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Hot investments: It’s time to get creative

By Chris Burke - Topics: Barcelona, Investment Risk, Investments, spain
This article is published on: 18th June 2019

18.06.19

Investing needs savvy, like a game of chess. It’s best to make carefully thought through moves so that it’s not left to chance. The most crucial part of investing is being in the know.

As a financial advisor, this is something I research and stay on top of so that I can best inform clients. And I only recommend what investments I would feel confident investing in myself. That is very important for clients to know.

When it comes to the stock market, it’s about knowledge and catching the wave at the best time. Right now in the world of investment it’s prime time for investing in some promising and exciting creative industries, namely the e-sports /online gaming industry and AI (Artificial Intelligence).

As we all know, the internet, Amazon and Netflix have totally changed the entertainment industry. We are no longer controlled by which shows are on television or in the cinemas, as we now have the luxury of watching whatever we want whenever we want. But perhaps the most massive surprise in the past year has been the overwhelming popularity of esports – which is simply fans watching professional video gamers compete online. Ever heard of Twitch? Well, there are more people logging on to watch pros gamers competing on streaming sites like Twitch than there are watching CNN or NBC.

Last autumn, a shocking 57 million people tuned in to watch a professional video-gaming (esports) match. It was triple the audience of the actual 2018 NBA finals. As a result of this success, the biggest companies including Coca-Cola and T-Mobile have spent hundreds of millions to sponsor these matches.

So, as e-sports and gaming continue to conquer all, which types of companies might be good to get in on? The top gaming companies you might want to consider investing with are Nintendo, Valve Corporation, Rockstar Games, Electronic Arts, Sony Computer Entertainment, Ubisoft or Sega Games Co. Ltd.

investments in games company

And behind every great game is the hardware required to make it fanstastic. NVDA might not be a name you’ve heard, but literally all video games require ultra-high-performance chips and NVDA chips are the crème de la crème, used by over 85% of professional gamers.

(Forbes, 2018)

The ever-growing world of AI (Artificial Intelligence) has been booming and helping companies solve and manage many previous b2b and b2c issues and right now France is aiming to be one of the forerunners in the industry. Last year President Macron announced his government was investing €1.8 billion over 4 year period. A few of the top French AI start-ups are insurance fraud detection companies like Shift Technology; the AI voice assistance platform, Snips, which manufacturers can utilise for their products and Saagie, the online protection platform to store and guard our precious data for banks and insurance companies.

So, there are some exciting and creative opportunities for investment out there but as a financial advisor, when it comes to investment portfolios research and timing are crucial, as is ensuring clients are in a financial position where they able to play the market without the fear of losing their life’s savings.

Before considering any investments, I always start by advising clients to ensure they have sufficient funds they can access quickly and easily and then discuss what length of time they would like to invest other sums for, as it’s my first priority to nurture and protect their financial future. I would not recommend any client to invest in something that I would not invest in myself, but each client is well-informed in the knowledge that if they have the money to try their hand at investing, it is of course a risk. But it’s a risk that can be rewarding and a real learning experience as well.

Understanding How Risk Affects Your Portfolio

By Emeka Ajogbe - Topics: Belgium, Investment Risk, Investments, wealth management
This article is published on: 11th June 2019

11.06.19

A crucial step to achieving long term financial security is recognising the importance of (and the relationship between) investment risk and return. In practice, this means implementing an investment strategy which matches your personal objectives and risk profile.

When I am speaking to clients about investing for the first time, they generally fall into two categories:

  • The Risk Averse
  • The Not So Risk Averse

Normally, within the first two to three years, one category changes their mind and changes to the other. Can you guess which one?

If you replied the risk averse becoming the not so risk averse, you would be right. This usually stems from clients becoming more comfortable with the idea of investing and the fact that taking risk can, when understood and applied properly, have a staggeringly positive effect on your portfolio.

There are many different reasons as to why people invest and no two people will have exactly the same objectives. Risk is a necessary and constant feature of investing – share prices fall, economic and political conditions fluctuate and companies can become insolvent. Therefore, understanding your risk profile is an important consideration before you actually invest.

Your risk profile is the relationship between your investment objective, risk tolerance and capacity for loss. As a result, you should be aware of your ability and willingness to accept risk and what level of risk might be required to meet your investment goals.

Investment profiles broadly fall into one of the following three categories:

Low Risk Profile
People with a low risk profile wish to preserve their capital and understand that there is very little scope for significant capital growth. These portfolios are heavily weighted to investing in cash and bonds.

Medium Risk Profile
People with a medium risk profile understand that to achieve long term capital growth, some degree of investment risk is necessary. Portfolios for this category of investor are usually balanced between cash, bonds and shares (equities)/equity funds, with perhaps some exposure to property as well.

High Risk Profile
People with a high risk profile are those who are prepared to accept the possibilty of a significant drop in their portfolio values in order to maximise long term investment returns. Higher risk portfolios have a far greater weighting towards equities/equity funds and less exposure to bonds and cash.

Different kinds of investment carry different levels of risk:

Cash
Cash or savings accounts are often regarded as ‘low risk’, yet, as the credit crisis of 2007 – 2008 showed, they are not ‘risk free’. Inflation will also reduce the value of cash savings if it is higher than the rate of interest being earned. At the time of writing, inflation in Belgium is just above 2% and the interest rate is 0%, which means that you are effectively paying your bank to hold your cash savings.

Bonds
Bonds or fixed interest securities are popular with many investors. If you invest in these instruments, you are essentially lending money to the issuer of the bond; usually a company or a government. In return, the issuer pays interest at regular intervals until the maturity date. The obvious benefit to the investor is regular income. However, there is a risk that the issuer may not be able to maintain interest payments and the capital value of the bond can fluctuate.

Shares
Although past performance is not a guide to future returns, historically the best long term investment performance is produced by equities or equity funds. The increased level of risk associated with equities is directly linked to the higher returns typically available from this type of asset.

The price of a company’s shares trading on a stock market is a reflection of the company’s value as influenced by the demand (or lack thereof) from investors. Essentially, when you invest in a company you are buying part of that company and hence able to share in its profits. The converse is also true, so you could be exposed to operating losses and a fall in the company’s share price. The risks, therefore, can be high, especially if you own shares in only one or a handful of companies. Equity funds, run by professional managers and which usually invest in a range of companies, are a means of avoiding such concentrated risk.

TYPES OF INVESTMENT RISKS

There are several types of investment risk that the you can be exposed to if and when you decide to invest, and you should be aware of the possible effect on your portfolio before you start:

Market Risk
Also known as systematic risk, it means that the overall performance of financial markets directly affects the returns from specific shares/equites. Therefore, the value of your shares may go up or down in response to changes in market conditions. The underlying reason for a change in market direction might include a political event, such as Brexit, government policy (consider current US-China trade tensions) or a natural disaster.

Unsystematic Risk
This refers to the uncertainty in a company or industry investment, and unlike market risk, unsystematic risk applies to only a small number of assets. For example, a change in management, an organisation making a product recall, a change in regulation that could negatively affect a organisation’s sales, or even a newcomer to market with the ability to take away market share from the organisation you are investing in.

Systemic Risk
This is the possibility that an event at company level has the potential to cause severe instability or collapse to an entire industry of economy. It was a major contributor to the financial crisis of 2007 – 2008. Think back and you will remember the phrase that Company X ‘was too big to fail’. If it collapsed, then other companies in the industry, or the economy itself, could fail too.

Currency Risk
Investment options include shares/equities in a range of currencies. Changes in exchange rates can result in unpredictable gains and losses when foreign investments are converted from the foreign currency back into your base currency, from US dollars into Euros for example.

Portfolio Construction Risk
This is the possibility that, in constructing a portfolio, you have an inappropriate income/growth split, or that you fail to monitor and manage the portfolio in line with your investment objectives. There is also a risk that you select assets that are inconsistent with your risk profile.

Interest Rate Risk
Interest rate risk is the possibility that an investment held will decline in value as a direct result of changes in interest rates. For example, bond prices are usually negatively affected by interest rate rises.

Concentration Risk
This is the possibility that you over-invest in a particular asset, sector, industry or region, which removes valuable diversifaction from your portfolio.

Opportunity Risk
This is the risk of being ‘under-exposed’ to other types of investments that could potentially deliver better returns.

Whether you are investing on a regular basis or have invested a lump sum, it is imperative to understand how risk, or your attitude to risk, can fundamentally affect the potential growth of your investment.

Whatever will be, will be

By Dennis Radford - Topics: BREXIT, Costa Blanca, Investments, spain
This article is published on: 3rd June 2019

03.06.19

It was announced last week that Doris Day had passed. She died on May 13, 2019, at the age of 97, after having contracted pneumonia. Doris Mary Kappelhoff was born on April 3, 1922. Just imagine the changes Miss Day witnessed during her lifetime.

Don’t waste your time trying to second guess.
Whilst the ongoing saga of Brexit and the numerous delays can be frustrating, we really should make the best of the additional time this gives us.

Do you remember the panic across the Expatriate community on the initial Brexit announcement?

  • You must ensure you residency application is processed in time!
  • You must ensure your Social Security and Health Care are in place!
  • You must change your driving license!

We are likely to have until 31st October 2019 before we leave the EU, which means you have additional time to put these things in place.

There are, of course, other areas where we may want to use the extra time positively.

Did you know?
In the 2017 Spring Budget, HMRC announced a new 25% charge on overseas pension transfers. Most expats living in Spain were unconcerned by this as it did not apply to pension transfers within the EU.

This is likely to change post Brexit. It is widely thought that HMRC in the UK will apply this 25% charge to your pension transfer post Brexit.

Use this time wisely. If transferring your pension is suitable for your situation, you should act now and save the charge being applied to your pension.

Since the day David Cameron, the then Prime Minister, announced that there would be a referendum on the UK´s membership of the EU, people have been fearful due to the uncertainty as to what will happen post Brexit.

In the last three years, life has continued in the financial world and investment markets have risen significantly. At the same time, inflation hasn´t disappeared just because Brexit is on the menu.

With dividends reinvested, £100,000 would be worth around £136,000 as at 18th February 2019. If we allow for inflation, this would be more like £128,000 but still 28% up. If the £100,000 had been left in a bank account, with no interest, which is commonplace these days, the true value would now be more like £91,000. Waiting for Brexit has cost the wait and see person £9,000.

Brexit proof your investments using top UK financial institutions
If you are living in France, Spain, Luxembourg or Belgium, did you know that certain large, household name UK financial institutions offer products locally from
Dublin based sister organisations?

These products are both EU regulated and tax efficient in the country where you live.
For example, one of the largest Insurance companies in the UK offers a fully French compliant (Dublin based) Assurance Vie. Another offers a Branch 23 product, which is tax efficient in Belgium. Both companies offer a tax efficient solution for Spanish residents.

As a result, should the UK leave the EU, you can still invest with companies whose names you know and trust, in a tax efficient manner, in the country you call home.

Please feel free to contact me if you would like to discuss any of these points in more detail.

We need to talk about China…

By Gareth Horsfall - Topics: Investments, Italy
This article is published on: 17th May 2019

17.05.19
  • There are more Christians in China than Italy and the Vatican combined
  • By 2030, China will add more new city-dwellers than the entire U.S. population
  • By 2025, China will build enough skyscrapers to fill TEN New York-sized cities
  • America’s fastest “high speed” train goes less than half as fast as the new train between Shanghai and Beijing (150 mph vs. 302 mph)
  • China has more pigs than the next 43 pork producing countries combined
  • China’s economy grew 7 times faster than America’s over the past decade (316% vs. 43%)

If you hadn’t already guessed, this article is about the economic powerhouse: China. Listed above are some interesting facts just to whet your appetite. However, given the current market turmoil surrounding Donald Trump and his China tariffs, I thought it would be a good idea to clear up some of the myths surrounding China, with the help of our friends at Blackrock Asset Management.

5 Myths about China’s economy

Economic growth is unsustainable

There is still lots of room for growth
The Chinese economy has been growing quickly for more than 20 years, and hit a peak of 14% in 2007, according to the World Bank. But things have started to slow in the last few years. Growth cannot continue indefinitely and China does have a problem with high levels of personal, corporate and government debt. However, even at today’s slower pace of growth at approximately 6% per annum, China will continue to grow more than twice as fast as many developed economies. China has seen growth of 6-10% over the past 7 years. Even a basic level of growth is enough for the financial markets to grow and for domestic reforms to be pushed through.

High debt means that China is high risk

China is actually reducing debt at a good pace
Many Chinese companies hold a great deal of debt and Chinese corporate debt has reached 165% of GDP, according to an IMF report. (Ireland, Netherlands, Belgium and Sweden have higher corporate debt to GDP ratios!)

The Chinese government is serious about addressing the high levels of debt and has signalled that corporate debt restructuring is now high on the agenda. Whilst this is a positive move for the economy it causes investors to worry about whether the Chinese authorities will be able to engineer a soft landing. Policymakers have been practical in their approach to reducing debt by making structural changes on one front but also ensuring that there is sufficient liquidity to avoid any stress. It sounds like good financial planning to me. Pay down your debt but maintain a good cash level in case of emergencies.

China also has a very high level of personal (retail) investors in its financial markets, and with such a high percentage the Chinese government is more likely than most governments to intervene should there be any danger of sharp falls in equity markets. Economic hardship can trigger social unrest, and the Chinese authorities do not like civil unrest!

Increased protectionism in the US will hit China hard

Despite what Donald Trump would like to make us believe China is an increasingly important player in global trade
The US-China relationship and some kind of trade war seem inevitable especially under the Donald Trump regime. This will affect international markets, without a doubt. However, despite all the noise over tariffs, the ambitious Belt & Road initiative is still in progress. This is China’s way of boosting trade and stimulating economic growth across Asia by building a massive amount of infrastructure to connect it to other countries. In addition, the US has walked away from the Transatlantic Trade Partnership and this offers China the chance to play an even bigger role in terms of trade integration in the region. This basically means that whilst America is battening down the hatches, China is opening itself up, making more allies and expanding its global reach of power.

BlackRock believes that trade tensions between the US and China will continue for a further period but does not think it will escalate into a full-blown trade war, although it does remain a risk.

It is difficult to get accurate economic data about China

There are more ways than one to skin a cat, so are there more ways than one of digging for money
Investors worry about the accuracy of economic data that comes out of China. This is where technology can come to our aid in the guise of satellite imagery. It can provide an alternative source of up-to-date information. For example, it is possible to form a picture of the ‘metalness’ on the ground as a way to measure the number of new factories being built, or existing ones expanded. This information helps to verify the data from the Chinese government. It is also much faster than relying on quarterly valuations.

Surprisingly, this information is so detailed that the economic activity of individual companies can be compared. Big Brother is watching you!

China has a liquidity problem

The tide may be beginning to turn
The inclusion of China in the Emerging Markets financial Indices is already starting to see more funds flowing into China. Going forward, more Chinese shares are likely to be added to the indices, driving even more money into the region.

China already makes up 32.7% of the Emerging Markets Index and will continue to take a larger proportion as China continues to deregulate its capital markets and make them more accessible to foreigners. If China achieved full market inclusion in the Emerging Markets Index, it would account for 50% of the total index of ALL emerging markets and it could eventually account for 30% of the emerging markets bond indices.

The strength of the US dollar together with the extended period of quantitative easing has held money in the US, but that trend is now changing with funds starting to flow back into Asia from the second half of 2017.

There is also a forthcoming Stock Connect scheme, linking the Shanghai and London Stock Exchanges, which will also give foreign investors greater and easier access to the shares of companies listed in mainland China.

All these developments, together with the broader structural reforms being carried out within China, may increase liquidity and as these five myths are debunked, the Chinese stock market may start to get the increased international attention it deserves.

As a client of The Spectrum IFA Group, China and other emerging markets will make up a proportion of your portfolio. Whilst the financial markets are highly volatile, the growth of investment is higher than in other developed markets. Yet, it is not a question of whether you should invest in volatile financial markets or not, but more the question of how much you should allocate to them based on your own personal circumstances and attitude to risk.

The asset managers we work with take care of those decisions on your behalf, so you don’t have to.

Do you know if you are overpaying Spanish tax?

By John Hayward - Topics: Investments, spain, Tax Relief, tax tips
This article is published on: 9th May 2019

09.05.19

Thousands of Spanish residents could be overpaying tax due to their lack of knowledge of the most tax efficient way to hold savings. People overpay income tax, savings tax, capital gains tax, and even inheritance tax, because they are holding their money in inappropriate savings and investment accounts. However, there are often simple solutions to what seem like complex problems. With the correct professional advice from people experienced in Spanish financial matters, savers could see more income and pay less tax.

Often, residents of Spain will turn to their bank to give them advice on what accounts and investment vehicles are best suited to them. The choice in Spanish banks is limited and the risks are often not explained. Many people are stuck in what they thought were deposit accounts, when in fact they are investments, the performance of which could be based on stockmarkets.

There are also those who hold “tax free” savings in the UK, such as ISAs, National Savings Certificates and Premium Bonds. All of these are NOT TAX FREE IN SPAIN. For Premium Bonds especially, there appears to be better returns, when compared to most other options which are paying close to zero interest. However, any interest or gain is taxable in Spain and needs to be declared.

A solution is to have money outside Spain but recognised by Spain for preferential tax treatment.

A COMPLIANT ACCOUNT AND NO WITHDRAWALS MEANS NO TAX DUE
In this example, €200,000 was invested in 2016 and the accountholder had no other savings income.

With a non-compliant account, tax must be paid each year on the growth of the account, totalling €6,260 over the 3 years. With the Spanish compliant account, if no withdrawals are taken, no tax is immediately due on the annual growth of the account.

*Click the image above to enlarge

AND IF WITHDRAWALS ARE MADE?
Again €200,000 is invested and the accountholder has no other savings income. This time the policy grows by €10,000 each year, and the accountholder withdraws this amount. With a non-compliant account tax payable is based on the full growth of the account, whatever amount is withdrawn. For a compliant account, tax is only due on the gain attached to the withdrawal.

*Click the image above to enlarge

That´s a 91% tax saving over 3 years!

To find out more about how you could benefit from quality financial planning advice and years of experience both in Spain and the UK, contact me today on +34 618 204 731 or at john.hayward@spectrum-ifa.com

Investing – Where do I start?

By Emeka Ajogbe - Topics: Belgium, Investments, wealth management
This article is published on: 22nd March 2019

22.03.19

Receiving a lump sum payment can be exciting, as it is not often that we have the opportunity to spend or invest a large amount of money at one time. However, if you are investing for the first time, it can be an intimidating step to take. After all, not everyone knows the difference between a share, a bond or a fund and the financial markets can seem like running a gauntlet if you do not know what you are doing.

Investing sensibly in stock-markets, rather than saving at the bank (particularly nowadays when you would be lucky to find interest rates above 1%), is an important means of achieving financial security, and, particularly over the long-term, returns are typically far higher than is achievable from holding cash.

That’s not to say that it comes without risks. Indeed, every fund or investment comes with a disclaimer that past performance is no guarantee of future returns, and this statement is indeed true. However, past results can be useful when reviewing how the fund or investment performed during a financial crisis or when the markets were buoyant.

MY CURRENT FINANCIAL SITUATION
Before you invest, it is imperative to first assess your overall financial stability. It is not usually appropriate to invest if you are in debt, for instance. It is recommended that you undertake a review of your current financial situation with a financial professional. This should include looking at your household’s current net income, expenditure and any debt (it is advisable to pay off debts such a credit card balances before investing as the interest rates for borrowing are likely to be higher than the returns you could achieve by investing). As investing should be a medium to long-term strategy, it is also advisable that you have an emergency or ‘rainy day’ fund that you can use should you need it. As a general rule of thumb, you should have at least six months’ expenditure set aside for immediate access.

HOW AND WHERE SHOULD I INVEST?
Once we have reviewed your financial situation, the next step is to consider how and where to invest.

There are two schools of thought when it comes to how to invest. Either take the plunge and invest the entire sum at once, or drip the lump sum in on a phased basis until it is all invested. Investing the money all at once will give you the best chance of benefitting from compound returns. However, if the markets drop significantly soon after you have invested, you may regret it, at least for a while. Drip feeding a lump sum by splitting it into smaller amounts is called unit cost averaging, so-called because you are trickling in the money over time and averaging the ‘price’ at which you buy your chosen investment(s). Depending on who you speak to, you will be advised to proceed one way or the other, or perhaps a combination of both. It also depends on how much you are investing. It is unlikely that any amount under €100,000 would be invested on a phased basis.

ADVANTAGES OF INVESTING THE ENTIRE LUMP SUM
Despite the risk that accompanies investing the whole lump sum in one go, research has demonstrated that the majority of the time, ‘going all in’ will outperform unit cost averaging. This is because it exposes you to the markets sooner, giving you more time to take advantage of compound returns. Research by a global leader in fund management, Vanguard, showed using historical returns, and a hypothetical portfolio that consisted of 60% stocks and 40% bonds, that in the UK, US and Australia, going all in usually outperformed the unit cost averaging strategy. There were only a few short-term periods during the deepest 12 month downturns where this was not the case.

Historically, markets have increased in value over time (which is great for growing wealth and making money) and Vanguard’s research showed that the lump sum strategy generated returns on average 2.39% higher than with drip feeding an investment in over twelve months. That does not sound like much, but when you take compounding into account, after just ten years the difference is quite staggering.

The table below illustrates how global markets have performed historically. As you can see, the positive periods far outweigh the negative both in performance and duration.

SOURCE: GFD, BLOOMBERG, GOLDMAN SACHS GLOBAL INVESTMENT RESEARCH

Markets typically trend upwards, so in most cases, if you were to wait and contribute using a unit cost averaging strategy, the markets will rise before you can invest everything. This means that you will be buying at a higher cost and attaining lower returns.

DRIP FEEDING MAY BE APPROPRIATE FOR SOME INVESTORS
Behavioural psychologists have long known that, for most people, the pain of losing money hurts more than the pleasure of making money when it comes to investing. This is clearly seen when markets are down and people tend to panic into selling, instead of waiting out the downturn.

Let’s say that you invested €100,000 and the next day, or week, your valuation dropped by 10%. What would your reaction be? Would you remain invested or take it all out as soon as possible? Someone who is risk averse or anxious about investing might prefer to invest via the drip in strategy to reduce any emotional discomfort that may arise from market volatility.

BRANCH 23

In Belgium, you have the opportunity to invest via what are known as Branch 21 and Branch 23 products. With Branch 21, you benefit from capital protection but usually a low return. With Branch 23, your capital can fluctuate in value but the prospects for growth are far greater than with Branch 21. Branch 23 is particularly tax efficient as you will not pay withholding tax on your returns, whereas there is withholding tax payable on interest from bank deposits, Branch 21 returns and on most directly-held mutual funds.

For more information on Branch 23 and its benefits, please click here

Tips in investing in tough times

By Robin Beven - Topics: Investment Risk, Investments, spain, wealth management
This article is published on: 18th March 2019

18.03.19

When the economy slows down, it is inevitable share prices will take a hit. Such times are never comfortable, but there should be no need for investors to panic. Instead, they can offer an opportunity to review your portfolio and ensure it is positioned to weather any storms that might lie ahead.

This does not mean you need to make sweeping changes – after all, weatherproofing your house against the winter doesn’t mean you tear it down and rebuild it from scratch. Instead, you make sensible, incremental changes that provide some additional strength. With that in mind, here are 10 practical tips to help you fight off the worst effects of difficult times.

DIVERSIFY
It is the basic number-one rule of investing but it can need reaffirming. Different asset classes perform well or poorly at different times. If your portfolio is exposed to a single asset class – for example, equities – its performance will follow the fortunes of the equity market and returns are likely to be volatile. However, if your portfolio contains a selection of different asset classes and is spread across different countries and regions of the world, the various elements can perform differently at different times – so if one is doing badly, another may well be performing better and so could help to compensate.

LOOK BEYOND YOUR HOME MARKET
With diversification in mind, perhaps you could start looking overseas for opportunities. A UK-focused portfolio might seem a sensible and conservative option for a UK-based investor. However, this strategy leaves you and your portfolio at the mercy of domestic sentiment. Other areas of the world may offer a more positive outlook or could simply be better placed to help you through any domestic downturn. You need to be aware of the different risks involved with different international markets but even a small step into, say, other developed western economies could help to diversify some of your risk.

BE PREPARED TO ROLL WITH THE PUNCHES
Your attitude during negative periods is as important as your portfolio’s structure. Economies simply cannot keep growing indefinitely and recessions are likely to happen every few years. Successful investors tend to be pragmatic and realistic – they invest for the long term and expect that, while there will be good times, there will also be some bad ones. A short-term downturn such as the 4th quarter 2018 should not be seen as a reason to panic.

LOOK BEYOND THE ECONOMIC DATA
Remember that economic data releases are backward-looking. At the start of a slowdown, figures will continue to appear positive, perhaps contradicting our everyday experiences, as old numbers remain in the calculation. Similarly, once economic growth begins to recover, it will take a while to be fully reflected in the new data. Headlines that scream “worst figures for 30 years” may confirm what we have just been through but do not necessarily reflect the prospects for tomorrow. What they often do, however, is fan the flames of investor uncertainty – not to mention sell newspapers.

CASH IS NOT NECESSARILY KING
During a recession, it may be very tempting to get out of the stockmarket and opt instead for the perceived safety of cash. However, this strategy can be risky. Stockmarkets are volatile, which means that, just as they can fall quickly, they can also recover quickly – perhaps with little or no warning. If you have decided that equities are the right asset class for you, then moving out of them when you have already suffered a loss could mean missing out when they finally begin to recover. Moreover, inflation can erode the purchasing power of cash over time so, while you can be assured you will not lose the face value of money when invested in cash, it is not actually a “risk-free” option.

GO FOR QUALITY
During recessions and stockmarket downturns, established, high-quality and financially strong companies tend to bear up better than their newer or more debt-laden peers. A tough environment helps to separate the wheat from the chaff and struggling companies may be forced to cut their dividends or release negative trading statements. Holding quality stocks, therefore, could help you ride out some of the storm. It is also worth noting that, if the equity market is falling across the board, this provides a great opportunity to pick up quality stocks at relatively cheap prices.

ASSESS YOUR EXPOSURE TO SMALLER COMPANIES
Historically, as an asset class, smaller companies have been worse affected during a recession. You therefore need to be sure of your attitude to risk before you decide to take any significant positions in them. When things are going well, smaller companies can offer the possibility of greater gains than their larger peers – but when things are going badly, the losses can also be much greater. If volatility makes you nervous or if your portfolio is relatively small, you could consider reducing your exposure to smaller companies and perhaps reinvest into some less adventurous choices.

CHECK IF YOU ARE OVEREXPOSED
Different industry sectors tend to perform well at different stages of the investment cycle. During an economic slowdown, some companies are less sensitive to the effects of that slowdown because demand remains largely unaffected – for example, companies in sectors such as food retailing, pharmaceuticals and utilities. Consequently, these tend to hold up better than, say, leisure companies and housebuilders, which depend on households having money to spare. It is usually worth holding onto high-quality companies, regardless of short-term hitches, but this might be a good time to ensure you are not overexposed to any one sector or region.

THINK LONG TERM
A recession is commonly defined as two consecutive quarters of negative growth (as measured by gross domestic product or GDP). Six months in the average life of a portfolio, however, is hardly a great deal of time. Even if we allow for the negative behaviour of markets before and after the publication of these sets of data, six months is not long compared with, say, the 20-plus years over which we plan for our retirements. Interestingly, the figures tell us that with a couple both aged 65, there’s a 0% chance that one will live until 92! If your portfolio continues to meet your personal criteria and is well diversified, a recession should not cause you to change plans. Sometimes doing nothing can be the best course of action.

THIS IS A FIRE DRILL – NOT A FIRE
Remember the saying ‘If you can keep your head when all about you are losing theirs…’ by Rudyard Kipling? Market downturns are a great practical example of this maxim. A fire drill is a good thing – the fire might never actually occur but, if the worst happens, at least you can be confident you have taken all the appropriate precautions. The real trick is to make sure you plan your portfolio properly at the outset, with the help of an expert. Then, when a downturn strikes, you can stay calm and review your situation sensibly and with confidence, rather than be panicked into any radical and potentially non-profitable reactions.

We hope you found the information in this guide useful and informative. If any of the points are of interest or you would like to discuss your own situation in more detail, please get in touch.

Common Investment Mistakes

By Chris Webb - Topics: Investment Risk, Investments, spain
This article is published on: 15th March 2019

15.03.19

1. Failing to plan
I believe the most common mistake is not having any type of financial plan along with clear investment objectives. Research has shown that investors who plan for their financial future are more confident, relaxed and optimistic about the future. They tend to save more and have less financial anxiety.
Expert advice is essential to financial planning. Not discussing your investment needs with a professional can have a negative impact on your overall results. Financial advisers help you to identify your financial needs, analyse your level of risk, and recommend appropriate solutions. They are there for your financial journey, offering advice and guidance to smooth the path ahead.

2. Not understanding what your risk profile is
It is important to analyse and understand your tolerance for risk. As an investor, you will typically fall into one of the following categories:

Defensive / Conservative – you are very risk-averse, and not comfortable with watching markets fluctuate as they do. You do not want to risk your capital for a potential gain.

Balanced – you have some appetite for taking risk and appreciate how markets can fluctuate daily. You can tolerate moderate levels of volatility in order to get a better return but again you want security with your capital.

Aggressive – you are looking for high returns and you are not concerned about short-term volatility. You probably have a long time to invest, so any capital loss in the short term can be caught up in the future and you are fully aware that what happens one year shouldn’t affect your long-term goals.
Understanding your risk tolerance will help you choose investment goals that are appropriate for you. It will shape the investments you make in your portfolio as part of your financial plan.

3. Lack of understanding
It sounds obvious, but you should never invest in anything you don’t really understand. If it’s been explained and you still don’t “get it” then ask more questions and don’t move forward until you do. If you fail to understand it properly then you should look for an alternative. If you are going to invest in a specific stock, make sure you take time to learn about the company and do enough due diligence. If you’re looking at various types of funds, then make sure you understand the geographic and sector allocations within the funds. Make sure each choice is within your risk tolerance, this information is readily available to you.

4. Overlooking fees
Investors often focus on a fund’s performance, which is very important, but they overlook fees when considering how well their investment has done. It is important to be aware of and understand the fees on your investment. Fees are deducted from the performance figures to give you the net result. Some investment funds have entry and exit fees, performance fees, as well as standard management fees. Reducing these fees is a simple way to get more out of your investment.

You can measure the fees on a fund by referring to the fund’s Total Expense Ratio (TER), which is a measure of all the fees for that fund expressed as a percentage.

5. Getting diversification wrong
Diversification simply means selecting not putting all your eggs in one basket. It is a simple way of creating a portfolio that includes different types of investments to reduce your overall risk. Investments don’t perform in the same way during certain economic conditions. When one investment doesn’t perform well, other investments may outperform to give you overall good returns.
A typical portfolio will contain a blend of equities, property, bonds and cash based on your investment risk profile:

Equities – Often provide the highest growth levels over the longer term
Property – Protects against inflation and gives an alternative to stock market returns
Bonds – Usually lower risk than equities, and therefore usually a lower return over the long term
Cash – Provides security and stability within a portfolio. It has the lowest long-term return potential, effectively zero.

6. Having unrealistic expectations of investment returns
The most important expectation for any returns should be aligned to your own financial plan, which is unique to you. The investment return you are looking for will differ greatly from that of other investors, as their requirements, risk profile and time horizon will be different.
You also must look at what is happening in the wider economy. The investment returns you can expect will be different depending on market conditions.
The most important measure of an investment return is whether your investment is keeping up with inflation. Regardless of the risk profile, your investment should keep pace with inflation to protect the “real” value of your money. This won’t necessarily happen every year but over a certain time horizon, the average figures should do.

7. Withdrawing your investment at the wrong time
Investors tend to withdraw monies from the market for two main reasons: they need money, or they are reacting to market movements. Making a withdrawal because you need access to money comes back to the initial financial planning that was conducted. With a well-defined plan in place you will have ensured there was enough money readily available, meaning you don’t need to exit your investments when it may not be the best moment to do so. Reacting to market movements, maybe due to anxiety about the market performance is a common investment mistake. Many investors sell when the market is at a low point. They are only realising those losses, making it more difficult to recoup them, as they might if they had stayed invested. When markets are down and your investment is stagnating, it is difficult to stand your ground; that’s human nature. It is important to remain focused on the bigger picture. Markets generally move in cycles and will recover, given time. Remaining in contact with your financial adviser will help you understand the markets and what to expect in times of volatility. At no point should your adviser be recommending any investments that don’t fit within your risk profile.

8. Not monitoring your portfolio appropriately
Many people make an investment and then go one of two ways. They either decide not to look at the performance figures or worse monitor it too regularly and feel the need to make short-term reactive changes. These changes are rarely beneficial; it is “time in the markets and not timing the markets” that counts.

Your investment profile changes over time, which means how you feel about your investments in your 20’s or 30’s will be very different to how you feel in your 40’s and 50’s. Whilst it’s important to review the performance of your investment, it is also essential to review your risk profile as time goes by.

9. Waiting too long to invest
The younger you are when you start investing, the better off you will be. Waiting too long means that you miss out on the significant benefits of compound interest. Essentially, starting younger allows you to look for more opportunity and benefit from market cycles, possibly take on more risk and it build up discipline to continue to save in the future. See my alternative articles on compound interest and starting early for greater detail.

10. Not recognising that time affects the value of money
The main principle of investing is to make a positive return in order to increase the purchasing power of your investments in the future. Many savers make the mistake of keeping their money in traditional bank accounts that pay them rates well below the rate of inflation. Typically a high street bank will be offering anywhere from zero to 1% maximum on a savings account. In reality you are losing money if it is kept in the bank! It is best to invest your money while also making sure that your investment keeps up with inflation.

GUIDE TO GROWING YOUR INCOME

By Robin Beven - Topics: Inflation, Investment Risk, Investments, spain, wealth management
This article is published on: 10th March 2019

10.03.19

A NEW ERA FOR INCOME STRATEGIES

Income investing has moved into a new dimension. In the past, income-generating strategies were largely restricted to cash and fixed income so that, to a large extent, investors had to accept the need to sacrifice the opportunity for capital growth in order to obtain a higher yield.

Times have changed and now, an income strategy does not necessarily mean you have to accept a hit to your portfolio’s value – especially if you are in a position to take on a bit more risk with your capital.

There are plenty of choices of all persuasions available to income-seeking investors and this guide sets out a number of the available options.

FLEXIBILITY AND VERSATILITY
For many investors, an income-generating strategy forms the core of their approach. Some want a portfolio that will provide a regular income stream for them to spend. For others, an income-based approach is a consequence of their attitude to risk, rather than an instigator of their strategy, and these investors might choose to reinvest their income to boost their portfolio’s total return over the long term.

Still others might have a core investment strategy that focuses on capital growth, complemented and diversified by an income-generating segment.

Every investor will have their own unique needs – for instance, they might choose to draw the income or to reinvest it for the long term. However, an income strategy can easily be adapted to meet each investor’s changing circumstances as time moves on.

A WORLD OF CHOICE
Whatever your investment risk profile, there are a wide range of asset classes from which to formulate a diversified income strategy – from government and corporate bonds, through UK and global equities to property.

Please click on the headings below to read more:

FIXED INCOME (BONDS)

Fixed income investments provide a stable and predictable level of income many investors find reassuring. They pay a set rate of interest that does not change, regardless of the prevailing economic environment, and also have a fixed repayment date. Bond prices are influenced by fluctuations in interest rates and the rate of inflation. In addition, corporate bond prices are also affected by individual company or industry newsflow.

Changes to UK base rates, which are set by the Bank of England’s Monetary Policy Committee, will affect the level of interest paid on cash in a UK bank deposit account, but base rates will not affect the level of income paid on a bond. In an environment of rising interest rates, bonds become less attractive, because investors can more easily achieve a competitive rate of interest from their cash deposits.

Similarly, low interest rates increase the appeal of bonds, as it becomes harder for savers to generate an attractive level of income from their cash deposits. Funds investing in such bonds are freely available, of course, care should be taken in choosing the best-suited one that fits-the-bill. See, “Collective Bond Funds, below.

CASH: NOT NECESSARILY KING

A cash deposit account might be the first port of call for many investors who want to generate an income. In an environment of low interest rates, however, it is difficult for savers to generate a meaningful return from their cash deposits. How times have changed! Furthermore, the impact of inflation will erode the purchasing power of their capital over the longer term.

GOVERNMENT BONDS

As the name suggests, government bonds are issued and underwritten by a government. UK government bonds – also known as ‘gilts’ – may be regarded as lower risk investments as, to date, the UK has never defaulted on its debts.

However, because they are a low-risk investment, the level of return available on gilts tends to be relatively low and they offer little protection against inflation. Index-linked bonds are the only exception – they pay a rate of income that is partly influenced by the rate of inflation. If the rate of inflation rises, the level of income they offer is adjusted upwards while, in an environment of falling inflation, the level of income paid will fall.

CORPORATE BONDS

Corporate bonds are issued by individual companies as a way of raising capital for their businesses. As with gilts, a corporate bond is redeemed at a predetermined date for a fixed sum and, during the life of the bond, the investor receives a fixed amount of interest.

Corporate bonds carry a higher level of risk than UK government bonds but that level will vary from one company to the next. High-quality companies are regarded as relatively low-risk, whereas lower-quality companies are believed to have a higher risk of defaulting on their obligations to bondholders.

The level of income paid to bondholders tends to reflect the level of risk involved. Investors who take on a riskier investment are compensated for that risk with a higher level of income. If a company should go bust, bondholders rank higher than shareholders as the company has to meet all its obligation to its creditors – including bondholders – before it considers its shareholders.

It is important to understand the risks of investing in corporate bonds. There can be a substantial difference in quality between one corporate bond and the next. Many of the large fund management houses undertake research to evaluate the potential risk of each bond, but they also often rely on research produced by credit-rating agencies such as Standard & Poor’s, Moody’s and Fitch. These companies assign a rating to companies that offer bonds. A high credit rating indicates the company is believed to have a low risk of default while a lower credit rating suggests the company presents a higher risk of default.

Bonds may be divided into two classes – ‘investment-grade’ for the highest credit ratings and ‘sub-investment-grade’ (also known as ‘high yield’ or sometimes ‘junk’) for the lower grades. A lower credit rating means a higher level of income paid, in order to compensate for the extra risk involved. Generally, investment-grade bonds are seen as a relatively lower-risk asset class, while higher-yielding sub-investment-grade bonds are regarded as higher risk.

COLLECTIVE BOND FUNDS

Collective funds that focus on government and/or corporate bonds will invest in a managed portfolio that can help you to reduce your risk by diversifying across a range of investments, rather than owning just one or two. Some funds will focus on a specific area of the market while ‘strategic’ bond funds are ‘go-anywhere’ portfolios, whose managers take a view on the bond market and focus on the areas they believe offer most value. If you are interested in adding an element of additional risk to your overall portfolio, therefore, strategic bond funds can offer an introduction to the sub-investment-grade arena or to overseas opportunities.

EQUITY INCOME

Over the long term, equities offer the potential for superior returns compared with many other major asset classes. An equity income strategy focuses on shares in companies that pay consistently high and rising dividends and typically aims to generate a consistent, above-average income stream, accompanied by the potential for capital growth over the long term.

Dividends are paid – usually in cash – by companies to investors and are taxable. By law, dividend payments must be paid out of the company’s profits or from profits generated in previous years. Companies are not obliged to pay a dividend, but a high dividend payout can provide an incentive for investors to take a stake in the company.

A company does not have to pay a dividend, and many, particularly small- and medium -sized ones, prefer to reinvest surplus cash into the business. The profits of a relatively young company, for example, can be unpredictable as it seeks to establish itself – and any profit it does make will probably be used either to repay start-up costs or as a reinvestment to help growth. Even as a company grows older, its management might decide to retain profits to finance debt, expansion or product development.

Longer-established companies tend to pay higher dividends – hence an equity income strategy tends to focus on large, high-quality companies, rather than smaller, younger firms. Nevertheless, a small but rising proportion of dividend payouts are coming from medium-sized and smaller companies.

Even large, well-established companies can fall on hard times, however, and the management might decide to shore up their firm’s finances by reducing its dividend payout or cancelling it completely. Furthermore, a diminished or cancelled dividend will undermine confidence in the company and its share price is likely to be negatively affected, cutting the value of your capital investment.

OVERSEAS OPPORTUNITES

While there is a longstanding culture of dividend payments among UK companies, a growing number of companies in overseas markets are returning value to their shareholders in the form of dividend payouts. The US has, for example, traditionally been home to a core of large companies that pay high dividends. More recently, Asian companies have sought to attract and meet the needs of international investors by focusing on dividend payouts, with countries such as Hong Kong and Taiwan establishing solid dividend regimes in this exiting region of the world.

A global equity income approach has become increasingly achievable, and many investment houses have launched funds to tap into this trend. Equity income investors now have much greater scope to diversify across a broadening range of countries by investing in collective funds.

EQUITY INCOME FUNDS

An equity income fund invests in the shares of companies that pay consistent and attractive dividends and then combines the dividend payouts in order to pay a regular income to investors. Diversification across a broad range of companies reduces the danger a single company’s decision to cut or cancel its dividend might drag down the overall yield of the portfolio.

PROPERTY

As an asset class, property can polarise opinion. It is often viewed as a relatively illiquid asset in that it can be time-consuming and expensive to trade. Some experts also believe investors are already overexposed to the property sector if they own their own home or a buy-to-let property, or if they are invested in commercial property through their business. However, property can play a part in an income portfolio for those investors who are not overexposed or who are attracted to its potential benefits.

RESIDENTIAL PROPERTY

‘Buy-to-let’ is a popular means by which investors gain exposure to residential property. Traditionally, buy-to-let has enabled investors to generate income through rents negotiated on short-term tenancy agreements. More recently, many buy-to-let investors have chosen to use their rental income to finance their own mortgage payments and to wait for the bigger profit in the form of a capital gain when the property is sold. Of course, as some investors have found to their cost, there is no guarantee a property’s market value will rise over the long term as we’ve seen along the Costas.

COMMERCIAL PROPERTY

In contrast, commercial property investment focuses principally on the generation of a high and consistent income that is generated through rents. Whereas residential leases typically operate on a series of short-term agreements, however, commercial leases tend to be much longer – perhaps 10 or 20 years.

Income from commercial property can derive from a variety of different sectors – ranging from City real estate, through shopping centres, to industrial parks and warehouses. Each sector commands a different level of rental yield and will react differently to the prevailing economic climate.

COLLECTIVE PROPERTY FUNDS

Direct investment in commercial property is very expensive but smaller private investors can access the asset class through diversified collective funds. Diversification helps to reduce the extent to which the loss of a tenant from one particular property might negatively affect the overall performance of the fund.

REAL ESTATE INVESTMENT TRUSTS

A real estate investment trust or ‘REIT’ is a company that manages a property portfolio on behalf of its shareholders. A REIT can contain residential and commercial property. Its profits are exempt from corporation tax, but it must pay out at least 90% of its taxable income to shareholders.

KEY FACTORS TO CONSIDER BEFORE YOU INVEST

Before deciding on the right blend of assets to generate an income stream, you should consider the following factors, which might affect the decisions you make:

INFLATION
The rate of inflation measures how the price of a basket of goods has changed over time. So, for example, if the cost of running your home increases by 5% in a year, you will need to earn 5% a year more to pay for the same level of comfort.

If you are aiming to maximise the income from your investments in order to pay for everyday expenses, you should consider the impact of inflation and – particularly over the longer term – whether you require a specific form of protection against inflation.

However, if you decide to invest in a fixed-rate investment – for example, a gilt or a corporate bond – be aware inflation will definitely have an impact. As an example, a fixed rate of 4% is attractive when the rate of inflation is 2%. However, if inflation rises to 5%, that return of 4% becomes less appealing.

RISK
Investment risk is a very personal thing as it can mean different things to different people. Some investors are not prepared to tolerate financial loss in any form while, at the other end of the spectrum, some investors most fear missing out on an opportunity. For still other investors, risk means not being able to meet future financial commitments.

Before formulating an investment strategy, every investor needs to be clear about their investment goals and their tolerance for risk. No investment is risk-free – the lowest-risk investments might guarantee the preservation of capital and/or regular income payments, but they cannot necessarily protect your money against the erosive effects of inflation.

Ultimately, in order to enjoy an absence or reduction of risk, a cautious investor has to accept the prospect of lower returns. Equally, an investor who is willing to pursue higher returns will also have to accept the possibility of increased potential for risk to their capital.

DIVERSIFICATION
Since every source of income carries some form of risk, it pays to diversify your portfolio across a range of different asset classes. Diversification helps to reduce the possibility that especially weak (or even strong) returns from a particular investment or asset class might have a disproportionate effect on the overall performance of the portfolio.

There is a world of choice out there for income investors. Whether you are a more cautious person or someone willing to take on higher levels of risk in the hope of achieving, ultimately, higher returns, please do get in touch so we can help you find a solution that meets your individual needs.

BEWARE: FADS AND FASHIONS

By Robin Beven - Topics: Investment Risk, Investments, spain, wealth management
This article is published on: 5th March 2019

05.03.19

The best way to start diversifying your portfolio and to blend together the myriad options in a way that best suits your personal circumstances is to speak to a professional adviser. Not only are they able to offer vast experience of the investment market, but they can also advise on the most suitable structures and products for your investments to match your individual needs.

Nowadays there are many more esoteric investment choices than ever before to capture the attention of potential investors – but they can create unpalatable risks if bought alone.

A GUIDE TO DIVERSIFICATION
This guide is designed to help start you on the road to building an investment portfolio. With a little groundwork, a balanced, well-diversified portfolio ought to be able to weather short-term storms and fluctuations. It should smooth out the various peaks and troughs and help you meet your financial objectives over the longer term, without causing too many shocks along the way.

Diversification is a much-used term in the financial world and one that can be employed at many levels. Most fund managers claim their aim is to diversify risk by buying a range of different investments, even when the area they specialise in is quite small. A smaller-companies fund manager, for example, with perhaps only 500 potential investments from which to choose, would suggest their hand-picked selection of 70 holdings offers diversification.

At the same time, it is my job as a financial adviser to help you diversify your portfolio by guiding you through the range of different assets, allocating your portfolio across the different options and, ultimately, helping you meet your objectives while staying within a level of risk that is acceptable to you.

When looking to invest, it is important to acknowledge that, no matter what the type of asset, there will be risks involved. These risks are made up of two principal aspects: market risk (the impact of economic factors, say, or government changes) and investment risk (the uncertainty and volatility of returns). Diversification can help to reduce both of these.

Market risk cannot be eliminated but it can be reduced by spreading a portfolio over a range of different asset ‘classes’ that should behave differently in different market environments. By broadening a portfolio’s exposure across a range of asset classes, you raise your chances that, at any one time, some assets will be rising while others may be falling – and the two movements should, to an extent, offset each other.

The same holds true for investment risk. While, for example, all shares are similarly exposed to investor sentiment towards the stockmarket on which they are listed, the investment-specific risk will vary from company to company. This means the share prices of each company will not move in the same direction, by the same amount and at the same time. Each share plots its own path, resulting in a smoothing of returns.

Investing across different asset classes sounds like a good move but you should also be aware of the other side of the coin. By diversifying your portfolio, you will also lower the level of return you would have received if you were fortunate enough to be invested only in the best-performing asset class. The skill comes in balancing your asset allocation so the relative payoff matches your own attitude to risk and reward.

This might lead you to ask how diversified your portfolio should be and the answer will depend greatly on your attitude to risk. Given the lessons of history, we can with some confidence assume nobody can accurately predict the performance of markets to the degree they will know exactly where to be invested at any point in time.

If this were possible, we would of course all be millionaires. Therefore, in effect, we use diversification to hedge our bets. The extent to which we need to diversify depends on how much volatility we feel able deal with – put simply, how much we tend to worry or panic when the value of our portfolio starts to fall.

SPREAD YOUR EGGS ACROSS MANY BASKETS
Any portfolio can be diversified. Do remember, however, when you diversify your portfolio, risk is not the only thing you will reduce. You will also lower the level of return you would have received if you had been fully invested in just the best asset class. The skill comes in balancing your asset allocation so the relative payoff matches your individual attitude to risk and reward.

Investment Advice for Expats

So that is the theory. In practice, once you know what risk you can deal with, the effectiveness of your diversification strategy will depend on the degree of ‘correlation’ between various elements in a portfolio – that is to say, the extent to which different investments move in relation to each other – and combining them appropriately so the overall movement is in line with your expectations.

Government bonds, for example, are perceived as being a safer haven when markets are rough and equities are volatile. Property, on the other hand, has tended to protect against inflation over the long term, while also not moving in line with equities. Then there is cash, which depends entirely on interest rates for the level of income generated. To a greater or lesser extent, each asset class responds differently to external influences such as interest rates and inflation.

DIVERSIFY WITHIN ASSET CLASSES
Within each asset class, there are further opportunities for diversification. Within equities, for example, the returns of some companies versus others are not related in any way. Generally speaking, there is little correlation between the performance of, say, biotechnology stocks and utilities – such as water and electricity companies – as the market forces driving these two sectors can be completely different. However, as both types of company are listed on the stockmarket, they are both exposed to factors that affect the overall equity market, such as the impact of a government’s monetary policy, or general investor sentiment.

DIVERSIFY BY GEOGRAPHY
Geography also allows some of the impact of stockmarket movements to be dissipated, as your portfolio is not only exposed to the economics and government decisions of one country. Different markets are affected by different economic and financial factors and are therefore not perfectly correlated with one another. If the Far East performs badly, for example, it does not necessarily mean European stockmarkets will have fallen. And within Europe, there is the possibility of further geographical diversification, as the performance of each underlying European stockmarket will not necessarily be aligned with that of its peers.

Even so, all equities are capable of being affected by global influences and particularly when investor sentiment is involved – just consider the boom in telecom, media and technology stocks in the late 1990s and their subsequent collapse in 2000. The effects were global – although markets such as the US, which had greater exposure to these sectors, were more heavily affected, almost all countries suffered from the somewhat depressed equity environment during the bear market that prevailed through to early 2003.

DIVERSIFICATION WITHIN BONDS AND PROPERTY
The same sort of thinking can go for fixed interest investments and property. Government bonds, for example – and particularly those of more highly-rated countries such as the US or the UK – do not tend to behave in the same fashion as the so-called ‘sub-investment-grade’ corporate bonds that are issued by less financially secure companies. Within property, meanwhile, even commercial and residential property are not always correlated in the returns they offer but both can be illiquid.

MAKING YOUR DECISIONS
Most investors should in general start by making a detailed assessment of their attitude to risk. If you could not live with the fluctuations of the stockmarket and would be very worried by the sight of prices going down, then you are a lower-risk investor and your portfolio should be biased towards correspondingly lower-risk assets, such as cash and perhaps some fixed interest.

If on the other hand you are comfortable with some volatility and are investing for the longer term – at least five years, say – you might decide to include a small element of equity exposure. Then again, if you are at the opposite end of the scale – a high-risk investor, who is perfectly happy with the ups and downs of markets – then you would most likely have the majority of your portfolio in equities.

USING COLLECTIVE INVESTMENT FUNDS
Collective investment funds are inherently diversified to some degree as they hold a number of different investments, generally in a particular market, industry sector or asset class. You could, to pick just a handful of examples, choose an emerging market equity, global technology, government fixed-interest, UK corporate bond or North American smaller companies fund.

As collective funds tend to hold 50 or more stocks, they automatically offer more diversity than just one or two stocks from these markets. By selecting funds, you hand over the job of stock diversification to expert fund managers, leaving you and your adviser to concentrate on the other main decision elements – asset class and geography.

If you are making your first steps into investment, or have only a small amount to invest, you can hand over even more of the decision process by targeting the broader portfolios of global equity or managed funds. Within these, the fund manager will diversify not only by type of company and level of exposure, but also by geography – and these portfolios usually involve some element of asset allocation as well.

Please note: The value of any equity, bond or property investment can go down as well as up and you may not get back the amount originally invested. Property is a specialist asset class and expert advice should be sought before making a decision to invest.

“the effectiveness of your strategy will depend on the extent to which different investments move in relation to each other.”

BRINGING IT ALL TOGETHER
When considering a portfolio’s proportions, many investors pursue simple strategies such as, for example, a ‘core & satellite’ approach. Typically, the ‘core’ portion would make up the larger part of your portfolio since it should be relatively less volatile and provide a solid base on which to build. The satellite investments would then add ‘spice’ to your portfolio by taking smaller positions in higher-risk regions, asset classes or industry sectors.

A lower or medium-risk investor might concentrate their core portfolio in cash, bond and property funds, or perhaps in an equity fund linked to larger, more highly regulated stockmarkets such as the US or the UK.

However, “multi-asset” funds are becoming the first choice for investors, be they lower, medium or higher risk investors, because the fund manager runs the fund for you without the distraction market noise.