The four simple essentials of investment strategy

A lot of emphasis is placed on maintaining an investment strategy for an SMSF but having one for a business is equally important and the same basic principles apply. Here are four points you should consider when developing your investment strategy.

1. Knowing the Target

Setting goals is of primary importance. What purpose will investment serve? Buying business premises, when the property cycle creates the opportunity, may make excellent sense but free cash reinvested into product development or staying ahead of changing technologies, may create a more assured future.

2. Strategy and Risk Management

Investment markets morph swiftly, as do investment timelines. When the focus is on core business, it’s difficult to have one eye fixed on market movements and the other on the calendar. However, both have impact on risk profiles, which may need to change to meet market, business and superannuation cycles.

Investment strategies require regular review to keep apace and to adequately manage risk at appropriate levels. Having expert support in this area is important. The professional view, blending long term vision with current awareness of markets and cycles is a vital component.

3. Timing of Returns

Strategy will be informed by investment goals, market movements and the timing of future cash demands.

Considering when income or capital return from investments will be needed is critical. Cash inflows may come from asset sales, interest yields or dividends, thus liquidity and the timing of returns is important when reviewing ongoing and new investments.

For example, targeting high capital growth opportunities and ignoring yield is inappropriate ahead of ongoing cash drains due to cyclic business demands such as increasing stock requirements or, in the case of a super fund, pension outflows.

4. Coping with the Timing of Market Movements

Markets are capricious and hard to second guess. The strategies employed to manage this while still maintaining returns are more important than trying to forecast future positions. Long term asset class cycles are interrupted by short term shocks, while wholesale disruption has overturned some entrenched sectors and will continue to do so.

Change is constant. The All Ordinaries index is presently only 13% below its 2007 high at a time of significant superpower repositioning; property markets across Australia are heading in opposing directions; and there are as many media pundits forecasting boom as there are forecasting gloom, on any given day.

Despite the noise, it is possible to take practical steps to manage investments and resultant cash flows using a sound, logic-driven approach to provide a base flexible enough to meet future needs. In changing conditions, opportunities arise and it’s good to have the capacity to react. Sound advice and collaborative input will best facilitate this.

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