Investment Checklist to Plan for a Successful 2020

We are just days away from a new year, and 2019 is about to end. It is appropriate to say that a decade is coming to an end. Following the gloomy days of Global Financial Crises 2008, this decade started in somewhat recovery phase of that financial crises.

A new decade is on the cusp with lesser geopolitical uncertainties compared to what we have noticed in the past two years. The proponents of Sino-US trade war are about to sign the phase one trade deal, and the UK is about to leave EU next year, following a historic general election win of Conservatives led by Boris Johnson.

Major geopolitical risks appear to be muted for the time being. However, if one were to say that trade wars are over, then it could be a misconception. The world has already made strides into de-globalisation, and protectionism is growing in almost every major economy.

Amid such an evolution in the world, you may find investments that could be beneficial of this regime, which we are going to witness in the upcoming decade possibly.

Let’s talk about investment checklist;

Define your investment objectives

As an investor, you should decide what you want to achieve with your investments. There could be specific goals in your life that could be fulfilled through investment and accumulating a return on those investments.

Each of your investing goals would have a timeline, and this timeline to achieve the objective will act as a base for many of your investment decisions. Moreover, you can start by knowing what you want to achieve and how much time do you have to achieve it?

Assess your risk appetite

To be cognizant of how much you can afford to lose is conventional wisdom before you start investing. Your risk appetite will be used to determine the investible assets available for you at a given point of time.

Risk appetite or risk tolerance depends on your income stream, age, commitments etc., and the risk tolerance of an investor could vary drastically, considering the demographics of the investor.

Australian mainstream indices are up more than 20 per cent over the year, and there are few more days left in this year. And, your risk tolerance might have had changes, depending on the performance of your portfolio.

If you had lost capital this year, you might be willing to take less risk in the upcoming year. However, if the case is the opposite then you must be thinking to take a little more risk than this year.

Moreover, when you know how much you afford to lose next year, then you can start with screening out your probable investment for the upcoming year.

Tweak your allocation

Capital allocation plays an important role in achieving desired results or returns in this case, and allocation depends on your risk taking capability or risk tolerance. For conservative investors, it is highly likely that investments are concentrated into less-risky assets.

For an enterprising investor, the portfolio is likely to diversify into a number of companies that offer high return potential along with higher risk. As the year is going to end soon, the risk tolerance of an investor must have changed due to the movements in the portfolio.

Therefore, the changes in your risk tolerance should be reflected in your portfolio allocations. If your risk tolerance is deteriorated, you must be thinking to have safer investment assets in your portfolio.

Similarly, if your risk tolerance has increased, you may now have the appetite to hold assets with higher return potential with higher expected risks.

Portfolio Rebalancing

Portfolio rebalancing means to re-aligning your portfolio according to the stated allocation for each asset classes in the portfolio. Rebalancing allows you to stick with your investment principles in a bid to attain your investing objectives.

As the asset class composition of the portfolio will continue to change due to the changes in the market value of underlying securities, the allocations that were adopted while initiating investing will change consequently along with the changes in the market value of underlying securities.

As a result, the actual portfolio allocations could be distinct drastically compared to the stated allocations, in a matter of days, weeks, months etc. An investor should fix a date on the calendar to undertake the portfolio rebalancing.

On this date, the investor can revisit his/her portfolio and decide whether to continue with the stated allocation or derive a new allocation. In both ways, the investor would be needed to sell and buy according to the portfolio allocations.

Diversification

The conventional wisdom of ‘not placing all your eggs in one basket’ fits into many scenarios in our day to day lives, and it does fit appropriately in this context as well. Portfolio diversification will shield you from the risk arising out of your investments.

In diversification, an investor spread his/her investments into multiple investment asset classes, and it allows to lower volatility in the portfolio over time. Diversification of your portfolio capital into various asset classes will balance your risk and rewards equation.

An investor is offered with a plethora of investible asset classes in the capital markets, and it is very favourable for an investor to have a wide variety of options available for portfolio diversification.

The most common diversification is undertaken with the following asset classes;

· Domestic Equity

· Bonds/Fixed Income Securities

· International Equity

· Short term instruments/money market assets

· Exchange traded funds

· Commodity-focused funds

Performance review

Just like portfolio rebalancing, performance review of the portfolio is an important task an investor should be undertaking in a timely manner. Meanwhile, the ongoing developments in the portfolio companies are likely to create jitters or cheers concurrently.

Investors should be cognizant of the undergoing developments in the portfolio companies, as it would allow the investor to keep track of the risks arising of out of the investments. If the investor is actively tracking the portfolio investments, it could also help to prevent the permanent loss of capital.

Also, the performance review would allow an investor to review his/her expectations from the investments, and continuous developments in the business of portfolio companies may impact those expectations which could lead to even stronger or weaker convictions about the investments.

Pick a theme

The new year brings new opportunities, and these opportunities are not only limited to your life but for companies as well. In this step, the investor could lookout for investment that could be benefitted from the ongoing developments in the economy.

An investment theme developed by any investor through his/her daily observations could have far better insights than the analyst preparing an investment report from a tall building in the business districts.

Themes are available everywhere, and you just to open your eyes and connect the dots. Moreover, your observations can provide you with answers to the questions that are not available in the balance sheets of the companies, but they might be available at the store of the companies.

Check your taxability

As an investor, you are liable to pay the capital gain tax arising out from investments in your portfolio. Talking to your tax advisor is the appropriate thing in this case, as you could get constructive advice from an expert.

However, we can give you some basic wisdom. Capital gains arise only when you sell-out of your holdings and the 2difference between the acquisition price and selling price of the asset is the capital gain/capital loss.

In Australia, capital gains of an individual are taxed at the same rate as your income tax rate, and there are exceptions to this.

Conclusion: …standing upon the shoulders of giants

A checklist can only be useful if it is diligently followed, like most things in life, planning is relatively easy than execution. The idea of using a checklist is to nudge an investor to automatically follow his/her predefined checklist items, so that the investor can avoid falling into behavioural biases.

It is advisable to not be bogged down by debacles that one may encounter in his/her investment journey, as it can be used as a steppingstone to improve your checklist further and make the checklist robust with time.

2020, could be professionally approached by following a well drafted checklist built on your experience or on others experience. As Isaac Newton very aptly put,

Disclaimer

This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.