Now is the perfect time to review your wealth management, particularly your investment portfolio, to make sure it is on the right track to achieve your objectives. Whether you are just taking a fresh look at what you have, or have the capital to invest, there are five key aspects you need to address for successful investing.
These will help ensure your savings are working as hard as they can for you, helping you earn real rates of return (after inflation and tax) at the same time as being designed around your objectives, circumstances and risk tolerance.
1. The right tax-efficient structure
2. Your appetite for risk
3. Matching your risk profile and objectives to a suitable investment portfolio
1) Tax and estate planning considerations – choosing the right tax-efficient structure for your investments
A tax-efficient structure, such as an ISA or pension plan in the UK, can keep most of your investments in one place and importantly provide protection to help you legitimately avoid paying too much tax. You want to ensure that as much of your hard-earned wealth as possible is placed in the most suitable structure to limit your tax liabilities. At the same time, consider your estate planning wishes, so that your investment capital can be passed to your chosen heirs as easily and tax-efficiently as possible.
That was perhaps easier to achieve in the UK where we are accustomed to the local rules, but once you are living in countries like France, Spain, Portugal, Cyprus and Malta, with their foreign tax and succession systems and various changes over the years, it is crucial to take tax planning advice from someone who is well-versed in the nuances of the local regimes and how they can impact your wealth.
Otherwise, you may happen upon an investment portfolio that produces excellent medium to long-term (5 to 10 years) returns, only to see them slashed by taxes that could have been avoided, or at least significantly reduced.
2) Your appetite for investment risk
Of course, no risk often means no returns. And arguably even bank accounts carry risk, as we saw with the 2008 banking crisis.
We also have inflation risk, where the rising cost of living erodes the spending power of bank deposits over time, more so when interest rates are low. While the recent inflation surge may have taken people by surprise, even low rates of inflation can reduce the value of your money over time.
Most of us recognise that for some of our assets, exposure to market movements gives us a better chance of outperforming inflation and producing real returns over the medium to long term.
However, the starting point has to be to obtain a clear and objective assessment of your appetite for risk. Otherwise, the result will be an investment portfolio that is not suitable for you.
These days there are some very sophisticated ways of evaluating your risk appetite, involving a combination of psychometric assessments and consideration of your other assets and the investment objectives you have for you and your family.
3) Matching your risk profile and objectives to the optimum investment portfolio
Every set of investments can be forecast to display a given amplitude of risk. Low amplitude, less investment risk but also lower likely returns. A higher amplitude of risk brings greater potential returns but also higher investment risk. The key is ensuring your investment portfolio matches your attitude to risk.
It is extremely difficult to effectively assess your own risk profile; you will benefit from third party professional objective guidance. Without such a sound assessment being then matched to the optimum blend of investments, you are likely to find yourself with a portfolio that is too risky or too cautious for you.
Another key initial step in ensuring your portfolio is suitable for you is to establish your objectives. Are you looking for income, growth or a combination? Or is your prime concern to preserve your wealth for children and grandchildren? What is your investment time horizon? Your adviser should then help you build a portfolio based on both your risk profile and objectives.
4) Successful investing through diversification
The next critical component is to ensure your investments are suitably diversified and you are not over-exposed to any given asset type, country, sector or stock.
By spreading across different asset types (such as equities, government bonds, corporate bonds, property, cash) and markets such as the US, UK, Europe and emerging markets, you give your portfolio the chance to produce positive returns over time without being vulnerable to any single area or stock under-performing.
This sound investment approach can be extended by utilising a ‘multi-manager’, approach where several different fund managers are blended together. This can reduce your reliance on any one investment manager making the right decisions in all market conditions.
Finally, it is important to review your portfolio around once a year to re-balance it, which your adviser should do as part of their continuing service. As asset values rise and fall, your portfolio can shift away from the one designed to match your risk profile and objectives, and you may need to make adjustments to re-establish your original weighting. You should also consider if any of your circumstances have changed and the implications for your portfolio.
Regular re-balancing helps control risk and can have a positive effect on portfolio performance.
In summary, at Blevins Franks we ensure your assets are put in the right structure to limit potential taxation and meet your estate planning wishes; objectively assess your appetite for risk and match it to the optimum investment portfolio to suit that risk appetite and investment objectives; diversify across asset types, markets and investment approaches, and finally, review your portfolio as needed.
Five key principles which applied well can help you have the peace of mind to sleep at night, while your investments and investment managers work to your requirements. So, make it a New Year resolution to review your portfolio and wealth management this month, to keep it on track, not only for 2023 but into the future.
Contact Blevins Franks for personalised advice on successful investing.
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.