What should I invest in?
22nd April 2021
I’ve recently been asked the question by a number of clients… ‘Is it a good time to invest?’ The frequent follow up is usually some form of ‘Well, invest in what and why?’, which usually elicits a sharp intake of breath and a nervous smile. When people find out that you’re a Wealth Manager, or Financial Adviser, there seems to be an expectation that you know where the next Tesla is coming from. This does tend to show a lack of understanding about the difference between trading and investing.
Investing is something that everyone should have a better understanding of and hopefully the following is of interest.
The “Why” ?
Before starting the ‘what shall I invest in’ it’s perhaps more important to get a grip on your ‘why’. Why you’re investing is very important as it defines the factors that could alter the way you invest. For example, if you’re investing for retirement, it defines your timescale and in simple terms, a longer timescale may allow you to potentially take more risk.
Everyone has different goals and ambitions but understanding these is key to an effective investment strategy. If you’re finding it hard to define why you want to invest then it’s going to be harder for a wealth management professional to give you good guidance. I’d always advise taking your time to understand this aspect of your financial plan and if necessary leave funds in cash until you do.
Once you’ve a clear aim in mind what next?
The important factors that help shape the investment strategy are self-evident – how much is available to invest, the timescale, the level of risk you are willing to take needed to achieve the desired results etc.
Risk is a vital and wide-ranging subject. In the wealth management industry it tends to be viewed as the volatility in value of an asset, which can decrease in value as well as increase. So more volatile assets, shares for example, are viewed as being riskier than those with lower volatility, such as bonds. In some ways, that’s quite simplistic as bonds are very highly impacted by interest rate movements, so maybe not the sector to be in currently given that interest rates are so low. I tend to think of risk more in terms of the real world impacts it can have on you, or your future, inflation being a large risk as inflation can erode the value of your wealth very easily.
After that things start to get more complex. If you are looking at investing there are many investable assets, ranging from cash deposits, through various Bonds, Equities, to Hedge Funds and other alternatives. Each has different qualities a focus on income, or capital return, with greater or lesser volatility and different ease of accessibility etc. As a result, there is no one size fits all solution, but rather a unique recipe often involving an exposure across various types of assets. This recipe is tailored to your needs but with possible exposure to areas that you’d possibly shy away from, but in the overall mix make sense, by helping to reduce overall risk via diversification.
So, you’ve got an idea of the right mix of assets what next?
Well, it’s time to look at how they’re managed. There are differing approaches, but broadly speaking the two major styles are passive or active management. Each has their place in investment portfolios and passive funds tend to be cheaper, as they simply track an index, whilst active management select a basket of holdings that are regularly reviewed and traded in an attempt to beat their index. Not all actively managed funds perform well, but the best can deliver results that exceed the index and sometimes by a significant margin. I remain agnostic as to which style is right, some sectors favour passive whilst some don’t; I’d rather use what seems the appropriate solution to achieve the aims that have been agreed; a blend of both can sometimes be the right strategy.
Once you’ve got a portfolio that looks to be set up to achieve your goals, managed by the best team with a level of risk that’s acceptable. All sorted? No, we’ve improved the potential for returns, but of course there’s the little matter of tax to discuss which is how we protect your net return as far as possible.
Like investments, tax wrappers come with differing characteristics. For example, pensions offer up front tax relief, freedom from tax but no access until you’re typically 55, ISAs are free of UK income and Capital Gains Tax, but no tax relief, a maximum of £20,000 per annum to be invested, but are easy to access. So, each one does a slightly differing job for you and its back to understanding your ‘why’ to see which one, or combination, achieves the best results.
By now you can see that planning and managing a portfolio, and the tax strategy, is a complex, time consuming business. It is something that you can do, if you’ve the time, and inclination, but if either of those are in short supply we are here to help. Perhaps, for many the ‘what’ you should invest in is a knowledgeable trustworthy independent adviser?
It is important to note the value of your investment can go up or down so you may get back less than your initial investment
Jerry Sisk – Financial Planner