Being overweight in one or two asset classes increases risk. To protect your savings you need to own a good mix of investment assets, designed around your objectives, circumstances and risk profile.
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:
Asset allocation and diversification are key to helping you achieve these goals – in very simple terms, don’t put all your eggs in one basket.
Most people feel safe with cash. The money you hold on deposit in the bank does not drop suddenly based on geopolitical events, investor sentiment or a company’s misfortunes. And yes, it is important to keep some savings in cash. It is a convenient liquid asset, available when you need it (dependent on any fixed term restrictions) and it helps to balance out risk in your overall portfolio.
However, depending on your situation, most people should not keep too much savings in cash for the longer-term. Inflation reduces the value of capital slowly but surely each year, which eventually can affect your standard of living. Do not ignore inflation even though it has been low recently, because over the longer time it will reduce your spending power.
Looking at inflation in France (using the EU’s Harmonised Index of Consumer Prices), €100,000 would have lost a quarter of its value between 1997 and 2017. In the UK, the drop would have been 32%.
While savers used to rely on interest to earn income from their bank deposits, this has been next to impossible since interest rates were cut to historic lows in 2009. The future for interest rates is uncertain at the moment, and may depend on how the economy reacts to Brexit negotiations, the Presidential elections in France and other EU developments.
Investing in bricks and mortar can seem a solid investment, and indeed it is an important part of your overall portfolio, but remember that your dream home here in France forms part of your portfolio, quite possibly a large percentage.
If you buy a second or third property as an investment, this could make you very overweight in this asset class, which greatly increases risk. If real estate prices drop, all your properties could fall in value, while other assets may be performing well.
One significant downside with owning property as an investment is that it is very illiquid. If you need money suddenly for any reason, it may take time to find a buyer. If you have to sell in a down market, this will affect your profits. And of course with selling property it’s all or nothing, even if you only need to release some of the capital.
Equities and bonds
These asset classes generally form a key part of a portfolio. Unlike cash they have the opportunity to grow, and unlike property they are liquid – you can generally sell at any time (unless you are holding a type of fund with restrictions). While the timing of the sale may affect profits, you do not need to wait to find a buyer so you can usually receive the cash within a couple of weeks. And generally you only need sell the amount you need, rather than the whole investment.
Holding a range of different investments within each asset class is vital to reduce risk. With shares and bonds it is easy to own funds which include a range of completely different companies and sectors across the world. With investment properties, however, most people can only afford to buy one or two, giving them little or no diversification.
You can also hold shares and bonds in arrangements that provide currency flexibility and tax and estate planning benefits.
For example, holding shares and bonds in an assurance-vie that offers a multi-currency feature can be very useful for UK nationals in France, particularly if you are unsure what currency to hold savings in until things settle down after Brexit. You could hold a mix of currencies, or wait to convert at a time that suits you.
An assurance-vie can also provide significant tax advantages in France, helping maximise your returns. This includes reducing succession tax and can help by-pass France’s forced heirship too. Just remember to choose your assurance-vie carefully as they are not all the same, and the jurisdiction they are held in can make a difference too.
All this said, diversification is important to reduce risk, so you should not have all your wealth invested in shares or bonds either. You need to own a mix of assets, including cash, property, commodities etc, and avoid the temptation to be too exposed to one asset or one market – many British investors tend to hold too many investments in UK companies. It is impossible to predict which will be the best performing assets each year – an asset can go from being the best performing one year to the worst the next, so it is essential to have a good mix and investments managers with a strong track record.
What mix is right for you should be carefully determined by your risk profile, time horizon, circumstances and objectives.
Look at the whole picture
Finally, do not review your investments in isolation. All aspects of your wealth management are interlinked. What changes you make in one may affect the ¬other – solving a problem in one could create a problem elsewhere. The way you hold your shares or property, for example, could affect your tax liabilities and how you can pass them onto your chosen beneficiaries. You need to look at the whole picture and establish solutions that provide benefits for your investment, tax, estate and retirement planning. It is advisable to take specialist advice to ensure you achieve this.
Any questions? Ask our financial advisers for help.
These views are put forward for consideration purposes only as the suitability of any investment is dependent on individual circumstances. Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals should seek personalised advice.