater than:
  • The inflation experienced during the term of the investment;
  • The calculated risk factor in making the investment;
  • Any funding costs (where gearing is involved in the investment); and
  • The tax consequences arising from the investment (both by way of revenue and any taxable capital gain).


The return that investors expect from their investments varies from each individual’s perspective – and it is not sufficient to say that we expect ‘the highest possible return’. Targeting a % return from an investment is important, but the need for a young wealth accumulator to have income will be less concentrated than that for a retiree – even if they are investing in the same asset class. (To some extent the structure under which the asset is held will create the variation required, but that is more relevant to the return to the investor, than the return ‘on the investment’.)

Bearing in mind the factors mentioned above in relation to Security, the return on an investment (aka, the Yield) is dependant on the price paid for the investment asset so that –

  • If a 10-year Bond is issued with a 5% p.a. quarterly coupon at an issue price of $100, the yield at date of issue can be said to be 5% (ignoring the quarterly cashflow effect that actually raises that rate of return marginally);
  • Assuming that some time after the issue, other investors develop the view that interest rates are going to rise - say by 1% - then they would only be prepared to buy that Bond from an original investor for around $99; and vice versa
  • If the anticipation was that the interest rates were likely to fall, the new investor would be prepared to pay the holder of one of these Bonds around $101.

In its simplest analogy, the price investors are prepared to pay for an asset is determined by their expectations regarding a return on their investment. Whilst a Bond as described above might be a gilt-edged issuance (with minimal risk – usually referred to as ‘risk-free’), similar principles apply to all investment assets, with the main variable being the requirement for a higher return to compensate for the fact that the asset may not provide a consistent return; and/ or carries a risk of capital loss.

As we have stated on many previous occasions, sentiment is a significant driver of investment decisions: people ‘like’ a particular type of company; or they ‘like’ property; they sometimes ‘fear’ that a recession is coming; they may ‘be concerned’ that they are going to ‘miss the boat’ on the ‘rising tide’; or they might ‘be concerned’ for the security of their jobs/ businesses – all of these are (some of) the emotions that influence what investors are prepared to invest into; and when they want to invest (or dis-invest).


This characteristic of any investment asset is important to most investors because at the end of the day, money is the exchange mechanism we use to take the value from one prioritized goal to another: if at present the need for funds to meet expenses are comfortably able to be met from current income, there is no need to divert investment assets for that purpose. There may arise a position where either cash is required for an expense (recurrent or capital), or that an investment asset that is judged as being more suitable to meet strategic objectives has been identified – in which circumstances, the investment assets held need to be ‘converted’. In these latter circumstances, it is important to the investor that there is an ability to liquidate the asset held, in favour of the higher prioritized purpose.

A simple set of examples follows:
  • Cash in a ‘bank-style’ savings account is immediately liquid (and in any amount up to the account balance, as required);
  • Direct Shares (equities) in a Listed Corporation are usually saleable and converted to cash (liquidity) within a few days – usually referred to as T+3 (and can be sold down – with some ‘small parcel’ constraints – in amounts required to satisfy the need);
  • Direct Property will usually need to progress through a sales program that might result, fairly typically in Queensland at least, in a contract with a 30-day settlement period – but subject to ‘inspections’, finance availability for the purchaser and sometimes, the sale by the purchaser of other property: and with no ability to control the proportion of the investment to be sold/ liquidated).

Buying Opportunity

We have referred above to a number of articles that appear in the Article Library on our website: a number of those articles also refer to an investment strategy known as ‘dollar-cost-averaging’. If after reading articles such as we have led with above, investors sought an opportunity to take the contrarian approach and re-enter the market while it is priced at current levels, they might be well advised to consider making the move over a pre-determined period of time with a number of tranches of similar value.

If you are interested in taking advice in relation to your investment goals and determining whether now is an appropriate time in your situation to take advantage of such a buying opportunity, please contact us, Continuum Financial planners to arrange an obligation-free meeting with one of our experienced wealth management advisers. [To assist in your decision in this regard you might also look at Who We Are, our Client Value Proposition and our Fee for Service statements.]

The information contained in this article is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek the appropriate financial advice and read the relevant Product Disclosure Statement or other offer document prior to acquiring any financial product.

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