Fiduciary Trust International

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An effective investment portfolio develops from a deliberate planning process that is tied to your specific goals, life circumstances and tolerance for risk, rather than a series of unrelated investment decisions.

A partnership between you and your investment manager that merges your aspirations with sound investing is the key to successful management.

Over time, your circumstances may change, so you and your portfolio manager should periodically reevaluate your goals and objectives and their implications for your portfolio.

Building a portfolio involves:

Defining your investment goals. Is your aim to grow your assets, or are you more concerned with generating dividends and income?

Are you investing with a particular need in mind, like preserving assets for your heirs, purchasing a business or financing an early retirement?

Recognizing your risk tolerance. What level of risk are you comfortable with? Some investors are able to tolerate wide swings in performance, while others are more interested in securities whose prices remain relatively constant.

Determining the allocation of assets. What mix of stocks, bonds, cash and alternative investments is ideal? Your asset allocation will be determined by your investment goals and tolerance for risk, as well as by market conditions.

Selecting securities. To fulfill your investment requirements and create a sound portfolio, successful security selection involves research, risk analysis, and a level of diversification appropriate to the portfolio objective.

Investment goals, risk tolerance, asset allocation and security selection will vary depending on the type of account being managed. For example, a person's taxable investment accounts will generally have different characteristics than a retirement, education or trust account.

Investment goals leads to investment objectives

Over the course of their lives, most investors will aim for one of three broad investment goals:

Accumulation. Building wealth, usually during one's working life, to fund long-term financial needs such as home purchases, childrens' educations and retirement.

Preservation. Protecting assets accumulated for long-term needs by utilizing tax-efficient investment and estate planning techniques.

Distribution. Transferring wealth to future generations or to charity.

Your investment goals help determine the structure and composition of your portfolio and investment objective.

For the trustee of a family trust, for example, concern with generating income for retired beneficiaries may result in a portfolio whose objective is high income.

Thus, the portfolio may contain fixed income or yield-generating securities. For an individual or family whose goal is to maximize the transfer of wealth to future generations or to charity, a more growth-oriented objective may be appropriate to ensure higher long-term returns that can outpace inflation.

For many older investors, the preservation and distribution of wealth may be the primary focus.

Once your investment manager has reviewed your goals, management of your assets will be based on one of the following investment objectives, listed below, from more conservative to more aggressive:

High-growth. Portfolios made up primarily of equity securities and are the most aggressive of the portfolios in seeking returns. High volatility is accepted.
Growth. Portfolios similarly managed with an emphasis on growth of principal, with some regard for production of dividends and income.
Balanced growth. Portfolios managed with an emphasis on growth of principal, but with additional focus on the production of dividends and income.
Balanced. Portfolios managed for both income and growth of principal with a goal of maintaining the value of assets with respect to inflation.
Income. Portfolios also made up of mostly fixed income securities with a relatively higher percentage of stocks. Emphasis remains on income production, but with some regard for growth of principal.
High-income. Portfolios consist primarily of fixed income securities. Emphasis is on regular income production and low volatility.

Risk and return

Within a portfolio, the volatility of securities, along with their respective performance, determines the risk and return profile.

A more conservative portfolio with lower risk, for example, will likely yield lower returns, while a more aggressive, growth-oriented portfolio will entail greater risk with the potential for higher returns.

Additionally, an investor may take on a higher level of risk with some assets, while remaining well-diversified and relatively conservative overall.

Risk types. Investing always entails some level of risk, which may include market risk, country risk, and exchange rate risk.

However, choosing not to be in the market is also a risk, as the value of cash and short-term investments are eroded by inflation.

Time horizon. Investors whose goals are long-term can generally assume greater risk and therefore more volatile securities in their portfolios.

Speculative investors also tolerate volatility. More cautious investors, as well as those with shorter time horizons, will generally prefer a greater proportion of relatively stable securities in their portfolios.

Efficient portfolio. An efficient portfolio is one that achieves the greatest possible return given the investor's tolerance for risk, and is the goal of successful investment management.
If efficient portfolios were plotted on a graph, the resulting line would represent what is called the "efficient frontier."

Asset classes

Once your investment objectives and risk tolerance have been established, investment choices can be made from the following broad asset classes:

Cash equivalents. Take the form of Treasury Bills, money market funds or certificates of deposit and may offer higher rates of interest than a typical checking or savings account.
Fixed income securities or bonds. Include Treasuries, corporates, high-yield, and municipal bonds. Portfolios with fixed income securities ideally have varied maturities to help to reduce interest rate risk.

Equity securities or corporate stocks. Include small, mid and large cap stocks, representing different investment styles on the value to growth spectrum, as well as domestic, international and global investments.

Alternatives. Asset classes, such as hedge funds and private equity, allow for the creation of portfolios with higher returns for a given level of risk or lower risk for a given level of returns. They are often used to reduce dependence on traditional equity and fixed income investments, and thereby to facilitate greater diversification, but they are generally only appropriate for more sophisticated investors.

Real estate. May include direct private purchases of property or real estate securities, and also including real estate investment trusts (REITs). A REIT invests in a portfolio of real estate investments and trades on exchanges like other securities.

Security selection

Your portfolio manager will choose asset classes and securities based upon your financial goals, as well as research and analysis of markets, industries and economic trends. Developing a well-balanced portfolio with investments across multiple asset classes offers greater diversification, in view of the fact that asset classes have not performed consistently over time. Market experience suggests that diversification remains a foundation for prudent investing.

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