The main purpose of investment and financial planning is to create financial independence. This is when you own the properties in which you live and have guaranteed income after tax that is greater than your budgeted expenditure.Having protected your finances should you die, become disabled or incur a critical illness, it is important that your assets are invested in a taxefficient manner to create spare income or capital for you. This applies over the short term and over the longer term to ensure you live comfortably in retirement. An individual’s tolerance to investment risk varies based on the time period of the investment and how speculative he or she wants to be. To achieve long-term real returns, it is necessary to invest in asset-backed investments. Asset classesThere are four main classes of investment – cash, bonds, equities and property. When building an investment portfolio, as well as purchasing the right assets, it is important to maximise the tax-efficiency and security of your investments. BondsTo minimise capital volatility we could look at funds that invest in bonds of shorter maturities. If you are looking for total returns, it is best to go for funds that invest in longer-dated issues as you can get better returns which equate to your capital being more at risk. As interest rates seem to be approaching their peak and growth is slowing, this is good news for bonds. EquitiesThe FTSE is near the same level as in 2002 but there is good earnings potential, particularly for large caps. Even if we see weaker global growth in the first six months of 2005, the risk attached to equities is balanced by strong valuations. PropertyProperty is growing in importance as a main asset class to the extent that commercial property outperformed equities, gilts and cash deposits over the past one, three, five and 10 years to the end of September 2004, according to the Investment Property Databank. Commercial property performs contracyclically to equities, due partly to the fact that it can retain its value, generates income from rents, has a low correlation with other assets and is fairly predictable. DiversificationMy recommendation is that a balanced portfolio is constructed predominantly from the main asset classes. Historically, with-profits investments have offered a mix across the asset classes but the latest ABI figures show that single investments into with-profits bonds have fallen over the last five years from around 4bn a quarter to just 441m in the second quarter of 2004 as other collective investments offer more transparency and potential returns. A diversified portfolio is therefore recommended because investing in a number of holdings across the asset classes will be lower risk and less volatile than a small number of holdings. The under lying asset classes in the portfolio will be equities, property and bonds, which tend to perform differently. Non-correlated assetsIt may be prudent to add to your portfolio through the use of alternative non-correlated investments to benefit from volatility in global markets. For example, hedge funds can be an extremely useful tool to achieve better risk-adjusted returns by combining uncorrelated assets. I have talked above about a portfolio of investments that perform differently, even though they will be similarly affected by the same events. Within a hedge fund, the manager not only has the ability to buy equities and property investments but can sell them without having owned them in the first place. Exchange traded funds and contracts for difference allow investors to go long or short on stock by trading on the margin. You could also onsider covered warrants. These are securitised derivatives giving you the right, but not the obligation, to buy or sell underlying securities at or before a predetermined date at a specified price. I recommend to you a balanced global investment portfolio with non-correlated funds included to improve total risk-adjusted returns.