When you have worked hard to build up your savings, it is not always easy to decide how best to look after them, especially if you are nearing retirement or already enjoying your retirement years.
You most likely have some or all of the following objectives:
- Protect your capital and maintain financial security
- Generate an income
- Grow the capital, but with an acceptable level of risk
- Leave a healthy inheritance to children and grandchildren
You know that you need to invest to earn enough capital growth but may also be wary about taking on too much investment risk. And if you are invested geopolitical events and market volatility can make you nervous and wonder if you should sell and sit in cash for a while.
In truth, for most people, successful investing is hard; financial markets are complicated and can be unpredictable. But by getting a better understanding of investment principles you can avoid some common pitfalls. Following these principles and working with a financial adviser will help turn your goals into reality.
The risks of trying to time the market
Successful investors are marathon runners, not sprinters. So staying invested in the markets over the long term usually gives the best returns. When you see the markets fluctuate, it can be tempting to buy and sell investments, either to chase short-term gains or because you are afraid share prices will fall. Unfortunately, this can often result in entering or exiting the market at precisely the wrong time and making emotional investment decisions will rarely help you meet your longer-term financial goals.
For individual investors, it is extremely difficult to anticipate and deal with the wide range and speed of events and issues which can impact economies and markets. At any time, external events, investor sentiment and even rumours can have a negative or positive impact, often unexpectedly and suddenly. Reacting to current conditions is usually too late, so to be successful, you would need to foresee both the best time to buy and to sell. Even experienced investors cannot get this right all the time.
Then there is the risk of missing out. It is surprising what a difference certain days in a market cycle can make to returns. If, for example, you are not invested because you are waiting for share prices to stabilise after a period of volatility, you could miss benefiting from rebound days if the market suddenly rallies.
To illustrate this, if you had invested £100,000 in the FTSE All-Share index for the full ten-year period up to 31 December 2021, and stayed invested the whole time, you would have enjoyed a profit (before fees and charges), of £110,700, so your investment would notionally have more than doubled to £210,700, including the original investment. Investors who missed the five, ten and twenty best days saw profits, before fees and charges are applied, drop to £64,090, £40,540 and £6,820 respectively. Those who missed the best 30 days saw a loss of £15,800.
While it may feel uncomfortable to stay invested when markets fluctuate, this discipline usually produces better returns over the longer term than chasing short-term gains.
The importance of diversification
Before investing, you need to ensure that your strategy is well diversified and suitable for your situation, risk appetite and goals. Even the most patient investor is unlikely to benefit from an ill-fitting portfolio that does not meet their needs or is overly concentrated in one area.
The best strategy for minimising risk is to diversify by spreading investments across multiple, unrelated areas. This should include a range of different asset classes (shares, bonds, cash and ‘real’ assets such as property) as well as geographical regions and market sectors. Diversification gives your portfolio the chance to produce positive returns over time without being vulnerable to any single area or stock under-performing.
Choosing an adviser who uses a dynamic ‘multi-manager’ approach can help increase diversification. By combining several carefully selected fund managers, this reduces reliance on any one manager making the right decisions in all market conditions.
Establishing a suitable investment approach
When investing, it is crucial to carefully assess your situation, income requirements, goals and timeline alongside your appetite for risk. This is best done objectively by an experienced professional who can then build a diversified portfolio with the right balance of risk/return for your peace of mind. Your arrangements should also be structured as tax-efficiently as possible for your life abroad.
If you have capital to invest, but today’s climate makes you nervous, you could consider spreading the timing of your investments over a period by investing in tranches. The ‘pound (or euro/dollar) cost averaging’ approach can help smooth out volatility and potentially improve average returns over longer time periods.
British expatriates may also benefit from exploring investment structures that have a multi-currency facility to minimise exchange rate risk. This would allow you to invest, for example, in sterling now and then switch to euros as you wished, and choose the currency of withdrawals.
Ultimately, a long-term, diversified investment approach is vital to help protect and grow your capital, whatever the economic climate. While a ‘keep calm and stay invested’ approach usually gives the best overall results over time, make sure you still review your planning once a year, or sooner if your circumstances change, to realign your investments with your risk profile and continue meeting your long-term financial goals.
Blevins Franks has decades of experience providing personalised investment advice to expatriates living in Spain, France, Portugal, Cyprus and Malta. We start by taking an objective assessment of your risk profile to develop an investment strategy that suits your personal situation and objectives, then choose the right blend of investment assets and managers to create a well-diversified portfolio that matches your needs and profile.
Contact us today to arrange a consultation.
These views are put forward for consideration purposes only as the suitability of any investment is dependent on individual circumstances; take individual personalised advice. The value of investments can fall as well as rise as can the income arising from them. Past performance should not be seen as an indication of future performance.