Starting the financial year with a clear investment strategy is essential for staying on track with your financial objectives. Whether you’re saving for a major purchase, securing your retirement, or building wealth, your investments should align with your personal goals, risk tolerance, and market conditions. Without a deliberate review and adjustment of your portfolio, you risk mismatched strategies that could hinder your progress.
This guide offers actionable steps for aligning your investments with your financial goals. From revisiting your risk tolerance to assessing new opportunities in the market, these steps will ensure you remain on the path to achieving your financial aspirations.
Why Aligning Investments to Goals Matters
Your financial goals serve as the ultimate destination, while your investments act as the vehicle to get you there. Misaligned investments can cause detours or delays, exposing you to unnecessary risks, excessive fees, or underwhelming returns. By periodically realigning your investments, especially at the start of the financial year, you ensure every dollar in your portfolio is working toward your specific goals.
Key Advantages of Investment Alignment:
- Optimised Growth: Ensures your funds are allocated to maximise potential returns for your goals.
- Improved Risk Management: Reduces the chances of overexposure to volatile assets or markets.
- Clarity and Focus: Provides direction and makes progress easier to track.
Below, we provide a step-by-step process to realign your investment strategy for the year ahead.
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Review Your Risk Tolerance
Risk tolerance is a measure of your ability and willingness to handle fluctuations in the market. Understanding your risk profile is crucial because it ensures that your investments align with both your financial situation and emotional resilience.
- Assess Your Risk Comfort Level: Changes in life circumstances or market conditions can affect your appetite for risk. For instance, younger individuals with longer time horizons may tolerate higher levels of volatility, whereas those nearing retirement might prioritise stability and capital preservation.
- Match Risk with Time Horizon: Timeframes play a pivotal role in determining risk levels. Long-term goals like retirement may allow for greater exposure to growth assets like shares. Conversely, short-term goals like a home deposit might necessitate safer, lower-yield investments.
- Understand Market Volatility: Recognise that higher returns generally come with higher volatility. If you’ve felt uncomfortable with your portfolio’s performance during recent market swings, it may be time to revisit your allocation strategy.
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Rebalance Your Portfolio:
The allocation of different asset classes in your portfolio plays a critical role in its performance. Over time, market movements can cause imbalances that deviate from your intended allocation strategy.
- Why Rebalancing Is Essential: Suppose you initially set your portfolio at 70% shares and 30% bonds. If shares outperform bonds, you may find your allocation now leans toward 80% shares and 20% bonds. While this might result in higher expected returns, it also increases risk beyond your initial comfort level.
- How to Rebalance Effectively: Rebalancing involves selling overperforming assets and reinvesting in underperforming ones to bring your portfolio back into alignment. This process not only reduces your exposure to excessive risk but also enforces the principle of “buy low, sell high.”
- Consider Tax Implications: Transferring funds between asset classes may trigger capital gains taxes. Work with professionals to mitigate unnecessary tax liabilities while staying aligned with your target allocation.
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Set Clear Objectives
Clear, actionable goals provide the framework for a tailored investment strategy. Without them, it’s difficult to measure success or make calculated adjustments.
- Define Your Goals: Goals can vary widely based on life stage and financial priorities. Categorise them as:
- Short-term (1–3 years): Building an emergency fund or saving for a car.
- Medium-term (4–9 years): Funding a wedding or a home deposit.
- Long-term (10+ years): Accumulating retirement savings or paying off a mortgage.
- Align Investments with Objectives: Different goals often require different investment choices. For example:
- Growth Assets: Suitable for long-term goals due to their higher risk and return potential.
- Defensive Assets: Suitable for near-term objectives where stability and liquidity are priorities.
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Explore New Opportunities
The investment landscape is constantly evolving, offering new tools, strategies, and markets to explore. By staying informed, you can seize opportunities that align with your overarching goals.
- Investigate Market Trends: Stay updated on emerging trends, such as renewable energy, technology sectors, or market shifts due to interest rate changes. While these can enhance returns, always ensure they align with your overarching goals and risk tolerance.
- Consider Gearing Strategies: Gearing involves borrowing funds to invest, amplifying both potential gains and risks. This strategy may suit investors with a high-risk tolerance and a longer horizon. Seek professional advice before adopting such strategies.
- Evaluate Investment Structures: Tax-effective investment strategies, like salary-sacrificing contributions to super or investing in high-franking credit shares, could maximise your net returns. Consult an adviser to explore strategies suited to your circumstances.
Taking Action This Financial Year
Aligning your investments with your goals requires intentional action. Here’s how to get started today:
- Perform a Risk Check: Reassess your comfort levels with market volatility and adjust accordingly.
- Rebalance for Stability: Restore your portfolio’s allocation to ensure it aligns with both your desired risk and returns.
- Set and Prioritise Goals: Identify clear objectives and review their associated timelines.
- Seek Professional Guidance: Work with a financial planner to identify and implement the best strategies for your needs.
Final Thoughts
Starting the year by aligning your investments with your goals is not just a financial exercise—it’s a commitment to staying on track toward the future you want. By regularly reviewing risk tolerance, rebalancing portfolios, and exploring innovative opportunities, you can stay ahead of market changes and meet your financial milestones confidently.
Now is the perfect time to take control of your investments. Consult a financial adviser to tailor an action plan that works for you. Being proactive today will pay dividends tomorrow.
If you would like to improve your current investment strategies or are looking to start your investment journey, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.