Who do you bank with?
By David Hattersley
This article is published on: 30th October 2013
Following the recent “Le Tour de Finance” seminar at the Marriott Hotel in Denia, one of the attendees approached me with interesting tale. The Lady was a British expatriate and long term resident in the Javea area. Like many retried expatriates she had been concerned about the security of her assets following banking issues in both UK and Spain, post 2008. She told me she had always felt safe banking with British household names whether at home or abroad. She was shocked to learn that Lloyds Bank’s Spanish operations had been sold to Banco Sabadell.
She felt this had not been properly publicised and she had not had clear information about the change from the bank. She visited her local branch and was surprised that the staff knew little about the change of ownership.
I was able to explain the €100,000 per account deposit guarantee scheme, guaranteed by the Spanish Government in the same way as UK bank deposits are guaranteed by the British Government to the tune of £85,000. This Lady had clearly done her homework and pointed out that the guarantee is per banking group and not per account. We agreed that bank accounts were necessary for emergency funds even when, given current interest rates they were guaranteed to lose money in real, spending power terms. We also agreed that for longer term investing, especially for income, there were much better options out there, one particular proposition from the Prudential, (fully Spanish compliant) had been highlighted during the “Le Tour” seminar.
Our motto is “With Care, You Prosper”, we urge our clients to take a very active interest in their finances, we are here to help our clients help themselves.
Compound Interest “The Eighth Wonder of the World”
By Chris Webb
This article is published on: 27th September 2013
None other than Albert Einstein described this amazing fact about finance, compound interest, as “the Eighth Wonder of the World”.
So, what is compound interest and why is it so important?
Compound interest is, quite literally, a form of free money… and it is free money that grows over and over again. The example detailed below explains how……..
Imagine that you invested €1,000 today and that whatever you invested it in went up by 10% this year. In this case you would have €1,100 one year later, made up from your original sum, plus €100 of interest or return on investment.
Now comes the Compound Interest: Assume you reinvested that €1,100 for another year and achieved 10% again. The following year you would have €1,210. This time you have made €110 of interest simply because the 10% interest is paid on the new balance not the original investment. Essentially, €10 of that interest is free money.
It is the interest you have been paid on your interest or, put another way, the return on your return.
At first glance this may not seem particularly exciting but over time the effect is incredibly powerful. Let’s look more closely at some examples to see just how:
The power of compounding
Let us say you decided to start investing some of your surplus income. For the sake of the argument, you wanted to invest €1,000 each year.
These might seem like numbers to small to make a difference but are they?
The two tables below detail the difference between non compound interest and compound interest.
I have illustrated at 5%, 7% and 9% growth annually, realistic expected rates of return.
These return figures are on top of your original investment !
NON COMPOUND
| Year No. | Annual Invested |
Total Invested | Return 5% |
Return 7% |
Return 9% |
| Year 1 | 1,000 | 1,000 | 50 | 70 | 90 |
| Year 2 | 1,000 | 2,000 | 100 | 140 | 180 |
| Year 3 | 1,000 | 3,000 | 150 | 210 | 270 |
| Year 4 | 1,000 | 4,000 | 200 | 280 | 360 |
| Year 5 | 1,000 | 5,000 | 250 | 350 | 450 |
| Year 6 | 1,000 | 6,000 | 300 | 420 | 540 |
| Year 7 | 1,000 | 7,000 | 350 | 490 | 630 |
| Year 8 | 1,000 | 8,000 | 400 | 560 | 720 |
| Year 9 | 1,000 | 9,000 | 450 | 630 | 810 |
| Year 10 | 1,000 | 10,000 | 500 | 700 | 900 |
| Year 15 | 1,000 | 15,000 | 750 | 1,050 | 1,350 |
| Year 20 | 1,000 | 20,000 | 1,000 | 1,400 | 1,800 |
| Interest Earned |
4,500 | 6,300 | 8,100 |
COMPOUND
| Year No. |
Annual Invested |
Total Invested | Return 5% |
Return 7% |
Return 9% |
| Year 1 | 1,000 | 1,000 | 50 | 70 | 90 |
| Year 2 | 1,000 | 2,000 | 102.5 | 144.9 | 188.10 |
| Year 3 | 1,000 | 3,000 | 157.63 | 225.04 | 295.03 |
| Year 4 | 1,000 | 4,000 | 215.28 | 310.80 | 411.58 |
| Year 5 | 1,000 | 5,000 | 276.28 | 402.55 | 538.62 |
| Year 6 | 1,000 | 6,000 | 340.10 | 500.73 | 677.10 |
| Year 7 | 1,000 | 7,000 | 407.10 | 605.78 | 828.04 |
| Year 8 | 1,000 | 8,000 | 477.46 | 718.19 | 992.56 |
| Year 9 | 1,000 | 9,000 | 551.33 | 838.46 | 1,171.89 |
| Year 10 | 1,000 | 10,000 | 628.89 | 967.15 | 1,367.36 |
| Year 15 | 1,000 | 15,000 | 1,078.93 | 1,759.03 | 2,642.48 |
| Year 20 | 1,000 | 20,000 | 1,653.30 | 2,869.68 | 4,604.41 |
| Interest Earned |
5939.03 | 9412.31 | 13807.17 |
We can immediately see a meaningful difference between what the saver has managed to achieve after a year versus the investor. Of far more interest is what happens over a number of years.
It is clear to see the big difference between keeping your money in a savings account and investing your money, potentially life changing, even if the amounts you start with are what you describe as “small”. Imagine, the impact can be huge depending on the amount you choose to save.
Just imagine the difference if you were saving €5000 per annum or if you transferred the cash savings you hold now and not later in life.
When Compound Interest works against you…….
It is just as important to understand that if you borrow money, the power of compounding hits you in reverse:
Over time you end up paying more and more to whoever you are borrowing from.
Luke Johnson, the man behind the Pizza Express Chain and ex Chairman of Channel 4 refers to this as “…the gruesome mathematics of leverage in reverse.” This is why you must eliminate debt and get invested as soon as you can. We all know that the majority of debt is expensive. It is challenging to make a 15-20% return on your investments but almost certain you will pay at least this on your debt.
In summary
So we can see from the power of compound interest that if you can achieve a half decent return on your money, even a relatively small amount can become a very large amount in time…
This is probably the most important thing you will ever learn about money.
My UK will and living in France
By Amanda Johnson
This article is published on: 15th August 2013
Question: Is it true that even though I live in France, new legislation is coming which means I can use my UK will when I die and will pay less inheritance tax as a result?
From August 17th 2015 European law will allow British Nationals the option of electing to use their UK wills in France. The inheritance tax regimes for France & the UK are quite different and professional advice should be sought before deciding which option is going to be correct for you.
Under the UK system each person has £325,000 of tax allowances before paying death duties on their estate, whilst in France it is 100,000 Euros per child per parent. Clearly the more children you and your spouse have the greater the allowance before paying death duties in France. You also have the tax advantages in France of using an Assurance Vie, where you can leave additional money per beneficiary outside of your inheritance tax bill.
As you can see where you pay inheritance tax is not a straightforward decision and opting to use a UK will is not necessarily a good idea for everybody. Although the new regulation is still two years away, understanding how you can maximise your inheritance tax allowances now, coupled will an understanding of which regime will suit your personal circumstances better after August 2015 is a sensible idea and getting the right advice is very important.
I offer a free consultation in the privacy of your own home to discuss your circumstances and explain how to maximise your tax free allowances here in France.
It is very important to manage your money so that it works hard for you, after all you’ve worked hard to earn it and have already paid tax on it, so why would you choose for your loved ones to pay more than they need to when you are gone?
Get your nest egg working harder
By Charles Hutchinson
This article is published on: 1st August 2013
Returns from bank savings accounts are at an all-time low, and savers are becoming increasingly frustrated. Expatriate financial advice expert Charles Hutchinson, of the Spectrum IFA Group, explains how expats can get their ‘nest-egg’ working harder.
Most of us know by now that interest rates in the western world are at extremely low levels, with the Euro base rate at 0.75%. In the UK it is even lower, at 0.5%. While helps some people such as mortgage holders with tracker rates, savers are being punished as banks have continually cut the interest rates paid on savings accounts. Retirees drawing a pension, or looking to buy an annuity have also been hit hard in this low-interest rate environment.
Low Interest Rates Here to Stay
First, it doesn‘t look like this will change for quite some time yet. The prevailing policy of central banks has been to increase money supply (quantitative easing, also known as QE), maintain liquidity in the banking system and keep interest rates low. Even a slight increase in the base rate over the next couple of years is unlikely to result in decent interest rates on savings.
Second, inflation is running at around 2-3% depending on which part of Europe you live. It just feels like everything is getting more expensive, especially food and energy costs. The end result is that we are effectively losing money by leaving it in the bank!
Of course, we all need to leave some cash in the bank, as our emergency fund. Most financial planners would recommend that you leave at least 6 months income as your emergency fund.
It is the ‘nest egg’ money (the savings that we don’t really need in the short-term) that we can do something about.
How Can You Get Your Nest Egg Working Harder?
With the objective of ‘beating the bank‘ over the longer-term, a diversified portfolio of investments can be built. In plain English this means spreading your money across different types of ‘assets’ and not having ‘all of your eggs in one basket’. Assets primarily fall into one of the following categories; equities (shares in companies), fixed-interest bonds, property, cash or commodities.
Lifestyle Investing
You need to be clear about your ‘Risk Profile’. At Spectrum, we carry out a ‘Risk Profiler’ exercise which aims to establish the level of risk you are comfortable with and helps you understand the relationship between risk and reward. We then employ a forward-looking ‘Life-styling Process’ which means building a portfolio to match your own personal situation and objectives.
The eventual portfolio should therefore match your risk profile, usually measured from ‘cautious’ at the lower end of the scale, ‘balanced’ and then ‘adventurous’ at the higher end. The investment strategy should therefore be appropriate for your stage of life.
What assets to invest in
There are literally thousands of investments funds and vehicles to choose from. At Spectrum, we filter these by using strict criteria when choosing clients‘ investments. For example we only use;
- UCITS compliant, EU regulated funds, ensuring maximum client protection and highest levels of reporting.
- Daily priced funds, providing clients with daily liquidity, so that clients do not get ‚locked-in‘.
- Financially strong and secure investment houses.
- Funds which are highly rated by at least two independent research companies.
Multi-asset funds
Multi-asset funds are popular with clients as they are managed by experienced asset managers who, through active daily management, can offer access to all asset classes within a single fund. Their job is to capture capital growth while also protecting investors when markets suffer a downturn. Some fund managers have a great track record of doing this, for example Jupiter Asset Management’s Merlin International Balanced Portfolio, which has returned +35% (Euro share class) since launch in Sept 2008, with relatively low volatility.
Multi-asset funds can be used as a ‘core‘ holding within a portfolio, with more specialised and sector-focussed funds making up the rest of the portfolio.
Equities (shares)
Many blue-chip companies have very strong balance sheets and pay dividends of around 4%, which is higher than current interest rates. This dividend income can be re-invested into your capital (unless you need the income). The capital value of course will fluctuate but if you are investing for the longer-term you have time to ‘ride out‘ any volatility.
Equity funds can be global in nature, regionally specific (for example focussing on emerging market countries) or even country specific. Other types of equity funds focus on smaller ‘growth-orientated’ companies rather than those blue-chip, dividend paying stocks.
Ethical Investing
Ethical funds are also an interesting option. These are funds which only invest in ‘ethical’ companies. They are screened and assessed on criteria such as environment, military involvement or animal welfare.
Fixed-interest bonds
This includes government bonds and corporate bonds. Western government bonds were traditionally seen as ‘safe havens‘ however yields are now currently as low as cash. It may be wiser to look at corporate bonds, and these are categorised in terms of risk (higher-yielding bonds means higher capital risk). Emerging market bond funds (with exposure to local currencies) could also be considered.
May investors like to get exposure to bonds via a fund, which is a diversified mixture of bonds. One good option may be Kames Capital’s Strategic Bond Fund, with a return of +57% (Euro share class) since launch in Nov 2007.
Commodities
Commodity-focussed funds can be volatile and would normally make up only a small part of a portfolio. However there is potential for long-term growth by investing in companies with exposure to precious metals and resources (gold, silver, iron ore, copper) as well as other ‘soft’ commodities such as agricultural resources and the food sector.
Property
Collective property funds or property-related shares could also form a small part of your portfolio. Physical property by its nature is illiquid but by using a property fund you can obtain exposure to shares in property companies, keeping your money liquid.
Review Your Portfolio Regularly
It is vitally important that your portfolio is regularly reviewed. One reason why people do not get the most from their finances is the lack of regular attention paid to their arrangements. Consider using a regulated, independent adviser who should offer regular reviews as part of their ongoing service.
At Spectrum we have an in-house Portfolio Management team, who help advisers and clients monitor their portfolios regularly for performance and suitability. One aspect of our regular reviews is ‘profit-take alerts’; when one area of your portfolio has out-performed then why not take some profits? Investors can really benefit from such regular service.
Charles Hutchinson has been with The Spectrum IFA Group since inception and is one of the founding partners. He helps expats in Southern Spain with their financial planning. The Spectrum IFA Group is a pan-European group of independent financial advisers. Feel free to contact Charles at charles.hutchinson@spectrum-ifa.com or call him on 952797923
French U-turn on tax grab spells good news for expats
By Graham Keysell
This article is published on: 2nd July 2013
Expats in France can breathe a sigh of relief after the French government backed down on its tax grab on second homes.
From September 1, those owning a second home in the country for more than 22 years will have complete exemption from capital gains tax (CGT).
Graham Keysell comments in The Daily Telegraph personal finance section. Read more here
Give your investment portfolio the ‘Lip’ Service it deserves
By Spectrum IFA
This article is published on: 1st July 2013
During the last few months, I am finding more and more people, who have always considered that they are averse to investment risk, are prepared to take a little more risk.
Typically, these people would have kept their savings on bank deposit. However, due to the lack of any decent rate of interest being earned over recent years, they have found that their savings are no longer maintaining ‘real’ purchasing power. Even worse, if they are dependent upon supplementing other income (for example, pensions) from savings, in many cases their capital has been seriously reduced. Combine this with the general feeling that people now feel that their capital is less secure with a bank (particularly after the Cyprus issues), it is no surprise that they are seeking a different way of protecting their wealth.
One of the problems for those people who wish to change direction, however, is that they may have little understanding or knowledge about how to do this. So where do they begin?
Seeking professional advice is, of course, a good starting point. Investment professionals will usually build portfolios for their clients by using a concept known as ‘asset allocation’ investing. Subsequently, the portfolio is invested across a range of investment sectors, in varying proportions, with the objective of finding the best investment return for the least amount of risk, according to the investor’s objective (for example, income or capital growth).
In the past, it was not too difficult to find the right asset allocation because the correlation of assets classes – which can simply be explained as the direction of that one asset class (for example, equities) moves in relation to another (for example, fixed interest) – was well understood and had not changed for many years. It was often said that as equity markets went up, bond markets would go down! However,the world has changed and it is not as easy to predict what assets classes may do in the future. Diversification remains a key part of a good investment strategy and so asset allocation is still a very important part of putting together an investment portfolio. It is vital for improving long-term returns and reducing investment risk (volatility), however, it is no longer the ‘be all and end all’ of good investment management.
When people are saving, they usually have a particular objective in mind. Depending upon your timescale, this will impact upon the investment strategy to be implemented. Added to this is the need to take into account your own particular attitude to investment risk.
At The Spectrum IFA Group, we use a Lifestyle Investment Planning (LIP) approach. This takes into account the period over which you wish to reach your goal and consideration is given to what the world might look like at the time that you want to use your capital, or draw income from it. Then a portfolio is built today to take advantages of the likely changes – to the extent that they can be predicted – over the time frame ahead. In other words, it is forward looking, keeping an eye on the future and not just on the past.
More information on our approach to investment advice can be found on our website at http://www.spectrum-.com/investment_advice.html.
Because different investment themes, stories and strategies will be appropriate to different people at different stages of their lives, using a Lifestyle Investment Planning approach can be very powerful, as it provides the opportunity to check where you are today (in relation to your objective) and then to consider the investment ideas, stories and strategies that are likely to affect you. It is also very important that the portfolio is reviewed periodically, in effect, an ‘audit check’ to see if you are on target to reach your goal (for example, income during retirement). The easiest way to understand this concept is to start at the point of retirement and work backwards.
Income Portfolio – In retirement, we all need a decent and growing level of income. Professional income declines or stops entirely, as we enter the ‘spending only’ phase of our lives. Various strategies to maximize income and beat inflation should be adopted. It is also important to consider cash flow and not just to concentrate on short-term capital security. By necessity, some capital volatility may have to be tolerated to achieve the level of income required. In addition, as it is important to beat inflation over the longer term, some growth strategies should also be employed, with the aim of ensuring that the capital maintains its real purchasing power throughout your retirement years. Since people are living a lot longer, this could be a very long time.
Pre-Retirement Portfolio – Before reaching the income stage of life, but as you start to plan for retirement, the last thing you need is for your portfolio to fall in value just before you want to start to draw an income, as this can dramatically reduce the income that you can sensibly take, if you wish your capital to last through your retirement years. At this stage of life, it is likely that you will have accumulated the majority of your assets. Your income may still be high, but the timescale for taking advantage of investment opportunities is short. You may have even started planning things to do early on in your retirement, the first ten years often being the most expensive. You will probably be looking forward to having more time available for new hobbies and travel. During this phase capital protection is paramount and active management of the transition from growth to income will take place. Portfolios should include some deposit based accounts and funds with capital protection or defined/absolute returns.This may reduce investment returns but it substantially reduces the investment risk. Many investors fail to make this most important change within the last five years before retirement, often switching from pure growth portfolios to income at the point of retirement. If this happens to be at a time when the markets have fallen significantly, then the income available, and hence your lifestyle in retirement, could be dramatically affected. If you are further from retirement, have planned well and have a pension or savings fund available to you, you can consider the type of investments that may do well from now until the point at which your retire.
Consolidation Portfolio – If you are within fifteen years or so of retirement, you may not be comfortable with the idea of having your capital very exposed to the more volatile investment sectors. Your primary objective may be to beat inflation with lower volatility than during the accumulation stage, over a medium time scale.The types of strategies you may elect to use could be emerging market bonds, rather than emerging market equities; high yield bonds (with income reinvested) can also offer good returns currently, but with lower volatility than shares; and equity income offers a growing income stream, together with a good chance for capital appreciation. During this phase, you should also have a good ‘profit taking’ strategy, where profits are transferred into lower risk investments to help the transition to Pre-Retirement.
Accumulation Portfolio – If you are a very long way from retirement (say 20 to 30years), then you should consider the long term growth stories and invest in sectors such as infrastructure and consumer spending. Currently, there is a huge and increasing demand for commodities, which will continue to push up prices. The growth in emerging markets is changing the world order, such that mature western economies will be outpaced by burgeoning new ones. Volatility is likely to remain for some time, although at this stage of your life cycle, you have the timeframe to ride out the peaks and troughs of the investment markets. Again, you should employ a good profit taking strategy to further diversify your spread of investments.
For all of the above strategies, asset allocation is still very relevant and it is still vital to have a well-diversified portfolio invested across many asset classes. It is also important to have geographical and sector diversification within the asset classes used. However, in reality, this is insufficient; applying the stories and strategies is equally important. As a European expatriate, it is also important to overlay your whole portfolio with currency considerations and even have in place an agreed strategy to move, fore example, Sterling or USD investments into Euro investments, over time, to match future income liabilities.
Of course taking expert, qualified and regulated investment advice is very important to ensure you have the best ideas to secure your future lifestyle aspirations. Ongoing monitoring of portfolios is vital to correctly manage the changes explained above, over your lifetime. Sadly, I come across too many cases where people have never had their portfolios reviewed by the person or company that provided the initial investment advice and as a consequence, their objectives are not being met.
Ask Amanda in The Deux Sevres Magazine & The Vendee Magazine
By Amanda Johnson
This article is published on: 30th June 2013
Since I started writing in The Deux Sevres Magazine & The Vendee Magazine, I have met and spoken to many interesting people who have either already made their permanent move to France or are in the final steps of doing so. They have many questions and here are some of those I have answered over the past year:
I have just sold my house in the UK and have some capital, why should I see a Financial Planner?So that all the financial options available to you in France can be explained, allowing you to make an informed decision based on your personal circumstances and aspirations.
I currently spend more time in the UK, why should I see a UK Financial Planner?UK financial rules and regulations differ to France. Talking to an “in-country” specialist & working with a French regulated company will enable you to keep up to date with the current rules relating to your finances and future changes as they arise.
If I need cash at a later date after buying a house here, can I easily release some equity in my French Property? This is a more complicated process than in the UK. The banks look very closely at what your plans for the money are and your personal circumstances. This is especially tricky if you find that your income has reduced since moving to France.
I have made a UK will, is that sufficient in France? If your main residence is in UK, then a UK will be fine. However, if your main residence is in France then it is necessary to make a French will.
If I move to France before retirement age, what happens to my UK Pensions until I am old enough to drawn them? There are many options available to you depending on your personal circumstances and this is an area that the needs looking at very carefully. Being an expatriate does allow you certain flexibility with historic employer pensions.
I have UK investments; can I get tax efficient investments in France? Yes, the French government give allowances to French residents and I can explain these to you, as well as whether the tax status on UK investments has changed with your move.
How much will it cost me to see a Financial Adviser? The Spectrum-IFA Group charges no fee for consultations. We get paid by the companies we deal with. Please ask for a copy of our client charter which explains how we work.
If you have any questions that you feel I may be able to help you with, please “Ask Amanda” and I will call you to discuss your questions and arrange the most appropriate answer.
What is risk? – Property
By Peter Brooke
This article is published on: 20th May 2013
In this series of articles we are considering the different TYPES of RISK we take when investing in different assets. This should help to build a portfolio in which we fully understand what risks each part of the portfolio expose us to.
We, as Anglo Saxon and Northern European types tend to have a bit of an obsession with owning property; it is an important part of our culture and we feel secure in the knowledge we own real estate.
It is very understandable, especially for an Englishman, why owning your own home is a very good idea (control of what it looks and feels like, feeling of “home”, long term outlook etc) but I believe that many people will tend not to look at ALL of the basic investment factors when selecting a property to buy (to live in or as a pure investment)… including risk.
Of course, location (location, location), price, quality, taxes and running maintenance costs are normally considered to some extent but for some reason many investors tend to believe that property is in some way risk free; . Like all investments we should “buy with our heads” and “sell with our hearts”, too many of us get this the wrong way round and ignore some of the issues that can really cost us dearly. Let’s look more closely at the property specific risks.
Liquidity Risk – the biggest single risk when buying property! Can you get your money out if you need it (or if something better comes along)? On the whole the answer is ‘no’ – or at least not quickly. If you find a buyer tomorrow you are unlikely to have your money back within 3 months; if you are looking for a quick sale then you can seriously damage your return by taking a low offer.
Interest rate risk – if you are borrowing to buy, as most people do (and probably should) then there is a risk that your cash flow will be affected and the total cost of your property over its life could go up dramatically, if interest rates move.
Market/Investment risk – as we saw in 2008 the price of property can fall as well as increase…. Again many investors feel that property is in some way a sure fire investment guaranteed to make money – like all other forms of investment asset this is only true if you buy the right property, in the right place at the right price. When property markets crash they tend to do so heavily and take a longer time to recover than more liquid markets.
Tax/Governmental Risk – one of the easiest assets to tax more in times of economic strife are properties, especially those owned by investors (as they tend to be easy political targets). Increases in local rates and taxes on property are easy to push through and raise a significant sum for government.
This article is for information only and should not be considered as advice. This article is written by Peter Brooke The Spectrum IFA Group
More on risk and investing in different assets
‘Ask Amanda’ – The Deux Sevres Magazine & the Vendee edition
By Amanda Johnson
This article is published on: 15th May 2013
Welcome to “Ask Amanda”.
I have been writing regularly for the Deux Sevres Magazine and am delighted to be invited to now contribute to the Vendee edition. I want to start by introducing myself.
I am Amanda Johnson and have lived in the Loudun area, with my family, for the past 7 years. I am a Financial Planner working with the regulated Independent Finance company “The Spectrum IFA Group”. We specialise in helping expatriates understand the benefits and obligations of living in the French system. Bilingual, with 20 years of financial experience in the UK, I am authorised through Orias in France and The Spectrum Group is also registered with the AMF.
Living in France is very rewarding but many of the rules and regulations, especially when it comes to taxation, inheritance, retirement planning, buying and renovating your home, differ from the UK. Working closely with colleagues throughout France ensures I can share experiences, best practices and keep you abreast of changes in French financial law. This is why I consider it important to have a servicing strategy of regular face to face meetings with my clients.
I am frequently asked about Inheritance tax planning and can usually make recommendations that ensure when you have lost a loved one any financial loss is kept to a minimum? I can help you optimise your savings by offering a range of investments in major currencies, protecting you from exchange fluctuations and from inheritance tax should the worst happen. I can also review existing pension arrangements giving advice on your future retirement plans.
Over the coming months I will be detailing questions I am asked and providing answers which have helped my customers & I hope will assist you. For a Free Consultation, on Inheritance tax, investments, retirement planning and tax efficient buying or renovating your home, or to review your current circumstances, please contact me.
Investment options
By Craig Welsh
This article is published on: 16th November 2011
In the last article we looked at investment options that provide a capital guarantee – ideal for those investors who want some growth on their savings but are afraid of too much risk.
Now we will discuss more “liquid” options; investments which do not involve locking up money for a certain time, and are liquid (i.e. can be traded daily).
Again, some important financial planning rules come into play:
- First, it is always recommended to leave some savings as accessible cash in the bank (at least 6 months income, which you can easily access if required).
- Second, you need to establish your attitude to investment risk and return – the so-called “Risk Profile.” This should be fully clarified before entering into any investment.
- Third, your time horizon is a crucial factor. Put simply: how long do you have before needing this money?
Medium / High risk investors For those who have anything between a “medium to high” risk category (i.e. those who are comfortable with volatility and accept higher levels of risk for a potentially greater return) it could now be a very good time to invest in equities (shares).
After the recent falls, some people feel that some equities may be undervalued. Timing the market however is notoriously difficult and so a “drip-feeding strategy” could be used.
Looking ahead with a 5 to 10 year investment outlook, the emerging economies (Asia, Latin America, etc.) continue to look attractive. China and India alone now generate around 40% of the world’s economic growth and there is a rising middle class in these countries. This creates demand for goods, materials and infrastructure.
Demographic trends (the larger proportion of young and educated people compared to retirees), growing urbanisation and increased demand for natural resources (it seems likely that commodity prices such as hydrocarbons, metals and water will rise in the long-term) mean that some excellent investment opportunities are available. Again, a drip-feeding strategy could be the most sensible approach here.
Emerging market equity funds should obviously be in a position to capitalise on this and provide some strong returns. However do not forget that strong domestic demand in emerging countries for products has helped Western companies grow their businesses in Asia and Latin America.
So, despite the public debt problems in the developed world, the private sector has some very strong companies with healthy balance sheets who are in a great position to capitalise on growth in the emerging world.
Many analysts therefore see this as a compelling reason for investing in global blue-chip companies who have exposure to growth in the emerging world. Further, this could also be a way of reducing exposure to the political risk inherent in some of the emerging countries.
Diversification The golden rule of investing! It is rarely advisable to “put all of your eggs in one basket” by choosing just one asset class. Even those with a more adventurous approach should balance out their portfolio with some exposure to other asset classes, to ensure diversification.
Low / Medium risk investors
* Multi-Asset funds “Multi-asset” funds, as the name suggests, normally aim to provide investors some exposure to each major asset class, giving the investor active management and excellent diversification.
There are funds in this sector which have disappointed but thankfully there are a handful of very successful fund managers who have delivered the steady growth that they aim for, for example Carmignac Patrimoine, Jupiter Merlin International Balanced Portfolio, and HSBC Open Global funds.
Some of these funds are for “cautious-moderate” investors who have a medium to long-term outlook.
* Fixed Interest bonds A fixed-interest bond is essentially a loan to either a government or a company, that pay a fixed rate of interest over an agreed period. The risk to the investor of course is that the debtor defaults on the loan.
This risk can be minimised by using a mutual fund which invests in a collection of fixed interest bonds, and there are many available with a long track record of steady returns (Franklin Templeton Global Bond for example).
Investors should be aware that there is still a risk to capital in a fixed-interest bond investment, particularly in the higher-yield sector.
Again the emerging markets are coming into play here with emerging market bonds attracting a lot of interest from investors due to the more fluid credit conditions in these economies.
* Absolute Return funds These types of funds aim to deliver a positive performance (absolute return) in any market conditions, even when markets are falling. They can do this by using a variety of financial strategies, and some have been reasonably successful over the last three or four years, with consistent performance and low volatility, even over the last few months.
Review regularly! Once investments are in place it is important to keep track of them and review at least twice a year.