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Health before wealth

By Jeremy Ferguson - Topics: Investments, Spain, Stock Markets
This article is published on: 27th March 2020

27.03.20

Never has this expression been more relevant

After we received the news the Lockdown here in Spain is due to be extended until the 12th of April, and my best guess is that could be extended even further if we are on a similar path to Italy. Let’s hope we are not, but I for one am building myself up to accept that’s a real possibility.

My previous articles have spoken a lot about the benefits of living here in Spain: the glorious sunshine, beaches, the associated outdoor lifestyle we all came here to enjoy and the longer life expectancy that comes with all that.

Living in Spain

Wow, how that has all changed in such a short period of time. I have to say how impressed I have been with how the authorities here reacted, in a very timely fashion, and as is typical with the Guardia here in Spain, no messing around! People respect them, and apart from some idiotic panic shopping at the beginning, they are showing a lot of decency towards the authorities and their neighbours.
The UK has reacted in a slightly different way, and I will be intrigued as to the level of intervention the police will take and how that will be received.

My wife and I have both been bed bound for a number of days with many of the virus symptoms, so we are pretty sure we caught the dreaded thing. Considering our age and state of health, together with the difficulty of getting tested, we could see no point in seeking the help of the already stretched hospital services, so we rode it through. The temperatures and headaches, together with muscle aches and sweats were awful, but over in a matter of days. It’s not like we can do anything other than stay at home anyway, so in a strange way, every cloud has a silver lining.

Whilst we are all very worried about the potential health threat, many of us will also be worried about the potential wealth threat as well; I know we certainly are. Our pensions and savings are both taking a big hit at the moment, and I am sure there are a great many of you out there who are feeling the same pain.

Stock market Spain

A bit like the virus though, just as the human body fights back, the economies and companies of the world have an incredible ability to do the same thing. There will be casualties of course, just like with the pandemic, but the ability of the human race to fight back in the face of adversity is quiet incredible.

So rather than worrying too much about the current downturns in investment markets, maybe just trust in mankind’s ability to come back from these things and get back to ‘normal’ as quickly as possible. I cannot even imagine what things must have been like after the end of the second World War, but the human race simply rolled up its sleeves, licked its wounds and eventually got back relatively quickly to economic good health, showing an incredible doggedness and determination in its quest to achieve that.

I am sure this event is going to have a profound effect on people in the future, and how they may act when we come out of this terrible situation. Maybe a lot less will be taken for granted, maybe things will be appreciated more, maybe people will have realised the importance of helping others with selfless acts, maybe the handshake will be a thing of the past.

I do know one thing though, that this will have a profound effect on me going forward.

So my message for both your health and your wealth: stay strong, be careful, look after others around you, and please don’t panic!

Jeremy Ferguson
The Spectrum IFA Group
Sotogrande, 11310, Spain
Office: + 0034 956 794409
Mobile: + 34 670 216 229

jeremy.ferguson@spectrum-ifa.com
www.spectrum-ifa.com

Jeremy Ferguson

Feeling down about investments?

By John Hayward - Topics: Investment Risk, Investments, Spain, Stock Markets
This article is published on: 20th March 2020

20.03.20

Take advantage of this great opportunity

The last stockmarket crash was in September 2008. Here we are again. At the time of writing, the FTSE100 is more than 25% down, even allowing for dividends. For many, this is not an attractive situation when considering investments. For others, the few that look through the dark clouds, this is a great opportunity. It is very difficult, for the vast majority of people, to time when to buy into markets and when to sell out. When to sell can be simpler for those who have a nerve trigger point that will say enough is enough and they will take their profit. Those who sell when things are going down often get it wrong and crystallise a loss. Some will be forced to sell due to other circumstances and could be lucky that this happens when markets are historically high. Others who have to sell at a low point, such as now, are obviously not so lucky. This then leads to a lack of confidence in investing and the feeling of never wanting to be burnt again.

Anybody sitting on cash, wondering what to do with it, should seriously consider investing at a time like this when stockmarkets have crashed. Interest rates are close to non-existent so there is little to offer short term deposit savers. Inflation trundles on and so cash might be ”king” in the short term, but long term hardly ever. The problem is that whenever there is a crisis few can see beyond its end, so they will not invest until things have improved. By then, the potential profits on offer have disappeared. The fact is that that markets will bottom out. Where? Nobody knows for sure, but based on the fact that a big influence on why markets have fallen so much is fear and panic, it is felt that markets are artificially low. There may be further to go down but it is likely that there will be a significant rebound. Markets tend to discount the future. This means that, on the day that someone says the virus is under control, stockmarkets will have already been on their way up for some time.

One way of coping with the uncertainty of when the bottom of this particular dip might be is to drip feed your money into the markets. This means that if markets continue to slide, you don´t suffer a reduced value on all of your cash. Conversely, if markets increase in value, then you are part of that increase. By feeding your money in over a period of time you are able to reduce the downside and be part of the upside. In time, once this crisis has ended, you will already be invested and thus reap the benefits.

To find out how you could make more from your money, protecting your income streams against inflation and low interest rates, or for any other financial and tax planning information, contact me today at john.hayward@spectrum-ifa.com or call or WhatsApp 618 204 731.

What to do with investments in a bear market?

By Victoria Lewis - Topics: France, Investments, Stock Markets
This article is published on: 16th March 2020

16.03.20

What a week of political, medical and financial news! Daily market commentary from asset managers, daily messages from my daughter’s school (all students’ temperatures have been taken daily on arrival for the last 2 weeks) and my stock market app has been flashing red, green, red and more red. Let’s see what today brings.

If the stock-market decline triggered by the coronavirus outbreak and the oil price slump is like past drops, there’s both good and bad news.

After a long (largely uninterrupted) run of share price appreciation since 2009, one of the longest bull markets in history, we have now entered a bear market, broadly defined as a 20% drop from recent highs.

Goldman Sachs pointed out that this week that we have never before entered a bear market because of a viral outbreak but that it may be useful to consider the history of bear markets to get a sense of their duration and intensity. There are different types of bear markets which can be described as follows (statistics from GS who analysed bear markets going back to 1835).

Structural bear markets are those created by imbalances and financial bubbles, very often followed by a price shock like deflation. Structural bear markets, on average, experience drops of 57%.

Cyclical bear markets are typically a function of the economic cycle, marked by rising interest rates, impending recessions and falls in profits. Cyclical bear markets experience drops of 31%.

Event driven bear market refers to things like a war, oil price shock or an emerging-market crisis. On average, this type of bear market results in 29% declines. The current crisis is event driven. Monetary response by central banks should be effective but time will tell. However, this is a new territory: an environment of fear where consumers are forced, or just inclined, to stay at home.

The good news is that bear markets triggered by exogenous shocks typically regain their previous levels within 15 months.

Whatever your view is on the markets, my advice is don’t try to predict the future. A recovery is inevitable and we trust professionals to skilfully manage our clients’ funds. We sometimes respond emotionally to stock market decline and volatility, but there is usually no merit in either reacting to, or trying to forecast, short term market events.

Don’t delay your financial plans. For planning, yesterday is better than today, which is better than tomorrow. Contact me, Victoria Lewis, if you want to discuss how you should react to these events.

A flight to safety, or an opportunity for investors?

By David Hattersley - Topics: Investment Risk, Investments, Spain
This article is published on: 13th March 2020

13.03.20

I am as conscious as anybody with regard to the above virus and its potential impact and consequence. A recent financial example would be the demise of Flybe, to which the coronavirus was a contributory factor. Natural animal instincts are fear, driven by fight or flee. So how can one consider investment at such a time, when currently 24 hour news channels and the press are swamping us with a savage feeding frenzy of headline information, with many showing a scant disregard to any in depth analysis and reality.

To clarify some facts, I did some research in the reliable analyses from the UK government, “Surveillance of influenza and other respiratory viruses in the UK” annual reports from 2014-2019. The following fact came to light: deaths in England with a contributory factor from the “flu” have varied from 14,000 to below 10,000 in each “peak season” during this period.

Viruses do mutate and new strains appear. With COVID-19 there is a documented risk for the elderly, in particular, those who may have pre-existing medical conditions, but you need to keep things in perspective.

Investing for the future

A simple phrase from Warren Buffet springs to mind, “When everybody is being greedy, be fearful; when everybody is being fearful, be greedy”.
So how do fund managers cope with this onslaught? How can they take into account all the facts referred to above? We live in a global world which has, nevertheless, regional differences. The multi-asset fund managers that we use have the resources to have access to massive amounts of data, which enables them to take all of this into account.

They invest for the long term, with an eye kept on short term risk. But they avoid short term “knee-jerk” reactions, taking a longer term view based on a minimum 5 year investment analysis and taking a balanced approach

So what’s our role as Financial Advisers? In previous articles I have eluded to each individual’s circumstances. Apart from the pure investment questions, so many other aspects need to be considered for effective financial planning including your personal situation, how much risk you want to take and how long you want to invest for. So a detailed fact find has to be the way forward, and that is carried out by us, not the fund managers. These fact finds are free, and are based on each individual’s requirements and circumstances. So feel free to contact me for a no obligation meeting, apart from the provision of a coffee!

So what is the outlook for 2020?

By John Hayward - Topics: Interest rates, Investment Risk, Investments, Spain
This article is published on: 4th January 2020

04.01.20

How was 2019 for you? For many, it has been another year of uncertainty with an apparent lack of decision making by politicians which has led people to delay making their own decisions. For me, it was the year that I broke my ankle two days into a fortnight holiday. If only for that reason, it has not been my favourite year ever.

So what is the outlook for 2020? Questionable political leadership in the UK over the last 4 years has created a weak economic backdrop where investment firms have been unwilling to risk client money in the UK. That appears to be changing and, whether you agree or disagree with Brexit, certainty creates confidence. A known is far easier to deal with than an unknown.

The current problem is how exactly Brexit is going to go through and how long it will take. That is why top investment firms that we recommend spread their exposure globally and not just in the UK. Although most British people have been hung up about Brexit (me included), the rest of the world has been carrying on their business regardless, creating growth for our clients at a time when other people I have spoken to have been too scared to invest, waiting for that magic day when everything will be at its perfect investment point. This approach is almost guaranteed to fail, certainly in the long term. Taking a grip and making sensible, informed investment decisions now is vital without waiting for a politician to decide your short-term, and long-term, fate.

Since David Cameron announced in February 2016 that there would be a referendum on the UK’s membership of the EU, we have seen the following (to 31/12/19)*:

  • +12% – UK inflation
  • +49% – FTSE100
  • +30% – A low risk investment fund that we recommend for cautious investors
  • +4% – Average savings rate
  • -8% – GBP/EUR exchange rate

What these figures illustrate is that the person who invested, or remained invested, in February 2016, should now be pretty happy. Those who have decided to wait until they know what is happening are likely to have made nothing with their money remaining in a non-interest bearing current account. Their money is now worth 8% less when allowing for inflation. This “loss” is compounded for those living in Spain, receiving regular income from UK State and other pensions, by the fact that the exchange rate is down 8%.

How long do you, or can you, wait before arranging your finances for your benefit and not leaving your money propping up banks that still have issues? We have many satisfied clients who have benefited from our knowledge and expertise. In addition, with our experience of tax in Spain, we can help those living in Spain after Brexit, guiding clients who have UK investments and reducing the impact of the Modelo 720 asset declaration.

Whilst there is a new batch of uncertainty surrounding what Brexit deal will be put in place on 31st January 2020, and what trade agreements will be set up by 31st December 2020, there are positive signs for the coming year and the benefits of these can only be achieved if one is invested appropriately.

We can review your current investments, wherever they may be, and make sure that they are both profitable and tax efficient, both here in Spain and the UK.

*Sources
Hargreaves Lansdown
Financial Express
Swanlowpark

The Changing Financial World

By Alan Watson - Topics: common reporting standards, France, Investments, ISAs
This article is published on: 18th October 2019

18.10.19

It was December 15th 1996; my wife and I were happy to be in Morzine and were enjoying dinner at hotel Les Airelles. Jean-Claude, the owner, was very attentive – we were his only guests! Heavy snow was falling, so the drive back to our home in Le Biot was a slow one, spotting just one other vehicle parked suspiciously in St Jean D’Aulps, the Gendarmes, who looked bemused that a Dutch plated car should mess up the untouched snow cover.

During Christmas I worked as usual in my IFA business covering Europe, but it was a stress free time; international clients had little to bother them, the main concern being market direction. The FCA did not exist; tax people were only after the big fish; even the Financial Ombudsman, for complaints, was years from formation; regulation was unheard of; QROPS transfers were an age away. The Isle of Man, Guernsey, Jersey, and of course Switzerland were the favourite hiding centres. Clients were happy to deposit large sums resulting from their global company contracts. Banks happily took in and paid out in cash, accepted transfers from third parties, and asked minimal questions to new arrivals in the beautiful French Alps; they were simply hungry for this amazing new flow of business. The financial world was a relaxed place, where large sums of “tax free” money could be transferred to the Notaries, who would inform the local land sellers that they had become wealthy; keys were given, dreams were realised and that much expanded supermarket just out of town saw the wine shelves emptying like never before. Travel businesses sprung up with sexy names like, “Utah snow and sun”, and their chalets were full the whole winter. The French tax people started to scratch their heads. Not only were local people driving back and forth through the Swiss border every day, but now a new irritation had arrived in town and some serious checking was necessary. The French Fisc. suddenly had many more employees, serious computer power, and somebody could apparently speak ENGLISH !

It’s now October 2019, my wife and I still love to eat in Morzine, but things have changed. Conversations with my clients all over the Rhone Alpes region take on a very different and focused tone. A global directive of information exchange requirements has shaken up the old world called CRS, “Common Reporting Standard”, which means the UK will exchange all financial, bank account, insurance policy and investment account information with France. Even that renowned haven of Swiss Private Bankers are happy to flood Europe’s tax offices with full financial disclosure information on former residents and clients. If that’s not enough, I regularly hear of clients being pestered by cold calling IFAs based in Paris, the south of France, even Dubai. The pleasure of being seen on social media! But now the approach is somewhat different, we have tight European regulation, or do we?

Making life changing investment decisions is a delicate operation. If somebody tells you they are part of XX group in Gibraltar, but due to “flexible” European financial regulation, they can passport, operate in France – beware: if things go wrong the UK, FCA or French regulator Orias will be unable to help you. A fully regulated French company holds the correct licenses and your chosen adviser should know French rules and regulations, preferably from many years experience in the region. Some individuals choose to keep a leg in the old country, just in case, but this half-half decision could cost you dearly. “Is a UK ISA tax efficient in France?” “My money is 100% Sterling, so impossible to move it over here.”

Your chosen IFA should know a great deal. Test their knowledge on markets, tax issues, currency movements/history, inheritance. Can they introduce you to competent local professionals? Moving from one country to another is a big step. Do make sure all fits into place, you should enjoy this wonderful region for years to come.

How to invest – Multi-asset Funds – Investing Made Simpler

By Emeka Ajogbe - Topics: Belgium, Branch 23 investments, Investment Risk, Investments, multi assets
This article is published on: 16th October 2019

16.10.19

I have spoken about asset allocation and rebalancing and their affect on your investments. An-other strategy that is available to you is multi asset fund management.

You may have heard (read) that I have mentioned that here at The Spectrum IFA Group, we favour the ‘multi asset fund’ route of investing. But, what is that?

MULTI ASSET FUNDS

Multi asset funds provide you with access to multiple funds and asset classes through a single fund, managed and monitored by dedicated experts on your behalf. This type of fund can increase the potential for diversification and help reduce the overall level of risk.

Choosing the right funds and building a diversified portfolio can be extremely difficult. The options available to you are almost limitless, with tens of thousands available to investors in Europe alone.

Generally speaking, it is highly unlikely that a single fund manager is capable of delivering consis-tent outperformance, year on year. Making the right choice for a portfolio and then refining it and rebalancing it over the years takes time, information and skill. Therefore, fund managers need to be monitored to ensure they remain at the top of their game – and replaced when they are not. The resources and/or expertise to do this properly can be time consuming and expensive. There-fore, multi asset funds can play a valuable role in part or all of your investments.

All multi asset funds offer a convenient way to access a wide range of fund managers and asset classes. Spreading investments across a wide range of managers and assets reduces the proba-bility of a fall in value across the whole portfolio.

At the same time, multi asset funds that are designed to target different risk levels make it simple to adapt a portfolio to suit your changing circumstances. For example, if you have no need to ac-cess your savings any time soon, then you are likely to be able to take more risk than clients who are nearing the time when they do need to access their money.

How to invest – Rebalance Your Investments

By Emeka Ajogbe - Topics: Belgium, Branch 23 investments, Investment Risk, Investments, Netherlands
This article is published on: 9th October 2019

09.10.19

I previously discussed how asset allocation is an investment strategy that can limit your exposure to risk. As you get further along your journey of being an investor, you need to understand how to rebalance your portfolio to keep it in line with your investment objectives.

Rebalancing is bringing your portfolio back to your original asset allocation mix. This may be necessary because over time, some of your investments may become out of alignment with your investment objectives. By rebalancing, you will ensure that your portfolio has not become overexposed to one asset class and you will return your portfolio to a comfortable and more acceptable level of risk.

For example, let’s say that your risk tolerance determined that equities should represent 60% of your portfolio. However, after recent market fluctuations, equities now represent 75% of your portfolio. To re-establish your original asset allocation mix, you will either need to sell some of your funds or invest in other asset classes.

There are three ways you can rebalance your portfolio:

1. You can sell investments where your holdings are overexposed and use the proceeds to buy investments for other asset classes. With this strategy, you are essentially taking the profits that you have made and reinvesting it into a more cautious fund.

2. You can buy new investments for other asset categories.

3. If you are continuing to add to your investments, you can alter your contributions so that more goes to the other asset classes until your portfolio is back into balance.

Before we rebalance your portfolio, we would consider whether the method of rebalancing we agree to use would entail transaction fees or tax consequences for you.

Depending on who you speak to, some financial experts advise rebalancing at regular intervals, such as every six or 12 months. Others would recommend rebalancing when your holdings of an asset class increase or decrease more than a certain preset percentage. In either case, rebalancing tends to work best when done on a relatively infrequent basis.

Shifting money away from an asset class when it is doing well in favour of an asset category that is doing poorly may not be easy. But it can be a wise move. By cutting back on current strong performers and adding more under performers, rebalancing forces you to buy low and sell high.

To discuss further how rebalancing can help your existing investments, please contact me either by email emeka.ajogbe@spectrum-ifa.com or phone: +32 494 90 71 72.

Interest rate outlook and what it means for your investments

By Barry Davys - Topics: Barcelona, Interest rates, Investment Risk, Investments, Spain
This article is published on: 1st October 2019

01.10.19

I had a very nice dinner a few days ago with an investment manager I have known for 12 years. We meet regularly and he is one of the investment managers in London that we, as a company, use for some of our clients. So we know each other professionally quite well and one of us always acts as devil’s advocate to the other one’s position in discussions. It is a great way of getting your point of view tested. Yes, we did talk about Brexit, but the more important issue was the fact that long term interest rates are likely to stay low for a very long time in Spain and in Europe. So here are some thoughts about what these low interest rates mean for our savings and investing.

First, Brexit. Brexit is on everyone’s lips and quite understandably so. Whether you love it or hate it, no one seems to be able to work out what is going to happen. I admit to not being able to work out where it will end. The Brexit outcome is incredibly important to us as individuals and businesses. Yet what about for our savings? Britain is the sixth largest economy in the World. Sounds important. According to the World Bank, the World economy is $86 Trillion. Britain’s economy is $2.8 Trillion. So Britain represents just 3.26% of the World economy. Which means we still have 96.74% of the World economy where we can invest!!!

Perhaps the more important story for savings and investments is the impact of very low interest rates that could stay low for decades. My dinner guest gave good insight into the future of low interest rates. This insight is important to us as individuals with savings and investments.

In October 2007, interest rates in the UK fell from 5.5% to 0.5% in May 2009. Interest rates in Europe followed a similar path. The ECB in July 2007 cut its interest rate from 5.25% to 0.75% in May 2009. The ECB rate has now fallen to just 0.25%.

Will low interest rates stimulate the economy? Yes, it will, but not enough to get economies back on track. Mario Draghi, the current President of the ECB, says central banks changing interest rates will help, but Governments have to spend more too for sufficient economic growth to happen. As an example, Germany has been taking a lot of stick because it has not been spending. The amount it collects in taxes etc is equal to the amount it spends.

ECB

This is the German Government policy. This is a sensible policy unless parts of the country break down and need repairs. Two items that need repair in Germany are the military and the transport infrastructure.

The military, if the stories are to be believed, did not have one single usable helicopter earlier this year. Roads in Germany need repairs, including bridges. Spending money on these road repairs not only give jobs to workers and their companies but also helps the German transport system to run smoothly. This helps the logistics chain in the economy and gives a boost to the economy. These are two examples of where government spending is helpful and supportive of low interest rates. To offset a recession there has been some suggestion of Germany spending €50 Billion on infrastructure spending. As a comparison, Spain already is spending more than it gets in on taxes.

The Bank of England Monetary Policy Committee is responsible for setting interest rates in the UK. It has said that due to the Brexit uncertainty, the next UK interest rate move is likely to be down. The UK official interest rate is only 0.5% now, which gives an indication of the outlook for interest rates: near zero for a long time.

JP Morgan is the sixth largest bank in the World with assets of $2.73 TRILLION. Bob Michele, Global Head of Fixed Income at JP Morgan, has gone even further than the Bank of England in predicting the European interest rates. His analysis shows that Europe will have negative interest rates for the next eight years. Mario Draghi has also said that European economic growth will be very low for seven years, which is another indicator for low interest rates. Indeed for both the UK and the EU there are many forecasts of very long term, low interest rates.

On the bright side, borrowing costs are much reduced as a result of low interest rates. Monthly mortgage payments are much smaller than normal. Businesses and Governments can borrow at much lower rates. On the dark side, we get little, or indeed no, interest on our savings. How low can interest rates go? Rates are negative in Switzerland and Denmark for people living outside the country. These non resident account holders actually have to pay the bank to take their money. When interest rates on savings are very, very low, what do we do with our savings?

If we have savings should we consider paying off our mortgage? Mortgage rates in Spain around 1.63% fixed for 20 years (via Spectrum Mortgage Services, email me if you require details). It can be better to invest than pay off a mortgage at this rate. If we have other loans you should look to pay off the loan from savings if the interest rate

property investment Barcelona

on the loan is greater than you can achieve by investing. A good benchmark figure to use is if the loan rate is greater than 5% per annum you should consider paying it off from savings.

Despite these low rates it is essential that we keep some money readily available, probably in a bank, as an emergency fund. Yet, with these historically low interest rates, it is also essential we do not leave more than we need in the bank. Inflation, even low inflation, eats into the buying power of money left in the bank. It is an insidious effect we often don’t notice until we come to buy our next big purchase. It is at this point we realise that we can’t buy what we thought we could buy because we have had interest on our savings that was smaller than the rate of inflation. When this happens, buying power falls. Instead of being able to buy the sports version of a car we find we can only afford the base model.

We need to use other types of savings and investing strategies during times like these. There are many other options, but most alternatives come with some investment risk. What does investment risk look like?

You may not have realised, but since the market collapsed in 2009 there have been corrections of -16.0%, -19.4%, -12.4%, -13.3%, and -10.2% in the S&P 500!

What is the investment return on the S&P 500 since bank interest rates hit their lows in 2009? INCLUDING the falls above, it may surprise you that the return has been 219%.

This is just one index based on shares in one country and is used to highlight volatility in a market. To reduce the impact of this volatility our savings should be in diversified pots. A fair question for you to ask me is “With these low interest rates, what pots do you invest in?” The answer is I have a mix. I have some very steady, some

stock-exchange

would say old fashioned, funds. Others are with a mix of investments managed by a fund manager, including some investments in the S&P 500. I have some UK Premium Bonds for my emergency fund as they are easily accessible. I have income producing investments in my pension. Index linked funds give me some protection against inflation (just in case we get an unexpected event). I have some forward looking funds that invest in India and China. And then… well I have three small holdings in UK private companies making new technologies and an Exchange Traded Fund (ETF) for Artificial Intelligence and Robotics.

There is diversity across types of investments, e.g. shares, funds, regions and bonds. Within the higher risk parts there is balancing of risk. The three individual shareholdings in tech companies are very high risk because the value of the shares in each company depends on the results of that company alone. Balance is provided because the ETF performance which depends on the 41 companies it tracks. If one company does badly, there are 40 others to take up the slack. It was sensible for me to diversify from an investment being dependent on the results of one company, to something which is dependent on the results of 41 companies. Especially as I am not a researcher in the fields of AI and robotics.

This is my mix of investments, but it may not be right for you depending on what return you want and how much risk you are prepared to take. Do I also choose superb investments and do these investments avoid market falls? I admit it, no they don’t. But my diversification does.

Tax is also relevant to the good husbandry of your savings at all times, not just when rates are low. With money in the bank and interest rates so low, it is not much more than adding insult to injury when the taxman takes 19% to 21% of your interest. However, it is important that having moved your savings from a bank account you make the investment tax efficient. How to do this will depend upon your situation and requires individual advice.

This brief note gives an example of what we need to do now as we are faced with low interest rates for a long period. What is right for you will depend on your circumstances. Is it worth taking some risk? Yes, especially if you use several different types of investments; investments in different types of assets and different geographical areas. Putting your savings in different pots can help to reduce the investment risk.

As is often the case, what looks like a disadvantage, the low interest rates, means opportunities appear elsewhere!

How to invest -The Importance of Diversification

By Emeka Ajogbe - Topics: Belgium, Investment Risk, Investments
This article is published on: 19th August 2019

19.08.19

There’s an old adage “Don’t put all your eggs in one basket”. I think about this every time I speak to a client about their portfolio. Often people wish to put their money into something familiar, like property. I remember in the early days of my career, I sat down with a property developer who had everything he had in his property portfolio of over a dozen properties, and all of his properties were in the same area of London. When I suggested that he needed to diversify because he was over exposed to the property market, he said that he had; that all the properties were not on the same road. When I checked the property addresses later, I realised that he was right, they weren’t. However, they were within ten minutes of each other!

This client had embarked upon a risky investment strategy as he was familiar with the asset class. Whilst he was having success with the returns, a sharp decline in the property market, particularly in the London area (which is what happened not too long after we spoke), would mean he would run into major financial difficulties. Enter, diversification.

Diversification is an investment strategy that reduces the risk that an investor is exposed to by allocating their funds into different financial instruments, industries, geographical areas and other categories. It aims to maximise returns by investing in different areas that would each react differently to the same occurrence.

Although it does not guarantee against investment loss, diversification is an important part of reaching long financial goals whilst minimising risk.

WHY SHOULD YOU DIVERSIFY
Let’s say, for example, that you are invested entirely in pharmaceuticals. It is announced one day that there will be a heavy levy against the pricing of drugs, which affects the costs that pharmaceuticals can spend on research and development. This would negatively affect the pharmaceutical industry, prices would fall and there would be a noticeable drop in the value of your portfolio.

However, suppose you have some of your portfolio invested in, say, technology. Strong performance in this industry, such as developments in cloud storage, could see the performance counteract the negative effects of the pharmaceutical industry on your portfolio. Even this small amount of diversification could protect the performance of your portfolio and ensure that all your eggs are not in one basket.

It therefore stands to reason that you would want to diversify as much as is feasible, while respecting your risk profile; across different industries, across different companies, across different asset classes. This will greatly reduce your portfolio’s sensitivity to market swings.

LOCATION, LOCATION, LOCATION
It pays to go global. As you can see in the table below, having funds spread across different locations can give you access to the best performing asset classes each and every year. One asset class can be the best one year, but is not necessarily top again the following year.

investment diversification

Diversification also means ensuring that your overall portfolio has exposure to various different investment styles. Some shares, known as growth shares, are held by investors as their value is expected to grow significantly over the long term. Others, known as value shares, are held because they are regarded as cheaper than the inherent worth of the companies which they represent. Value shares and growth shares can react differently in different economic environments.

Whilst it is possible in theory, in practice having a perfect balance between assets, sectors, markets and companies to suit an investment objective or risk profile is extremely difficult. However, the diversification qualities of collective investments schemes, along with the option of investing into multi asset funds can present the investor with a sound, individually tailored diversification solution.

At Spectrum, we favour the multi-asset approach to investing for our clients. These investment vehicles allow our clients access to multiple funds, asset classes and locations through a single fund that is managed and monitored by dedicated specialists and experts on the investor’s behalf. This type of fund can increase the potential for diversification and reduce the level of risk.

For more information on how understanding diversification can help you grow your wealth, please contact me either by email emeka.ajogbe@spectrum-ifa.com or phone: +32 494 90 71 72.

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