Structuring your portfolio

Portfolio returns are generally determined by 3 factors:

1) Market timing, (2) Individual fund/security selection, (3) Selection of asset classes.

Modern Portfolio Theory has proven that your return can be increased for any given level of risk via proper allocation between asset classes, and that the allocation itself is by far THE MOST IMPORTANT determinant of return; timing or individual asset selection are NOT, contrary to what the many novice investors think. It can be tempting during times of stock market uncertainty to delay making new investments or even consider selling existing investments and try investing again when values are lower-this strategy is known as ‘market timing’.

Just as the sharp falls in stock markets tend to be concentrated in short periods of time, the best gains are similarly concentrated. Because these gains often occur just before, or after, a market fall-an investor who tries to time investments is highly likely to miss the best gains.

Fidelity has analysed the returns from the UK, US and other stock markets over the period 1988-2003. This shows that missing just a few days of performance can significantly impact return.

Market	Index	Stayed fully invested	Best 10 days missed	Best 20 days missed	Best 30 days missed	Best 40 days missed
UK	All Share	10%	6.8%	4.5%	2.5%	0.8%
USA	S&P 500	12.2%	8.7%	6%	3.7%	1.7%
Germany	DAX 30	7.5%	3%	-0.6%	-3.4%	-5.9%
France	CAC 40	8.5%	4.1%	1%	-1.7%	-4.1%
Hong Kong	Hang Seng	14.3%	7.7%	3.6%	0.3%	-2.5%
All figures show annualised, total returns, from 31.12.87 to 31.12.2003, in local currency terms. Source Fidelity Investments

Missing the best 10 days (equivalent to about 1 day a year) has reduced annualised returns from the US and UK stock markets by around a third, and even more in other markets. Missing the best 40 days (just about four a year) has seen UK and US market returns cut by over 90%, with even greater lost returns in the other markets. Far from minimising risk, market timing is in fact a high risk strategy.

At first, investor's financial objectives, risk tolerance and investment horizon are determined through filling out questionnaires. We then quantify risk tolerance and identify possible rate of returns making allowance of subsequent planned addition and withdrawn of funds, income taxes, inflation etc. After establishing risk tolerance and rate of return expectations then asset classes are selected for portfolio. When selecting asset classes, special attention is given to make sure that there should be some meaningful negative correlation exists among asset classes so portfolio can be stable in different market environments.

International diversification of a pension, life or investment portfolio involves spreading investments across different stock markets around the world. The key benefit of diversification is that it helps to even out the peaks and toughs of investing in a single stock market and so reduces volatility.

Overseas diversification benefits include:

• Diversification away from reliance on a single economy
• Diversification of portfolio to take in overseas markets
• Investment in sectors not available in the UK
• Less exposure to one currency
• Exposure to currency risk where the investor feels that this is of benefit
• International assets are not perfectly positively correlated to domestic assets
• In addition offers the potential for extremely high returns in emerging markets

Finally investor's portfolio is implemented by selecting individual collective funds, which closely represent selected asset class characteristics. For example, if 20 percent holdings are allocated for growth & income class fund then individual funds are to be identified which best meets growth & income characteristics. Our asset allocation approach gives investors an opportunity to re-evaluate and re-optimize their portfolio holdings on a regular interval to reflect ongoing changes in their life as well as changes in economical environment.

This Web site is intended to give you information, not investment advice. We do not guarantee its accuracy, nor completeness, and it is not intended to be the primary basis for investment decisions. We may express opinions in this site and elsewhere about allocating investments between asset classes. This is Not a specific investment recommendation to any person or entity. We do not make personal investment recommendations to people or entities except to those who have engaged us expressly for the purpose of providing professional investment advisory and/or other financial advisory services. The process of making specific recommendations involves a close understanding of our client’s objectives and expectations. Unless we have this information. We are Unable to make Any personal investment recommendations.