Investment
Planning
and Advice
Before you decide how to invest your funds it is important to have a plan. The main aim of an investment plan is to ensure that your investments reflect organisational goals and objectives.
For example, your investment goals may be to:
- Create capital growth
- Protect your investment capital or
- Generate a regular income
TMF applies five steps when creating an
investment plan
- Identifying individual or organisational
goals and objectives
- Planning for income and/or growth
- Determining an investment timeframe and risk profile
- Identifying specific investment objectives
- Deciding on asset allocation
Step one involves understanding your current financial position then identifying where you would like it to be in the future (your vision). Certain realities and limitations will be acknowledged in this step, including current risk exposure levels and financial strengths and weaknesses.
TMF will assist you to:
- Identify your core business
- Identify your current risks
- Determine your current income requirements
- Understand your current asset portfolio
By understanding the current business risks that your organisation is exposed to, you can then begin to look at how your risk can be managed. The aim is to clearly document a set of realistic and achievable goals and objectives. Being aware of your goals will help you determine your risk profile.
Investment can be broken down into two simple sectors:
- Income - focused investments, i.e. investments required to generate regular income or cash flow, and
- Growth - focused investments, i.e. investments that will grow over time.
The aim is to determine the required annual income or cash flow to meet your ongoing operational and/or financial responsibilities and your future goals and objectives. Then to ensure that your income sources, including your potential investment income, is sufficient to cover your annual cash requirements.
The investment timeframe is very important and often provides a reality check. Timeframes are closely related to risk levels, for example the longer the timeframe the lower the potential risk
An TMF financial advisor will help you to examine:
- The expected time in which to achieve your financial goals
- Your attitude to risk
In identifying your risk profile you will determine your appetite for risk. This is your attitude towards investment risk and your tolerance of temporary losses of your investment capital for longer-term gain. In this step you will identify your liquidity requirements, capital protection requirements and acceptable volatility levels when considered in conjunction with your investment timeframes and growth/income requirements. Thereafter you will have completed a risk profile that will help to decide the appropriate mix of investments.
Managing risk
Uncertainty is always and everywhere, but risks can be identified and managed.
Various risks are present within any investment. The essence of risk management lies in maximising returns from the areas we understand and can manage, but minimising the areas we do not control, or have any understanding of.
The four principal risks involved in an investment are:
a. Credit risk
The risk that the party with whom you have invested funds (including banks and governments) is unable to repay those funds together with interest on the due date. Or the risk that the company in which you have purchased shares finds itself in financial difficulty.
TMF assists you to manage credit risk by designing a diversified portfolio that spreads your investments across a range of securities and/or asset classes. The securities and/or assets fall within set credit rating parameters as agreed with the client.
b. Market risk
Risks changes in the economy, industry or world markets that may have an impact on local interest rates and equity prices. For example, the risk that interest rates may rise after you have invested money for a fixed period of time, or the NZD exchange rate may rise after you have invested in overseas markets.
TMF manages market risk by ensuring that your investment portfolio is within the asset allocation parameters most suitable to your market risk requirements.
c. Liquidity risk
This term is used to describe how easy it is to turn an investment back into cash. A highly liquid asset is one that is very easily converted to cash and the reverse is true for an illiquid asset. The market will price a liquid asset at a premium to that of a non-liquid asset - all other things being equal. Because most Maori land cannot be sold it is a non-liquid asset.
TMF manages liquidity risk by ensuring that your investment portfolio matches the liquidity profile most suitable to your requirements.
d. Control risk
The risk incurred in the execution, control and monitoring of investments. These risks include how:
- Transactions are paid for,
- They are monitored to ensure that they are performing,
- The interest and dividends are collected,
- It is ensured that investments are made only pursuant to the parameters set by the investor to minimise credit and financial risks.
To manage control risk, TMF uses the TMF System managed in conjunction with First NZ Capital and FNZ to provide back office custodian and administration services for your investments.
Investment risk should take into account the investor’s current financial situation and be measured against investment objectives. Therefore, investors must be very clear about their objectives, as this will ultimately define the investment risk and their subsequent asset allocation. Asset allocation provides the means of limiting risk and maximising returns.
Effective asset allocation provides an investor with diversification, risk and liquidity profiles that will match their requirements - all crucial elements of an effective investment strategy. Because every investment carries with it an associated level of risk, it is important to realise that most investments can move up and down in value over short periods of time. This is called volatility.
Your specific investment objectives start to provide the framework for your investment portfolio. They include key investment objectives that are linked to your goals, controls and/or limitations to be observed, prudence requirements and any other restrictions or guidelines specific to your organisation.
An TMF financial advisor will help you to:
- Identify key investment aims and expectations
- Identify investment regulations and limitations
- Determine any specific investment requirements and/or restrictions
Asset allocation provides the means of limiting risk and maximising returns and is considered the most important decision. Over the medium to long term asset allocation may account for up to 90% of the variation in returns of a portfolio. Effective asset allocation provides an investor with diversification, risk protection and liquidity - all crucial elements of an effective investment strategy.
An TMF financial advisor and the TMF investment committee helps you to:
- Determine asset classes, target portfolio weighting and acceptable range
- Determine investment parameters, required credit rating and any other asset sector controls
- Identify appropriate performance measurement benchmarks
