Asset Allocation & Diversification

Broadly speaking, there are four main asset classes into which one can invest: Cash, Fixed Interest Securities, Property and Equities, although there are many additional sub-divisions within each class.

Each asset class has different characteristics, an expected risk and return profile and performs an alternative but essential function in a well constructed and diversified overall investment strategy.


As such, the importance of appropriate asset allocation and diversification across and within asset classes cannot be underestimated, as it is crucial to the reduction of overall investment risk and volatility, through the combination of asset classes and their sub-divisions which are said to have a 'negative correlation' to one another - that is, they don't follow each other's market movements closely and in fact, may tend to move in opposite directions.


Put simply, this means that if one asset class or sub-division thereof is performing poorly at a given time, another should be performing better and thus your overall return should be smoother than if your portfolio contained only the one asset class. To use a popular expression, it is the investment equivalent of 'not putting all of your eggs in one basket'.


To give a practical example of the value of diversification, in this case within an individual asset class, in the very difficult market conditions we all experienced between September 2008 and March 2009, an equity portfolio which was comprised of the constituents of, say, the FTSE 100 index, would have suffered a fall in value of around 40% at its lowest point. In contrast, an equity portfolio which was comprised of only banking stocks would have suffered a fall in value of around 90%, so it is clear that diversification is critical.


Perhaps the clearest benefit of combining asset classes correctly, however, is that academic research tells us that this is the single most important factor in determining long-term investment performance, with over 90% of returns being generated through suitable asset allocation and less than 5% coming from fund and stock selection - despite active investment managers' and stockbrokers' misplaced belief to the contrary.


For these reasons, a key aspect of the Reeves investment process involves working with you to establish the ideal asset balance for your portfolio, in order to help you to obtain your desired investment returns in accordance with your personal circumstances, objectives and risk profile.

Client 'Wrap Accounts'

Before taking an in-depth look at the principles of our investment philosophy, we thought it would be helpful to explain one of the important features of Reeves' investment proposition; namely the use of client 'wrap accounts', which are designed to complement and assist the ongoing financial planning and wealth management process.

In brief, instead of the traditional and often haphazard composition of a client's assets, which might be dispersed amongst a variety of financial institutions, a wrap account is an administration service offered by an independent, specialist provider, which enables you to hold all of your assets - be they your general investment portfolio, pensions, investment bonds, ISAs, etc - in one place.

You no longer need to deal with several different companies to achieve specific objectives in your overall financial planning strategy, nor do you have to receive masses of paperwork from each of them, nor find yourself wondering how your portfolio has been performing.

In our view, wrap accounts are very cost-effective and essential to the improvement of your financial organisation, as well as being central to the provision of a professional wealth management service, both now and into the future.

A detailed appraisal of the features and benefits of your private wrap account is not appropriate here, but in summary, it provides:
- Simplicity
- Transparency
- Consolidation of your financial affairs and statements
- The functionality to deliver the smooth, efficient management of your assets
- Quick and easy implementation or change of financial planning strategies
- Access to low cost, institutional investment funds
- Unrestricted tax planning opportunities / investment choices
- The ability to receive your income payments from just one source
- A significant reduction in paperwork and administration
- Immediate, secure access to your portfolio via Reeves' website

Quote Of The Day 30/8/10

"The idea that any single individual can beat the market is extraordinarily unlikely. Yet the market is full of people who think they can do it and full of other people who believe them." Daniel H. Kahneman, 2002 Nobel Laureate in Economics

Quote Of The Day (21/9/10)

"In the middle of difficulty lies opportunity." Albert Einstein

Preparing for Unemployment

In our blog we always tell you WHY you should start investing money and why you should invest in a pension.

Every reason we have given you to invest so far has been about positives. "A great future for you and your loved ones" "Maintaining a luxury life without income" "Chase your ambitions". However it's not that easy for everyone. In the past 12 months we have all saw unemployment rates climbing at a staggering rate and with the new coalitions cuts it looks possible that there could be more people losing their jobs,

If you have experience in your profession and your work history is good then you will more than likely find a job. For most it's when not if the next job is coming around the corner and if you are financially prepared then losing your job will just be a minor setback. If you aren't prepared then it could result in an absolute financial disaster.

Below are some figures on unemploment in the UK

Yorks/Humber: 242,000
Wales: 121,000
Scotland: 239,000
North West: 297,000
South East: 273,000
Northern Ireland: 57,000
North East: 118,000
East: 204,000
East Midlands: 169,000
London: 380,000
West Midlands: 226,000
South West: 162,000

Hopefully you are reading this as a working person and not somebody who is unemployment and unprepared. For more information about Unemployment and Job loss protection plans ring Reeves Independent on 0871 271 1280 or email pat@reevesifa.com for more info.

Fund Focus August 2010

Fund Focus – August 2010
ETF Securities Physical Gold (Exchange Traded Commodity)

Fund aims

ETFS Physical Gold (PHAU) is designed to offer investors a simple, cost-efficient and secure way to access the precious metals market. PHAU is intended to provide investors with a return equivalent to movements in the gold spot price less fees.

Key Facts

Tracks the price of gold, not a portfolio of equities
Simple to trade on a major stock exchange
Settled and traded in ordinary broker accounts
Transparent tracking with clear pricing
Backed by physical, allocated metal
Provides additional portfolio diversification
Able to short, and margin eligible
0.39% total expense ratio

About exchange traded commodities

ETCs track commodities - not commodity companies - and enable investors to gain exposure to commodities without trading futures or taking physical delivery (i.e. receiving 10 tonnes of wheat on your doorstep!).

Benefits

Accurate ETCs accurately track the underlying commodity index or individual commodity
Liquid ETCs are open-ended securities, and therefore are not limited to on-exchange volumes
Accessible ETCs are traded and settled on regulated stock exchanges, the same as any equity, and can be purchased and held in ordinary brokerage or custodial accounts
Simple ETCs do not involve any of the difficulties with buying and then managing a futures position (eg. worrying about margin calls, contracts expiring and rolling positions) or in buying and storing physical commodities
Transparent ETC pricing is based on a transparent formula with the pricing updated daily on the ETF Securities website
Flexible: Investors can go long or short ETCs

About Gold

There are a number of reasons why one would hold gold in their overall portfolio:
As a hedge against inflation
As a safe haven in times of geopolitical and financial market instability
As a commodity, based on gold’s supply and demand fundamentals
As a store of value
As a portfolio diversifier

Gold is a monetary metal whose price is determined by inflation, by fluctuations in the dollar and U.S. Stocks, by currency related crisis, interest rate volatility and international tensions, and by increases or decreases in the prices of other commodities. The price of gold reacts to supply and demand changes and can be influenced by consumer spending and overall levels of affluence.

Gold is different from other precious metals such as platinum, palladium and silver because the demand for these precious metals arises principally from their industrial applications. Gold is produced primarily for accumulation; other commodities are produced primarily for consumption. Gold’s value does not arise from its use and worldwide acceptance as a store of value. Gold is money.

Comments

The ETF Securities Physical Gold ETC was included in the aggressive portfolio for the first time at the last review. This was partly motivated by our desire to diversify the types of asset held (i.e. equities, fixed interest, commodities etc) and partly due to our view that markets would remain volatile over the proceeding quarter. Over the 1 month period (to 27/08/2010) the security has returned 4.68%* and over the 3 month period (to 27/08/2010) has returned 1.99%.*

Any investor thinking about holding gold as an investment should seriously consider the five reasons for holding gold listed above. To what extent do you feel inflation will rise? Do you see any end to the current economic turbulence? Will commodity prices generally rise over the long term? These are all questions you should be asking yourself.

With a portfolio review imminent we will be revising our thoughts on gold as an investment in the very near future. To discuss any of the issues raised above please contact an adviser.

*information correct as at 27/08/2010. Source: Morning star


        Reeves Independent, 47 St. Georges Terrace, Jesmond, Newcastle upon-Tyne
                                                                0871 271 1280
                            Authorised and Regulated by the Financial Services Authority

This document is intended to provide general information and does not represent a personal recommendation of any service or product. The value of investments can fall as well as rise and you may not get back the full amount invested. Past performance is not a guide to future returns. The sections within this document are opinion onlyand do not constitute advice. Other charges may be applicable and are subject to change without prior notice. Please refer to our brochure for information on our other products and services. We will always recommend that our clients seek advice before making a decision on whether to invest.

Exchange Traded Funds

Many people will have read something about ETFs however given that it is a simple concept, very few people really know what ETFs are. Below are some key points that you should be aware of when investing within an ETF.

What is an ETF - Summary of the concept

An ETF is a pooled investment fund similar to a unit trust or mutual fund, which can be bought and sold on a stock exchange, like ashare in a company.

Essentially an ETF is an index tracking fund. Its aim is to provide investors with the same return as the chosen index - (i.e. the FTSE 100 or the S&P 500). For example, if the FTSE 100 index goes up by 10% during a year, an ETF tracking this index should provide investors with exactly the same return, minus fees.

ETFs track most major indices for stocks, bonds, commodities and other asset types. Sector based ETFs are also available, offering access to specific industries.

The Benefits

ETF’s offer a range of benefits to investors and can enhance a portfolio in the following ways:

Transparency

 Investment objective of the fund is simply to track an index

 There is daily disclosure of the underlying securities of the fund

 ETFs carry an explicit total expense ratio

Liquidity

 ETFs are listed on exchanges and can be traded at any time the market is open

 An ETF is as liquid as its underlying securities

Diversification

 At fund level: holding the entire index in just one trade

 At portfolio level: ETFs cover a full spectrum of asset classes.

Flexibility

 Intraday trading: as easy to get in as to get out

Cost effectiveness

 ETFs offer a cost effective route to diversified market exposure

 The average total expense ration (the overall annual cost of the fund) for ETFs in Europe is 0.31% per annum versus 0.87% per annum for the average index tracking fund.*

What type of ETF’s are available?

There are a range of different companies offering ETFs throughout the UK and Europe. They can offer some of the following indices to track:

FTSE 100; FTSE 250; MSCI Europe; S&P 500; MSCI world; MSCI Japan; MSCI Emerging Markets; MSCI Latin America; MSCI Brazil; S&P

Global Timber and Forestry; S&P Global Clean Energy; £ Corporate Bonds; DJ STOXX 600 Basic Resources.

Some of the aforementioned indices will mean more than others but they show the diverse range of assets you can hold within ETFs.

TO SEE HOW ETFs CAN ENHANCE YOU PORTFOLIO PLEASE CONTACT ONE OF OUR ADVISERS ON 0871 271 1280.

*Source: iShares “ETF: A Guide For UK Financial Advisers”. From: Morningstar, ETF Research and Implementation Strategy Team, As at end March 2009.