Personalising Your Financial Portfolio

It makes sense to consider personal preferences when building a financial portfolio, but certain biases may affect your wealth creation outcomes negatively. Anthony Palmer, Group Commercial Director at Carrick Wealth, explains what to look out for.   

Many investors have strong preferences on how their savings are invested, now more so than ever. “These preferences range from where they want their funds invested (geographies), to which sectors and even which currencies they prefer. The rise of ESG (environmental, social, and governance) investing has provided another widely adopted means of factoring in personal investment preferences into investment decision-making” says Palmer. “ESG investing covers broad factors such as climate change, water management, pollution (carbon emissions), health and safety policies in the workplace and even how corporates treat their workers in a post-pandemic environment, for example, whether employees are forced to vaccinate or not.” 

The key is to avoid making decisions based on trends or biases – which you may not even be aware that you have – if it’s going to have a negative impact on your long-term financial health. It’s important to identify your biases and discuss them with your financial advisor who can give you a more objective view. “If you can identify your investment biases then you have the best chance of protecting your investment portfolio from these biases. Keep in mind that not all biases are negative, so incorporating the good ones is as important as removing the bad,” explains Palmer.  

Types of Bias

Biases include sector bias (gravitating towards more familiar industries), company bias (loyalty to an employer or a family business, for example), bias towards recent events (how you relate to current market activity and possibly reacting too quickly to upward and downward trends) and country bias (you may feel more comfortable doing business with companies based in your home country, for example). 

“The most destructive bias in my view is short-termism, ultimately the danger of making investment decisions that are not aligned with the investors long-term goals,” says Palmer. “This behaviour has been amplified by the world of social media where misinformation and hype can distort investment decision making and cause investors to be tempted to try time the market rather than following an optimally constructed investment plan that takes their individual investment objectives, tolerance for risk and time horizon into account.” 

The Importance of Diversification

Another aspect that can be destructive says Palmer is concentration risk, whereby investors have a strong preference for a particular sector/asset class such as technology, property or even crypto assets. “Diversification is essential in constructing a portfolio that not only meets investors return objectives but also the investor’s risk profile. Returns are important and chasing returns (risking-up) is easy. How much risk you are taking to achieve those returns in our view is more important. The third dimension is alignment with their personal beliefs.” 

The Right Mix of Assets

Ultimately, getting the right mix of assets is essential in achieving your long-term investment goals. No single asset, geography or sector etc consistently out-perform in all market environments. “The market is dynamic and macro variables are ever changing,” says Palmer. “A well-diversified portfolio of assets that are aligned to the investor’s long-term objectives has the highest probability of meeting their expectations. That right mix of assets should not only achieve the right outcome but can also go a long way in ensuring that the investor remains invested for the long-term. Often we see investors that have a portfolio of assets that is only aligned to their return objectives but poorly constructed relative to their ability and willingness to take risk.” 

The bottom lines is developing your own personal investment philosophy is essential in developing an investment portfolio, which in turn helps you achieve your investment objectives. If you’re unsure of how your biases may impact your financial journey, Palmer suggests you appoint a financial advisor or a wealth specialist “to construct a personalised investment strategy that meets your risk return objectives, incorporating your positive biases and negating the ones that in the long-term will prevent you from achieving your financial goals.”