Investment Planning

The foundation of any successful investment strategy is a clear understanding of your short, medium and long-term financial objectives. Your planned expenditure and some emergency cash should always be ring fenced so that investments don’t need to be accessed in the early years.

We need to establish:

  • Your future plans
  • Your timescales
  • Your attitude to investment risk
  • How much accessible cash you should retain
Investment risk Nothing in life is without risk. We choose to take additional risk only if we believe we will be rewarded for doing so. Investing is no different. Your expected investment return is the financial reward you expect to receive for accepting a degree of investment risk. So what is investment risk? Put simply, it is a measure of how much uncertainty there is about the return an investment may deliver. The more risk you take, the wider the range of potential outcomes. Risk has four primary aspects that are discussed when we sit down with you.

Risk perception generally relates to how much you know about investment markets and their tendency to follow a roller-coaster path that is not always comfortable. We tend to be more afraid of things we know very little about. Those who have a high degree of knowledge about financial markets tend to see them as less risky.

Risk required is often overlooked and relates to the returns that you need to meet your objectives. The higher the return required the more risk might have to be taken, and this need may override your perception and tolerance. On the other hand, you may choose to amend your future plans in line with your attitudes.

Risk capacity has do do with whether, for a given level of risk, your financial situation can withstand the impact of a market decline without suffering an unacceptable loss of lifestyle now or in the future.

Risk tolerance expresses how you feel emotionally about taking risk. Where do you strike the balance between getting a favourable outcome versus and unfavourable outcome? Analysis suggests risk tolerance slowly decreases with age, and personality traits are known to be affected by major life events, good or bad. However, it appears that risk tolerance neither collapses in bear markets nor soars in bull markets. We see that people tend to accept risk in bull markets and avoid risk in bear markets. What we are talking about here is often linked to misunderstandings about how markets work in the long term. We use a risk profiling tool called ‘Finametrica’ that has been long established as a credible measure of how we instinctively feel about risk.

Asset allocation

The most important decision relates to the mix and proportion of equities (shares) fixed income securities (government and corporate bonds) cash, commercial property and other assets that will be held. Academic research suggests that this process, called ‘asset allocation’ is the key to successful investing and that stock picking and trying to time the market are much less relevant in the longer run.

We believe that for investors the most important decision concerns the mix of holdings in the portfolio rather than focusing on the individual holdings themselves. To work out what is best for you we consider factors such as your financial needs and objectives, your overall resources, your attitudes to risk and for how long you want to invest.

When constructing investment portfolios we follow the principles of modern portfolio theory (MPT). This was first developed in the 1950s by Harry Markowitz. The aim is to maximise return and minimise risk over the long term by carefully choosing different assets and blending them in a portfolio.

MPT is a mathematical formulation of the concept of diversification in investing; selecting a collection of investment assets that has collectively lower risk than any individual asset. This is possible in theory because different types of assets often change in value in opposite ways. For example, when the prices in the stock market fall, the prices in the fixed income (bond) market often increase, and vice versa. A collection of both types of assets can therefore have lower overall risk than either individually.

In the short term, external events can impact on investor behaviour and market efficiency making them act and react in unpredictable ways. This is why we view investing as being for periods of not less than five years and preferably much longer. We usually advocate high cash holdings outside clients’ investment portfolios to give liquidity and the capacity to ride our market highs and lows.

Our Investment Philosophy

Darwin Wealth work with Clients, Corporations and Trusts as to which investment style should they adopt when investing in each asset class and explain in detail these investment styles.  Our approach is to gain value where possible based on the research of noble prize winners French and Fama ( Efficient Market Hypothesis Prof Eugene F, Fama, University of Chicago) and the main principle is to ensure efficiency and value where possible for our clients.