One Size Does Not Fit All
How much you have in cash, how much you have in fixed interest investments (including how much you have in individual fixed interest investments and when they mature), how much you have in equities (in each market and within each market the yield, the risk and the market cap) are all determined by the size and timing of your financial needs over time, your risk preferences and the current risks in the market place.
If the structure of your portfolio, the planning of your portfolio and the management of your portfolio is so specific then how can a product which is a one size fits all investment possibly meet your needs?
The answer is simple, one size does not fit all. Most products cannot be effectively integrated with other assets to form a portfolio.
It is because of the fact that a portfolio should be personal, that a portfolio should be built as much as possible from the basic investment elements. Only where a basic element can be accessed more efficiently by a product, should a product be used.
In reality, if products are being used, your advisors should know the required structure of your portfolio and the required asset allocation before any specific products are selected.
All products should be used for is to allocate to each component of the portfolio at the lowest cost, as close as possible to the underlying asset while retaining all the natural characteristics of the asset they are allocating to.
This directive runs counter to most product sales.
Many products represent fixed combinations of investments which may not match your financial needs. They may also represent a more expensive way of meeting your needs or may indeed expose you to risks they should not.
Many products are sold as stand alone transactions where the advisor may not pay attention to the structure that you would need to reflect your financial needs.
Because every product that is sold will affect the shape and structure of your portfolio, merely stating that a product reduces risk and increases diversification is not enough.
In fact, while it may increase diversification if it does not match your needs and it cannot be managed it may end up increasing risk and reducing return, irrespective of its diversification benefits.
Putting a stand alone product in a portfolio that cannot be integrated into the structure is like adding an obstruction in the road. You end up having to drive around it.
Your advisors should not start off with the product, they should start off with the structure and asset allocation of the portfolio and then look to products where necessary.
This means your advisor needs to possess portfolio construction, planning and management expertise. Otherwise it will be difficult for your advisor to be able to assess the effect of the inclusion of a product on the structure of your portfolio and its ability to manage current and future financial needs.
But, then, we get back to the basic problems in the investment industry.
There is insufficient expertise and resources to personally construct, plan and manage assets to meet financial needs over time.
Perversely, the industry possesses all the expertise and resources needed to design systems that could solve the problem, but this would mean dismantling the transaction based industry that the institutions rely on for their earnings.
Important characteristics of assets
An asset class needs to be as easily and as directly accessible as it is within its natural state, needs to be as liquid as it is within its natural state (can be sold easily and without additional cost or penalty) and needs to be purchased and managed efficiently and cost effectively so as to retain as much as possible of the differential return. An asset class also needs to be as close as possible to its natural risk/return relationship.
Any product that combines assets, prevents individual asset classes or components from being sold, or restricts sales to specific time frames is a problem to the portfolio. Also any product that effectively increases the risk profile of an investment would also be included.
It is important to note that the important characteristics of assets and asset classes can be maintained within a properly constructed, planned and managed portfolio of assets. Indeed, the systems and services of the future will not need to use most of today's products to solve the portfolio problem.
Products will in the main be the relic of a passing and bygone age. From the horse and cart to the internal combustion engine, from the witch doctor to modern medicine, from the product to the properly constructed, planned and managed portfolio