return that is required to meet your financial needs and also cover any tax implications, without eroding the value of your portfolio. Realism – You need to be realistic in your determining the return that can be provided by your portfolio.By knowing your constraints of investing, this will assist in developing a portfolio that suits your needs.Major Objectives: The three major objectives outlined below will assist you in determining the appropriate asset allocation for your portfolio. Preservation of Capital - If one of your major strategies is preserving your initial capital investment, this can be achieved by investing in securities that are considered risk free and which will mature in one years time – restoring your principal amount. For example you have an account size of $100,000 and current T-bill rates of approx. 7%, roughly $93,000 can be invested in T-Bills, which are consider risk free. The other $7,000 can be invested in some other venture, even a speculative one, and even if the full $7,000 is lost you will have maintained your principal amount. Income - Refers to the regular series of cash flows from a portfolio, whether it is in the form of dividends or interest. Return, risk and inflation influence income. Capital Gains – Refers to increases in capital due to sales proceeds being higher than cost bases. The emphasis here is on the security selection and market timing, and generally is a trade off against preservation of capital. Capital gains are taxed more favourably than interest income, which also provides some incentive for this objective over income.It is important to understand these major objectives, so that you can reach an appropriate balance among the three.Asset Allocation: Along with the design of your investment portfolio, you need to determine the broad categories from which investments will be selected. The usual main asset classes are cash, fixed i...
