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Give your investment portfolio the ‘Lip’ Service it deserves

By Daphne Foulkes - Topics: Investments, Uncategorised, wealth management
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 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.

Article by Daphne Foulkes

Daphne FoulkesIf you are based in the Midi Pyrenees & Languedoc Roussillon area you can contact Daphne at: daphne.foulkes@spectrum-ifa.com for more information. If you are based in another area within Europe, please complete the form below and we will put a local adviser in touch with you.

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