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Today I went to see Sofia, a salaried Dentist in London for her annual review.
Last year when I first met Sofia she had an existing ISA portfolio of approximately £25,000 invested solely in a UK Equity Fund.
We talked about her plans for the investment as she said she was thinking of withdrawing it all as she had lost money on it over the last 12 months. So we discussed one of the main reasons why people lose money in investments – by investing in one single fund (having all their eggs in one basket).
We discussed rather than withdrawing the money (and in doing so losing the tax efficiencies of ISAs) and putting it into cash as she didn’t need the money for the next 5-7 years. We ascertain her attitude to investment risk and looked at creating a diverse portfolio investing in all asset classes to minimise losses and maximise gains.  After going through this process Sofia agreed that she was a balanced investor and back at the office we set to work on diversifying the portfolio.
Based on our analysis I recommended Sofia invested not just in UK Equities but also corporate bonds, property, US and European Equities along with a small amount in Far Eastern equities. By investing in all of the different asset classes she will take advantage of the rises in certain markets while not being so worried about the falls in others as only a smaller percentage of her portfolio overall is invested in the higher risk sectors.
Today we reviewed Sofia’s portfolio and I am please to say it had made a gain over the last year due to the diversification. Sofia was so pleased she decided to invest further in the last tax year, and is also looking to maximise her ISA allowance for 2012/13 too. Therefore we reassessed her attitude to risk and rebalanced the portfolio to this standard (meaning we took some of the profit from the well performing funds and made up the shortfalls on the not so well performing funds). The benefits of rebalancing are that by taking out the profit to avoid being over weighted when a market falls ensuring maximum returns and minimal losses. Rather than investing on an annual basis it was better for Sofia to make monthly investments to take advantage of pound cost averaging. Pound cost averaging means that by investing on a regular basis over a period of time you can take advantage of falls in the market as they mean you buy more units as the price is lower (a bit like buying items in the January sales!), therefore when the market raises your portfolio rises quicker as you have purchased more units. Investing this way can bring positive returns even in a falling market.
Sofia is happy with her new portfolio as it meets the exact risk she is prepared to take, whilst maximising the potential returns she would like to achieve. I look forward to reviewing Sofia’s portfolio again to ensure her portfolio continues to marry up with her goals.
 
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