Making a Will in Switzerland
Wills in Switzerland
As a general rule, the Estate of anyone residing in Switzerland is governed by Swiss material law, especially by the relevant provisions of the Swiss Civil Code, which definitely apply in the absence of a Will, notwithstanding the deceased’s citizenship, personal status or religion.
Swiss law, which was influenced by the Napoleonic Code, provides for various solutions, either mandatory or optional, and includes the so-called rules of “forced heirship” – according to which some heirs (the spouse, the children and, in some cases, the parents of the deceased) are in any event entitled to a minimum portion of the Estate (similar rules apply in most countries on the continent and in Scotland).
Choice of Law
According to the Swiss Federal Law on Private International Law, foreign residents in Switzerland may, by making a Will, direct that their Estate be governed by the law of their country of origin and, thus, avoid all or some of the rules set by Swiss law.
This choice of law (that is not permitted in the event of double citizenship including Swiss citizenship) does not affect the jurisdiction of the Swiss authorities and, depending on the deceased’s Canton of residence, inheritance tax must still be paid in Switzerland (taking into consideration the deceased’s Estate on a worldwide basis).
As regards American citizens, it may be wise to specify the law of the relevant US State (with which they have some connections, e.g. California), while Brits should refer to “English law” (or “Scottish law” for the Scots) rather than UK or British law since it does not exist as such.
Making a Will
If made in Switzerland, the Will must have the form prescribed by Swiss law. As a rule, it must either be entirely handwritten, dated and signed by the “Testator”, or made before a Swiss Notary Public (where the Will is actually drafted by the Notary and signed by the Testator in the presence of two witnesses who are often the Notary’s assistants).
Typed Wills or so-called “joint” Wills (one single Will made by two people) are prohibited and void.
Handwritten Wills may be drafted in any language, while Wills made before a Notary Public are usually in the local official language (i.e. in French in the French-speaking area of Switzerland, such as Geneva or Vaud).
Although it is not legally required in Switzerland, when a handwritten Will may predictably need, at some point, to be proven in the US, it is worth asking two witnesses to certify the Will at the time it is signed by the Testator, as this would be expected by a US probate Court.
Making a Will before a Notary Public is especially advisable when the mental capacity of the person making the Will could later be questioned (due to illness, age, potential influence of other people, etc.).
Usually, Wills made with the assistance of a Notary Public are kept by the latter who must send them to the competent local Court or authority upon the testators’ death. When Wills are made privately, it is wise to leave them in some place where they will be found easily, but they can be lost or destroyed. It goes without saying that any Will may, at the Testator’s discretion, be changed, amended, replaced or cancelled at any time by their authors and mere photocopies are not effective.
Appointment of an Executor
Under Swiss law, when there is no Will, the Estate is usually handled by the heirs (who must act jointly).
An Executor (or more than one) may however be appointed by Will and, upon the Testator’s death, will be required by the competent local Court (the Judge of the Peace in Geneva and Vaud) to accept this mission. The Will may include some specific instructions to the Executor who is generally entitled to deal with the Estate without any restriction.
The appointment of an Executor in a Will (and a possible Successor Executor – contingent in the event of the death or incapacity of the first one) is recommended when some assets are held abroad (especially in the US, in the UK or in other common law jurisdictions), when some of the heirs are under 18 years of age or when the situation may prove complex for some other reasons.
Where no Executor was appointed, the local Court may, under some circumstances, appoint an Administrator to take care of the Estate and to protect the heirs’ interests, especially if they are not all known.
Anyone finding a deceased’s Will in Switzerland must send it to the local authorities. Probate proceedings include the notification of a copy of the Will to all the heirs and beneficiaries and, depending on the circumstances, to any relatives possibly entitled to a portion of the Estate.
If the heirs suspect that the deceased was insolvent, they may reject the inheritance within 90 days. Alternatively, they may, within 30 days, apply with the local Court for a formal inventory to be drawn up (at their own expenses) and only accept the inheritance accordingly.
When the heirs accept (even tacitly) the inheritance, they immediately become the successors of the deceased for all the Estate assets and liabilities. They must act jointly and they are severally responsible for the deceased’s debts and obligations (including outstanding contributions or taxes owed in connection with undeclared assets).
Usually, when the deceased was a foreign national, Swiss Courts require that the heirs submit a formal statement to be issued by a Notary Public, in accordance with information that must be given by two witnesses who have no interest in the Estate and who must confirm the deceased’s family status, along with a list of all relatives who may be entitled to the Estate. In the event of any doubt or if no one is able to provide the requested information, the Court may order that a formal notice be published in the official gazette, allowing any potential heir to challenge the Will within 1 year.
In some cases, the heirs also have to submit a legal opinion confirming the solution resulting from the application of some foreign rules (if selected in the Will) that are sometimes regarded as rather “exotic”.
Once the situation is clarified (and, where applicable, after a fiscal inventory is filed and inheritance tax paid), the Court issues a Certificate of Inheritance naming the heirs and allowing them to fully access the Estate assets and arrange for these to be distributed amongst them.
- Non-Swiss can (should) ask for their Estate to be governed by the law of their home country and state the country (i.e. will therefore avoid Napoleonic Code).
- They must clearly state in the Will that this is what they want to do, g. “I direct that my Estate shall be governed by *** law”.
- If it is not made before a Notary Public, the Will must be handwritten and married couple must write a Will each (so-called “joint-wills” are invalid in Switzerland).
- A handwritten Will does not have to be witnessed and it should be kept in a safe place.
- The appointment of an Executor (or more than one) should be considered.
- It is helpful to attach a list of worldwide assets such as the name of the bank, branch and account number in which accounts are held, details of life policies or any other assets, as well as the contact details of people who could inform the heirs (such as Attorney, Financial Advisor or Accountant).
Creating or Updating your Will / Estate Planning – The Right Questions
If you died today, how would your Estate be handled?
- Is there a Will and where is it?
- Which debts should be eliminated?
- Which assets should be sold (such as business or real estate)…
- … and which ones should be kept (such as heirlooms)?
- Who is to receive which assets (financial and sentimental)?
- Are there any distribution clauses (e.g. to give your watch to your son/daughter when they reach age 18)?
- Who is to take legal responsibility for any children under age 18?
- Who is to assist the heirs and to ensure that your instructions will be implemented?
- Did you know that, if you are a US citizen, Swiss banks can be required to freeze your accounts until all US taxes are declared and paid, thus a joint account could be frozen?
- If a joint account holder passes away, the account can be frozen until Swiss taxes are cleared up, with the surviving spouse only able to present bills for living expenses to be paid.
- If a married couple has children and one of the parents dies without leaving a Will, the child/children are deemed to inherit 50% of the Estate and depending on the Canton, may have to pay Inheritance Tax. In the Canton of Vaud, children may however be “gifted” up to CHF 50’000 per year each – tax free.
Careful individual planning allows to identify and solve a number of issues like these.
We offer a free initial consultation should you wish to discuss these or other financial planning matters and should legal advice be required, we will work in conjunction with excellent English-speaking Attorneys and likewise have access to excellent English-speaking Accountants if pertinent.
This notice is for information purpose only and does not constitute legal or other professional advice. Any specific queries should be looked at individually with a professional advisor. This document may not be disseminated or published without written authority.
How to protect yourself in uncertain times
Wealthy individuals have a lot more in common than just their wealth. Ambition, skill, patience, consistency and a strategic game plan are all vital to ensure success. Keeping an eye on the end goal and never giving up have been key to reaching greater heights.
Only a minority of the population become extremely rich, as the likes of Warren Buffet, Richard Branson or Paul Getty, but this does not mean that we can’t enjoy a comfortable lifestyle with luxuries and freedom.
World stock market performances over the last 60 years reveal that the enduring trend is up and it is evident that any sharp downward movements often coincided with world calamities. Even with the peaks and valleys, stock market performance over time still yields inflation-beating returns for those who remain loyal.
Despite this, investors are concerned about the fluctuating Gold price and negative impact of the mining and metal strikes in South Africa and the developing Russian/Ukraine crisis which is already a cause for alarm – Russia is now talking of disallowing air travel over its skies to the East thus hampering tourism, the lifeblood for many of the Asian Tiger’s economies.
Hearing the words ‘hang in there’ is not enough reassurance for those trying to save for retirement or financial independence. This in turn affects investors who feel the pinch whether it be through investment of stocks directly through their own portfolio comprising retirement annuities, pension plans, QROPS, unit trusts or any other long term investment products which are exposed to the share market.
The critical questions is …
“How you manage your income and investments to shield against market volatility?”
Well, there are basically two main strategies that need to be developed in order to provide an effective buffer against economic turmoil.
The first is effective management of income and the second is a well-structured investment strategy.
Effective Money Management
It is little wonder that rising interest rates cause such widespread concern when so many people and businesses are exposed to excessive debt. If you take an average small- to medium-size business owner, they will probably have an overdraft, two car leases, a home mortgage and perhaps credit card debt. In anyone’s book, this results in a big chunk of money to repay before the school fees have been paid or the life policy has been covered.
The first step to minimising the effects in uncertain economic times is to reduce debt. If you don’t have excessive debt, the impact of rising interest rates on your pocket will be negligible and it’s worth bearing in mind that if you have cash reserves, the higher rate will benefit you greatly.
Well-structured investment strategy
The consensus amongst investment experts is to advise individuals to construct an investment portfolio in order to take advantage of long term trends. If the long term structure of an investment portfolio is healthy, short term storms can be weathered.
The first defence against any volatility in the markets is diversification. What this means, is that investors need to ensure that their investment portfolio is structured in such a way that they have investments in different asset classes such as cash, bonds, property and equities.
Uncertainty and volatility are intrinsic to investment markets. For this reason, investment should be viewed as simply a means to having enough money to live the lifestyle that you would like to live.
An investment portfolio should remain unchanged during times of volatility, unless the factors upon which the construction process was based have changed.
Investors should not change a long term game plan based on short term volatility. Attempting to time the market based on short term movements only increases portfolio risk.
The best way to protect yourself from market volatility is to first reduce your risk, which can be achieved by reducing debt. By doing this, you will have a lot less to worry about if inflation forces interest rates up.
The next step is to ensure that your investment strategy has a long term view and a financial planner will be your best resource when setting up a long term portfolio.
If you realise from the above the importance of seeking proper professional financial advice involving risk classification and correct diversification, why not give me a call in order to facilitate a meeting where we can do this.
Precious metals and gold
Which of these has more value? Is there something better?
When it comes to hedging (protecting) against dollar debasement, few things have performed as well as gold. Having gold or unit trust gold funds could be said to be “preparing for the worst.”
Following the fairly recent global financial crisis, governments have adopted expansionary monetary policies by cutting interest rates and increasing the amount of money in circulation to keep their banks and indebted borrowers afloat. Even though the historical case for gold is strong and the price goes up, the raw supply and demand case for platinum and palladium might be even stronger.
Russia and South Africa currently hold 80% of the world’s platinum and palladium reserves and both are struggling to maintain output. In fact, global supply is becoming increasingly less as production declines in these two politically volatile countries. Strikes in South Africa have resulted in the loss of 550,000 ounces (14,174,761 grams) worth of production in the first quarter of this year. And the tensions along the Ukraine border threaten to trigger huge disruption in markets in Russia.
This instability in South Africa and Russia all but ensures that the platinum and palladium markets will see yet another supply deficit in 2014.
Regardless, demand continues to increase and is unlikely to come down soon. Primarily, these metals are used in catalytic converters, the mechanism in your car’s engine that helps reduce noxious gas output and helps to keep the air cleaner. As more and more cars hit the roads – particularly in developing nations – the demand for cleaner air looks set only to rise.
Do you have gold shares in your investment portfolio? Or Uranium or Platinum? Now is the time to look at exactly what assets make up your portfolio. After all, I am sure you want to cover all bases.
“The best time to invest is when you have money.
This is because history suggests it is not timing which matters, but time”
Sir John Templeton
The REAL effect of inflation
On a day-to-day basis, inflation isn’t necessarily something you spend a lot of time thinking about. However, occasionally, you might find yourself asking – what exactly is inflation? And how does it affect me?.
Inflation is simply a sustained increase in the overall price for goods and services which is measured as an annual percentage increase.
As inflation rises, every pound or euro you own purchases a smaller percentage of these goods or services.
The real value of a pound or euro does not stay constant when there is inflation. When inflation goes up, there is a decline in the purchasing power of your money. For example, if the inflation rate is 2% annually, then theoretically a £100 item will cost £102 in a year’s time and £121.90 in 10 years time.
After inflation, your money can’t buy the same goods it could beforehand.
When inflation is at low levels it is easy to overlook the adverse effect it has on your capital and the income it produces. Regardless of how things look today, the likelihood is that the price of all the goods we buy and services we use will be higher in the future.
Inflation does not reduce the monetary value of your capital, a pound is still a pound and a euro is still a euro, but it reduces the “real” value. It erodes the spending power of your money, potentially affecting your standard of living.
The chart below details the effect of inflation over a 15 year period, 1998 to 2013. It is easy to see that leaving money exposed to inflation risk and not attempting to beat it and achieve higher growth is a no win situation.
Many clients will say that investing is a risk (see my alternative article to risk), and of course there is always an element of risk but leaving your money in a low rate bank account, open to inflation risk, is surely the riskiest option…….you can’t win !!!
If you had left your money open to the effects of inflation between 1998 and 2013 then it would have lost 35% of its purchasing power.
As statistics prove we are living longer now which means that we can look forward to a longer retirement period therefore the impact that inflation will have on your finances needs to become a prime consideration.
An Inflationary Tale
An Inflationary Tale
Inflation is a complicated concept. It’s not easy to understand but if ignored, your money will slowly and stealthily reduce. As a teenager growing up in the 70’s I would hear the newscasters talk about inflation and price controls yet could never tell if it was a good or bad thing. Interest rates were going up as were house prices and income. This had to be a good thing I thought but little did I know!. What I learned later in life as I studied inflation is that, like most things, inflation is a double-edged sword. There are winners and there are losers. It is good for some and bad for others. As you read this tale focus on the two main concepts about inflation. Learn what it is and what it means to an investment portfolio.
What Does The Word Inflation Actually Mean?
Type the word “inflation” into a search engine on your computer and you will probably get information informing you that inflation is “A rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects an erosion of the buying power of your money – a loss of real value. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.” If you are like me and read the above definition you are thinking blah, blah, blah, blah, blah. So since the objective of this Newsletter is to keep things simple, let’s just translate this to what it means to you as an investor.
I like to think of inflation in terms of what $100 can buy in the future if I don’t invest it today. Let’s say, for example, if I make 0% rate of return on my $100 bill because I either put it under my mattress or buried it in the ground or kept it in a safety deposit box and then a few years later I want to know what it can buy. This is what inflation means to the investor or consumer. What that $100 can buy is called purchasing power and purchasing power is directly proportional to the rate of inflation. The following table shows what $100 un-invested can buy at different inflation rates over different time periods. I call it my “Mattress Investing table” because it teaches us that you can’t put money under your mattress unless you want to guarantee that you will slowly erode the value of your money.
(The Loss of Purchasing Power Associated with Not Investing $100.00)
|Inflation Rate||5 years||10 years||15 years||20 years||25 years||30 years|
How should an investor read this table?
Investors should understand that if they keep money in a mattress for 15 years and the inflation rate over 15 years is 5% per year their $100 can only buy $46.33 worth of “Stuff” 15 years later. If inflation were to average 7% for 30 years their $100 could only buy $11.34 worth of “Stuff.” I know it’s silly to think that anyone would keep their money in a mattress but the reason I use the table above is because it illustrates the important concept about inflation which is loss of purchasing power. Inflation in and of itself is meaningless. What matters to people is what inflation causes which is the loss of purchasing power. As an example, when I get in my car to drive I have a rudimentary notion of how the engine functions. People that know me know I’m not mechanically inclined. I do however know how the steering wheel works. To an investor, inflation is the engine while purchasing power is the steering wheel. You can be completely oblivious to how an engine works and still be an excellent driver. So, if you are so inclined you can spend a disproportionate amount of time studying how the engine works or the nuances of inflation or you can learn how to drive and invest your money to combat the loss of purchasing power. How to invest your money to combat inflation is discussed in A Preservation Tale. I’ll give you a little hint—I am not a Gold Bug but if you put a $100 gold coin under your mattress instead of a $100 bill you have a much better chance of preserving purchasing power during inflationary times.
So once again, how should an investor read the Mattress Investing table?
Let’s focus on the 3% inflation rate since that has been a good approximation for so many decades. What this table shows is that if the inflation rate is 3% and you keep your $100 under your mattress, in 5 years it will only buy $85.87 worth of “Stuff.” I like to use the technical term “Stuff” to describe purchasing power!. To investors, the intended use of a $100 bill is to be able to buy “Stuff.” In and of itself the $100 bill is worthless. Its only value is the amount of “Stuff” it can buy. In this case it can only buy $85.87 worth of “Stuff” so the Mattress Investor has lost $14.13 of “Stuff” by keeping it in his mattress or not investing it. When you hear the term Loss of Purchasing Power it means “Stuff” you can’t buy!.
This leads directly to what I consider the minimum objective for investors and one of my maxims.
The purpose of investing should be to at a minimum maintain your purchasing power. I believe you should invest so that you don’t lose your “Stuff.”
So what can we learn from this tale that puts money in our pocket? Who wins and who loses from inflation? By now it should be clear that at any inflation rate greater than 0% you must make more than 0% on your money in order to maintain purchasing power. Yet when guaranteed interest rates are not accommodative, like they are today and have often been in the past, the investor must invest in non-guaranteed investments to maintain purchasing power. For investors that have read tales such as this one this presents a quandary. They can intelligently ask themselves, if I want a guarantee and guaranteed rates are so low that I can’t preserve purchasing power then I must accept a loss of purchasing power. However, if I want an opportunity to maintain purchasing power I must assume risk. This is the never-ending portfolio management question that is forever on every investor’s mind and will be at every stage of their life. While most investors answer this question by forgoing guaranteed returns in order to not just maintain purchasing power but to potentially increase purchasing power, others do not. There are investors that choose to avoid risk at all cost and are knowingly watching their purchasing power slowly erode.
Unfortunately, the sad circumstance for most risk-averse investors is that they behave as they do out of ignorance or fear and not based on knowledge. Many are willing to invest their money in bank CDs, money market funds and government bonds at below required levels just to keep it guaranteed. The only guarantee they’re getting during most periods is the guarantee of a loss in purchasing power. When and if there is increased inflation these are the people that will also suffer the most.
Lastly, I have included a paragraph from a 1977 article written by Warren Buffett for Fortune Magazine on inflation. Inflation was a big deal back then though we tend to dismiss it today since it’s been so low for so long. But I thought the paragraph would be appropriate since it is easy-to-understand writing and he has a unique way of thinking about inflation as a tax. If you think of it the same way you will quickly understand that inflation is a consumer of your capital. We as a society take to the streets if there is so much as a hint of our elected officials raising our taxes. Yet we have no problem when we willingly or out of ignorance tax ourselves by investing in below inflation rate guaranteed investments. The following is taken straight from the article.
“What widows don’t notice”
By Warren Buffet
The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5 percent inflation. Either way, she is “taxed” in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax, but doesn’t seem to notice that 6 percent inflation is the economic equivalent.
If you are concerned that your money is not achieving returns equal to or higher than the inflation rate or wish to review your portfolio so as to make sure it is geared to do so, then please do not hesitate to give me a call.
How to Invest – Basic Investing Strategies
Have you applied these when making an investment?
Recently, while talking to an expat who has been living in Barga in Tuscany for many years, he confided in me that he thought he could invest without advice from other professional quarters. However, after seeing some of his investments post no real returns (ie the net return after inflation is factored in), he was in a quandary as he felt he would “lose face” by speaking to a qualified independent financial adviser. And he also added that he had friends living close by who had shared the same experience.
Learning how to invest your money is one of the most important lessons in life. You don’t need to be college educated to start investing. In fact, you don’t even need to be a high school graduate. You just need to have a basic understanding of business and have the confidence to make a plan — consider it a business plan for your life. You can do it.
Why investing can be scary
For many of us, money and investments weren’t discussed at home. These subjects may even be taboo within certain households — quite possibly, in households that don’t have much money or investments.
If your parents or loved-ones were not financially independent, they probably did not give you good financial advice (despite their best intentions). And even if your family is/was well-off, there’s no guarantee that their financial advice makes or made sense to you. Plenty of parents encouraged their kids to buy a house during the peak of the housing bubble, because in their lifetimes, housing prices only ever went up.
The goal of investing
Of course, everyone has different financial goals — and the more you learn, the more confident you’ll be in determining your own path. But here’s a basic financial goal to strive toward:
Over decades of hard work, most people who are about to retire or those who have already retired, would like to make more money than they spend and then invest the difference. By the time they retire, they would like their investments to throw off enough cash — through dividends or interest – so that they can live on this income without having to sell any investments.
Notice the first part of this goal is about hard work. If you’re hoping to take a little bit of money and gamble it into a fortune in the stock market, you can stop reading now, this article isn’t written for you. But if you have worked for a few decades, and want to make sure that you don’t have to work until life’s end, you’ll need to spend less than you make and invest the difference.
Also, you’ll notice that this goal doesn’t recommend selling your investments. Rich people don’t sell-off their assets for spending money — if they did they wouldn’t be rich for long. They stay rich because their assets provide enough cash flow to support their lifestyle. And these cash-producing assets, through careful estate planning, can be passed down from generation to generation.
Enjoying your twilight years by living off your investment income and having something left over for your loved ones or for a charitable organization is something that all investors should aspire to. It may not be possible for everyone, but it’s the right attitude.
What to invest in?
Before you even start to look at this area, it is absolutely imperative that a “proper” financial risk analysis of yourself is carried out. And this does not take the form of much-used generalised risk questionnaires (that would be like you or your wife doing a compatibility quiz in a woman’s magazine!!) No, the emphasis is on the words “proper risk analysis”
Once this has been done you move on to the most important factor in investment planning.
Diversification (or, Spreading the Risk)
Many, many investors are under the impression that if they have, say, a term deposit at bank/institution A, another at B, and a third at C, they are diversifying. They could not be more wrong.
When investing one looks at doing so across what is commonly referred to as Asset Classes. These comprise Cash (very Conservative Risk ie term deposit), Bonds (Moderate Risk), Equities (high risk) and Commercial Property (Moderately Aggressive Risk). Then, taking one’s appetite for risk (from the Risk Profiler), one invests across the Asset Classes accordingly.
The most common investments are mutual funds (unit trusts), insurance investments, bonds and the stock market. This article is not aimed at those with the time, experience, acumen and who can afford losses by direct share purchases.
Unit trusts/Mutual funds can own shares or bonds and with some commercial property exposure on your behalf.
Know the difference between saving and investing
Your investments and your savings are very different things. What if the stock market crashes? If you do not have a cash savings account to cover for emergencies (usually about six months’ income), you would probably have to sell your investments at the worst possible time. Don’t fall into this trap.
Being a successful investor requires money, patience and, just as importantly, confidence. Having confidence to make and stand-by your financial decisions requires education. Never stop learning.
When last did you do a “proper risk” analyser?
What applied five years ago is not going to necessarily be the same today. We are getting older and as the years go by, more often than not we tend to become more conservative. Hence the need to do a refresher where risk is concerned and then use this to analyse your investments in order to ensure the two correspond accordingly. If not, you actually run the danger of investing by default/error which could have a material impact on your life in the not-too-distant future.
If you realise from the above the importance of risk classification and correct diversification, just as you visit your doctor (or should) for an annual check-up, why not give me a call in order to facilitate a meeting where we can ascertain things. As the saying goes “you owe it to yourself!!
‘Risk’ (with an Italian flavour)
“If no one ever took risks, Michelangelo would have painted the Sistine floor”
Neil Simon, Playwright
Each and every one of us has our own risk tolerance which should not be ignored when considering making any type of investment. Any good financial planner knows this and they should make the effort to help you determine what your risk tolerance is.
Then, based on this information, they should help you to build a portfolio that is aligned to your level of risk.
Determining one’s risk tolerance is based on several different criteria and there are different ways to look at how you should assess the risk you need to take. Firstly, you need to know how much money you have to invest, what your investment and financial goals are and what time horizon is involved. Then you need to consider the actual risk you are prepared to take.
Due to the emotional aspect of investing, there are various ways to look at it.
Let’s say you plan to retire in ten years and you’ve not saved a single penny/cent towards it. You could view this in two ways:
- You need a higher risk tolerance because you will need to do some aggressive investing in order to reach your financial goal.
- You may consider that as retirement is looming, you do not want to take unnecessary risks. If the markets were to crash it would affect your situation, therefore a more balanced portfolio (lower risk tolerance) would be better suited.
On the other side of the coin, if you are in your early twenties and want to start investing for your retirement now, you could share the same views.
- You should have a higher risk tolerance because you are young enough to ride out any market turmoil, maybe restructuring to a more cautious profile nearer the end goal.
- You should take a lower risk level and be happy with lower gains (potentially) but the end result will achieve what you require. You can afford to watch your money grow slowly over time.
There are more factors to consider in determining your tolerance.
For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do?
Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out… if you have a high tolerance, you would let your money ride and see what happens.
This is not based on what your financial goals are. This tolerance is based on how you feel about your money!
Again, a good Financial Planner should help you determine the level of risk that you are comfortable with and help you choose your investments accordingly.
Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. It’s all tied in together, it’s emotional.
Prior to working with any clients I insist on completing a detailed risk tolerance questionnaire. This will tell me exactly what your attitude to risk is and a suitable portfolio can be devised to suit you individually.
If you are interested in investing or saving for the future then get in touch to discuss the opportunities available and, just as importantly, the risks associated.
If you already have an investment portfolio and feel that it was never rated against your own risk tolerance then let me know. I am happy to discuss further and go through the questionnaire to ensure that what you have already done is suited to your circumstances.
This article is for information only and should not be considered as advice.
This article is written by Chris Webb The Spectrum IFA Group
More on risk and investing in different assets
How are you at managing your Finances ?
As the old saying “Practice Makes Perfect” seems to suggest, we are bound to improve at everything over time. However, there is something about “money” that just appears to get the better of us. Nowadays, we only need to look at the level of debt defaults to see that this is an area where most of us just don’t seem to be making much progress or improvement.
Here are just a few reasons why people, in general, do not successfully manage their finances:
- They have never been able to predict what the market will do next. However, this doesn’t deter them from trying to predict the markets!.
- They’re thrilled that the credit card they’re paying 22% interest on offers 1% cash back!
- They think dollar-cost averaging is boring without realizing that the purpose of investing isn’t to minimize boredom.
- They try to keep up with friends and family without realizing that friends and family are actually in debt.
- They think €1 million is a glamorously large amount of money when, actually, it’s what most people will need as a minimum in retirement!.
- They associate all of their financial successes with skill and all of their financial failures with bad luck.
- Their perception of financial history extends back about five years. This leads them to believe that bonds, for example, are safe and that the average recession is as bad as the recession of 2008.
- They don’t realise that the single most important skill in Finance is control over your emotions.
- They say they’ll take risks when others are fearful but then they seek the foetal position when the market falls by 2%.
- They think they’re too young to start saving for retirement when realistically every day that passes makes compound interest a little less effective.
- Even if their investment is over a period of 20 years, they get stressed when the market has a bad day.
- They size up the potential of investments based on past returns.
- They use a doctor to manage their health, an accountant to manage their taxes, a plumber to fix their plumbing. Then, with no experience in the financial market, they go about their own investments all by themselves.
- They don’t realize that the financial “expert” giving advice on TV doesn’t know their personal circumstances, goals or risk tolerance.
- They think the stock market is too risky because it’s volatile, without realizing that the biggest risk they face isn’t volatility. The biggest risk is not growing their assets sufficiently over the next several decades.
- When planning for retirement, they don’t realize that their life expectancy might be 90 years or more.
- They work so hard trying to make money that they don’t have time to think about or plan their finances, especially for those days when work will no longer take up all their time.
You may read this, identify a few points that relate to your own position and now find yourself asking “What can I do about it though?”
Without doubt the answer to that question is to seek professional advice so speak to a qualified and regulated Financial Planner. They will be able to analyse your position from both an investment and an emotional perspective, ensuring that your plan of action is tailored to you as an individual.
You should expect a detailed consultation process and only after this process has been completed can the correct advice be presented, ensuring you avoid the pitfalls detailed above.
The steps to the consultation process are as follows:
- A full and thorough financial health check on your current and future situation including the completion of a Financial Review questionnaire.
- Identifying areas of strengths and weaknesses in your financial planning and understanding your specific goals.
- Designing a strategy to help ensure your financial aspirations are met. Also reviewing any existing portfolio’s to ensure they are working effectively and efficiently.
- Once your strategy has been finalised, a full financial report based on your Financial Review will be provided to you along with a concise recommendation.
- Ongoing consultations consisting of regular monitoring of your selected strategy and face to face meetings to ensure that your financial goals are achieved.
To explore all of your options and to discuss how this consultation process can benefit you please contact your local Spectrum IFA Group consultant.
Discussing investment risk
When talking to clients, Financial Advisers are required to consider investment risk. There are many risk profiling tools available for advisers to help understand a client’s attitude to risk but what happens next?
When I joined the industry, understanding risk was much easier than today.
Cash in the bank was considered low risk or even no risk at all. Government Bonds were considered slightly higher up the risk scale and Equities (shares) were higher risk again. Property was not considered risky and gave its name to an English expression, “Safe as Houses”.
In 2008 everything changed. Banks failed, Governments were under financial stress, Stock Markets fell. Do these events mean advisers should tell clients everything is high risk?
Banks are being recapitalised and in the European Union, Governments guarantee the first €100,000 of a bank deposit.
Two caveats to this, the type of account;
- not all accounts carry the guarantee and
- the guarantee is by banking group, not individual bank. If a depositor has money in 2 banks but they are part of the same group, then only €100,000 is protected.
We are all feeling better about the strength and security of banks so that is the good news. What about the deposit rates we are being paid? Is there an inflation risk we should be concerned with? If inflation is running at a rate greater than the deposit interest we are being paid, we are losing money in real terms aren’t we?
We have also seen Countries in financial difficulty and even being bailed out. Is it therefore always sensible to hold Government Bonds? What hap¬pens to bond values if interest rates rise? Is there a risk the value of Bonds would fall.
We have seen volatility in Equity markets with some large companies having financial difficulties. At the same time some companies are doing very well, are cash rich and are paying good dividends. Regulators tell advisers we need to understand our client’s attitude to risk and provide solutions to our clients that match those attitudes. The regulators do not yet tell us which asset class¬es represent high risks or low risks. Is it therefore good advice to tell a cautious investor to leave their money on de¬posit at a bank? Almost certainly not. How do we advise a client who wants no risk and a return in excess of inflation? It’s not an easy job.
Our feeling is that the only advice we can offer is to spread the risk, diversify in terms of asset classes, pay attention to liquidity and fully understand any product or portfolio. Now is certainly not the time to have all one’s eggs in one basket!
This article is for information only and should not be considered as advice.
This article appeared in Trusting #6 and was written by Michael Lohdi, Chairman of The Spectrum IFA Group
More on risk and investing in different assets
Organize and simplify your financial portfolio
SIMPLICITY: freedom from complexity, intricacy, or division into parts: an organism of great simplicity.
In the course of my travels working alongside expat communities, one of the most frequent complaints raised by retirees is how complicated, tiresome and difficult it is to keep tabs on their financial affairs, primarily because they seem to have a host of different people advising them on a number of issues. So rather than enjoying their well-earned retirement, a lot of people seem to devote an excessive amount of time managing their financial affairs whilst trying to keep up to date with changes in the markets and changes in legislation etc.
This was confirmed by a recent survey of investors where 55 percent responded with the statement, “I am trying very hard to simplify my life”. This was up from 48 percent in the previous year. It seems that most people want simplicity in their lives but the truth is that many just don’t know how to go about it. We live in a world of i-phones, i-pads, e-statements and social media – we are constantly online and constantly contactable and so it is difficult to truly switch off.
One of my services is to help clients simplify their financial lives, eliminate clutter, organise accounts and streamline how they manage their money. This is where I can truly add value.
I help my clients to be as efficient as possible with their day-to-day money management by showing them how to make the best use of banking facilities in Italy (and save money in the process), showing them how to save money by paying bills online, using currency exchange services, looking at how to make the most of the tax credits in Italy, possibly moving UK pensions to other jurisdictions, wills, and managing investments more effectively.
By consolidating everything, you can reduce the levels of incoming mail and paperwork, avoid certain fees and also ensure that assets are properly diversified.
In the course of a recent discussion with a prospective client I asked how their portfolio was being managed. He asked me to wait until he retrieved this information and, finally, some 10 minutes later produced approximately eight files each detailing different investments with a variety of companies.
On enquiring as to how each was performing and what their latest values were, he could not tell me, saying we’d have to obtain new statements and that he was “sick and tired of receiving so much investment correspondence, be it in the form of his own portfolio or marketing advice material that he seldom bothered to read through and normally threw them in the bin. At my suggestion we agreed to make another appointment and sit down, ring the various product providers and obtain up-to-date statements. Once this information was received we sat down and reviewed those elements that were performing well, those that were not so good and discussed what could be done to improve his overall situation. I recommended that rather than employing a financial planner, like myself, to manage the day to day investment management decisions, that based on the amount of money that he had invested, he should employ the services of a Private Client asset manager. In this way they could deal with the day to day investment matters and we could concentrate on how to minimise his cross border tax issues, reduce paperwork, and find ways to improve his overall financial position. This freed up time for him to concentrate on his other interests.
One Final Point
In this man’s situation he was clearly eligible for more sophisticated financial management than he had previously been used to, but was not aware he could access these types of services. Our job is to ensure all elements of your financial affairs are well maintained and that you get the best, based on your situation. By consolidating and streamlining financial affairs you have a real opportunity to help yourself manage the difficulties of cross border tax and financial issues that face expats living in Italy.
If you are over awed by the complexities of the Italian tax system or are concerned that you are not making the best use of tax breaks in Italy, or if you merely want your financial life to be simpler then you can contact The Spectrum IFA Group