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.

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

• Bank Accounts and Cash
• Bonds
• Equities
• Precious Metals
• Alternative Investments
• Portfolio Planning & Different Ways to Invest
• Discussing investment risk

Investment options – Captial protected plans

By Craig Welsh
This article is published on: 3rd October 2011

This summer we have seen severe volatility in global financial markets, with concerns over the European debt crisis and the pace of the global economic recovery being the principle causes. At this article, we look at investment options for people not comfortable with taking on a lot of investment risk.

Whether it is savings you have built up, a redundancy package (a Stamrecht construction for example) or money from the sale of a property, one should investigate about how to sensibly invest for the longer-term.

Stock markets have enjoyed a relatively fruitful time since the lows of spring 2009, with the S&P 500 index, EuroStoxx 50, and FTSE 100 gaining around 75%, 55% and 66% respectively up until July this year.

However when markets see a drop like we have seen (the Eurostoxx 50 lost 20% through August and September) it usually provokes one of two reactions – either concern / anxiety / panic and a reluctance to invest ANY savings in equities, or indeed you see it as a great opportunity to invest at lower prices (buying low to sell high) and get prepared to pick up a bargain.

Many bank savings accounts are failing to pay an interest rate which is any higher than inflation. This means that the value of your long-term savings can be eroded simply by leaving them in the bank.

I have some savings which can be set aside. What are my options for investing?
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, or your “Risk Profile” as it is known. This should be fully clarified before entering into any investment.

Third, your time horizon is a crucial factor (how long do I have before needing this money?).

“Capital protected” options
There are many of these products available (most often promoted by banks) however not all of them are considered good value.

Independent advisers are in a position to research out the more attractive and sound offers. Characteristics of these products vary however they normally involve “tying up” savings for between 3 to 5 years, offer 100% protection of your capital while your overall return is linked to stockmarket growth.

Recently, the Spectrum IFA Group managed to negotiate exclusive terms with one provider that guaranteed an 8.15% return after one year (a cash deposit) on half of the invested amount, with the other half remaining invested for a further four years.

The return on the second half of the investment is dependent upon market performance, subject to a minimum return of 5%; a very popular plan and it is expected that a similar offer will be available soon.

We were also involved in the creation of a Protected fund from CitiBank and BlackRock which offers 80% capital protection, with a profit lock-in feature. This gives the investor exposure to equity growth with some downside protection. This is a daily-traded fund and so does not have any lock-in period.

Other capital protected plans that offer good value include a product from Barclays Bank which offers a 5-year plan with 100% capital protection and a potential return of 55%, depending on the averaged performance of the FTSE 100 Index. Investors who would like to benefit from positive stockmarket performance, but who are not comfortable with the risk of loss, may be attracted to this sort of plan.

There are also so-called “Kick-Out” Plans which offer a guaranteed rate of return, without the need for a rise in markets. For example, one investment grows at 9.5% per annum, with the return paid out as long as markets are at or above the same level as the starting point at any given six-month point, from and including the end of month 12. The plan “kicks-out” if at one six-monthly point (after year one) the index is at or is higher than its starting point.

It must be noted here that capital is at risk if markets fall by more than 50% at maturity and because of this we would highly recommend that investors take professional advice from a qualified adviser before investing in capital protected plans. What is crucial is who is providing the guarantee; the strength and regulation of the bank or counterparty must be analysed.

Diversification
The golden rule about investing! It is rarely advisable to “put all of your eggs in one basket” by choosing juts one option. You should try to split your capital between your preferred options and sit them together in a well-diversified, tax-efficient portfolio.

Review regularly!
Once investments are in place it is important to keep track of them, reviewing at least twice a year.