Are your savings and investments suitable for you today and your future plans?

Investment Planning

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

Investment planning can help to determine whether your savings and portfolio are held in a way that is suitable for your current circumstances, and also strategically placed to achieve your long-term goals by carefully examining your risk appetite, objectives and ensuring tax efficiency.

We often write about the importance of protecting your wealth, from taxes, inflation, succession restrictions etc. It is worth highlighting that one key element, whether you are looking at tax planning, estate planning, investments, or pensions, is that the arrangements and strategies you use should be designed around your specific personal circumstances and aims.

Otherwise, there may be unexpected consequences in the future which do not suit what you had in mind for your family, or your investments may not be meeting your needs or could be too risky.

Personalised financial planning

Your circumstances change over time, as can your objectives, at which point you need to review your wealth management.  So, for example, it is important to re-evaluate your financial planning when you retire, and it is critical that you carry out a thorough review when you move to a new country, such as Spain, to take your new circumstances, income needs and the different tax regime into account.

A tailor-made strategic approach is key for the success of your investment portfolio.  Every investor has different objectives, time horizon and attitude to risk.  So it is vitally important that your portfolio is created and managed to meet your particular requirements.

Too many people have portfolios which are not suitable for them.  They often carry a higher level of risk than they are comfortable with, even though they may not realise this.  They may not have adequate diversification, or own too many illiquid assets, or perhaps some unregulated investment schemes.  Or the investment choices or combination of them may not actually be appropriate to meet their specific needs.

The opposite can also be true – people can be too cautious, and this can have consequences in your later years.

The inflation risk

Traditionally, many retirees have preferred to leave much of their savings in bank deposits, believing it is the safe approach for them now they have retired.

But there are no ‘safe investments’ and you need to consider the impact inflation and low interest rates can have on cash deposits.

Interest rates were at historically low levels for over a decade.  In the UK, for example, the Bank of England base rate was less than 1% from March 2009 to March 2022.  And while it is now above 3%, this is to combat high inflation – currently 10.5% in the UK.    This wipes out the gain you made and the spending power of your capital is falling.  While inflation will not remain this high, even low inflation rates will erode your value of your savings when compounded year after year over many years.

As a basic illustration, if you have €50,000 in a current account with no growth, and inflation is 3% every year, after 10 years its value will have fallen to around €37,000. After 20 years it’s around €27,500 and after 30 just €20,555.  That’s a 59% reduction in purchasing power.

Managing and balancing risk

Some risk is unavoidable to achieve an investment return that should keep pace with inflation.  However, to avoid undue risk, you should obtain a clear and objective assessment of your personal appetite for risk, for example through psychometric analysis.

Once you have your risk profile, you can move on to look at allocation of assets between equities, fixed income  (bonds), ‘real assets’ (eg listed property or infrastructure) and cash to create the most appropriate investment portfolio to match your profile and objectives.

The higher your concentration in particular assets, the less diversification and spread of risk in your portfolio.  The tried and tested strategy to mitigate risk is diversification — a well spread portfolio of investments, not only in terms of asset classes but also by geographic region and market sectors, in order to limit your exposure to any single sector of the market.  It is widely acknowledged that asset allocation is of greater importance than the selection of individual stocks and shares.

If you want to take maximum advantage of the expertise of the world’s best investment managers, the key to success is a thorough, critical analysis of funds and fund managers in order to select the best managers for each area of investment. While most private banks and other wealth managers advocate this ‘open architecture’ strategy, in reality, very often a significant part of their portfolios is placed in their own ‘in-house’ funds.  As part of your diversification strategy, if you use multi-manager funds, they will be managed by several different fund managers, each selected for their expertise in specific regions and market sectors.

It is hard for private investors to establish which are the best managers and funds to use, so specialist advice is essential in order to select the most appropriate investment strategies and asset managers to meet your needs.

If it sounds too good to be true…

Also, always remember that if it sounds too good to be true, it probably is.  Investors can be seduced by investment schemes which claim to offer the alluring combination of high returns with little or no risk.  However, time and time again, the bubble invariably bursts and they lose their money.

Protecting returns from taxation

Finally, to achieve the best real returns, and protect your wealth for future generations, you need to use arrangements which shelter capital from tax; provide a tax-efficient income, and facilitate the transfer of capital to your beneficiaries with minimum of bureaucracy and inheritance taxes.  These should be arrangements which are compliant in Spain.

Investment planning – Regular reviews

Finally, it is also essential to reassess your portfolio on a regular basis and adjust the strategy accordingly.  Market conditions change and  asset prices rise and fall, affecting your original weightings and leaving you with an unbalanced portfolio which will change the portfolio risk.

And of course your personal circumstances can change too, which can affect your investment objectives and/or risk tolerance.

So, for peace of mind, you need to get your appetite for risk assessed objectively and matched to the optimum investment portfolio; diversify across assets markets and investment views, ensure your assets are in a tax-efficient structure, and carry out annual reviews.

All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice.

Contact Blevins Franks to arrange a consultation today.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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