I used as a framework a model portfolio grid which is used by my firm (see right).In quick summary of that article, I suggested that portfolio A, designed for a low-risk investor over a short investment term, might invest entirely or almost entirely in cash or deposit-based funds. Portfolio B, on the other hand, might be equally applicable to a slightly longer-term investment for a low-risk investor or a short-term investment for a slightly higher-risk investor. This portfolio still relies heavily on deposit funds but could also start to bring in an element of fixed-interest investments and perhaps commercial property funds, depending on how the adviser and client view the risk profile of this asset class. Noting the diagonal nature of the portfolio grid, portfolio C could be applicable to a medium- risk investor over the short term through to a low-risk investor over the medium term. This portfolio concentrates much less on cash and has a greater emphasis on fixed-interest funds and/or commercial property funds. A measured amount of equity-based investment might also be appropriate here although in these articles I have assumed that equity investments will only really become prominent in the higher-risk portfolios. The next example in our grid, portfolio D, is more appropriate to investors with a higher risk tolerance or those who are investing over longer terms than investors who might opt for portfolios A, B or C. I hope that there will be no need to review the remaining portfolios in any great depth. Instead, at this point it might be more appropriate for me to make a few general comments about the difference between portfolios D to I and the more risk-averse portfolios discussed previously. First, it is generally accepted that the two main influences on the appropriate risk strategy of a portfolio are the risk profile of the investor and the likely investment term. Thus, in our simplified grid, portfolio E might be just as appropriate for a high-risk, short-term investor as a low-risk, long-term investor. Second, exposure to deposit-fund funds is likely to decrease in portfolio D as a greater weighting is given to equities. The trend towards equity-based investment will continue throughout the higher-risk funds. Third, one would expect that the relationship between risk and reward would suggest that the higher-risk portfolios should produce greater returns, especially in the longer term. This generally accepted wisdom could be questioned by some observers as regards commercial property funds in recent markets. As I have highlighted from time to time in previous articles, these funds have performed extremely well over the last four or five years and , especially where funds are invested directly in property rather than in property shares, display relatively very low volatility. Nonetheless, this could be expected to be a short-term phenomenon, with the risk/reward relationship between different asset classes and differently-weighted portfolios holding good in the medium to longer term. This leads me towards a fairly simple comparison to summarise the main issues I have discussed in this series of articles. First, let us review the projected returns from portfolio C, as discussed last week (see right). Using the same format of presentation but replacing half the cash holdings with equities, it could be suggested that portfolio D will enjoy slightly higher projections. As I have stressed in my previous articles, it has to be accepted that the projected rates of investment returns from equities and property are subjective (property) or even highly subjective (equities) but the willingness and ability to support this subjectivity with a knowledge of the current state of investment markets and well-reasoned logic is surely helpful to investing clients. Thus, the projected returns from increasingly higher-risk portfolios should be expected to rise as lower-risk, lower-return asset classes are replaced with higher-risk, higher-return asset classes. Here, let me make a brief but important reminder of the correlation principle, which I have written about frequently and enthused about at many seminars. If two or more asset classes perform totally independently of each other, then by combining those asset classes in a portfolio, the overall performance should simply be the weighted total of each investment (the end column in our portfolios). But the overall risk profile of the portfolio should be much reduced as the extremes of performance in any asset class are offset to a greater or lesser degree by performance in the opposite direction by other asset classes in the portfolio. To summarise this series of articles, I suggested first that rather than just glibly project potential investment returns at the standard rates, an adviser can much more usefully bring the client’s attention to an informed view of current and likely market returns. Thus, cash might return 4 per cent, gilts 4.5 per cent, higher-grade corporate bonds 5.5 per cent and so on (see above). Of course, this approach should be accompanied by the caveat that certain markets can change rapidly, especially those at the higher end of the risk scale, such as equities. Next, these projections of investment returns can also be accompanied by an assessment of recent volatility ratings for each asset class and sector, as measured by standard deviation factors, as I have written about extensively in previous articles. Comparing, likely rates of investment return with the historical volatility factors, an assessment of the value of each asset class can be made for investors in different circumstances and with different requirements. Finally, portfolio planning strategy leads to the combination of asset classes in such a way that the adviser can aim to maximise portfolio returns for a given level of risk or minimise risk for a given level of desired portfolio returns. In my next series of articles, I will return to the highly topical subject of pensions, looking at current and impending developments in this market, moving far beyond the A-Day changes in April.