The Keys To Successful Investment

01.10.14

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.

In today’s world has become harder for investors to create and manage a portfolio which will achieve real returns, while matching their specific needs and risk profile.

In today’s world of low interest rates and higher taxes, it has become harder for investors to create and manage a portfolio which will achieve returns that outpace the erosive effects of inflation and taxation, while matching their specific needs and risk profile.

Nonetheless, if you follow some basic rules and take professional, personalised advice, you will achieve a portfolio that gives you peace of mind.

If it looks too good to be true… It almost certainly is!

This is very important advice to keep in mind, if you do not want to risk your wealth.

Since the ‘South Sea Bubble’ in 1720, investors have been seduced by investment schemes which claim to offer the alluring combination of high returns with little or no risk. However as investors have discovered time and time again, the bubble invariably bursts and they lose their money. In some cases, these schemes are simply fraudulent (e.g. Madoff), in others they are ‘black box’ products created by investment banks.

Obtain best advice

There are literally thousands of banks and investment management companies who all claim to be leading experts in the management of financial assets. 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.

A tailor-made approach

Every investor has different objectives, time horizons and attitude to risk. So it is vitally important that your portfolio is created and managed to meet your particular aims and objectives, including your requirement for income. It is also important to reassess your profile on a regular basis and adjust the strategy accordingly.

Understand your risk profile

As interest rates today are close to zero, no risk means no returns. Some risk is therefore unavoidable to achieve an investment return that will outpace 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.

Asset allocation to match your risk profile

The critical starting point in the creation of the most appropriate investment portfolio to match your risk profile and objectives is the allocation of assets between money market, fixed income (government and corporate bonds), equities and ‘real assets’ such as property.

It is widely acknowledged that asset allocation is of far greater importance than the selection of individual stocks and shares.

Diversification

The higher your concentration in particular assets (or asset classes), the higher the risk. The tried and tested strategy to mitigate risk is diversification — a well spread portfolio of investments, not only in terms of asset classes (as described above) but also by geographic region and market sectors, in order to limit your exposure to any single sector of the market.

Access to the world’s best investment managers

No investment organisation excels in the management of all asset classes. 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, very often, in reality, 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 market sectors.

Discretionary or advisory?

Investors have the choice of two distinct styles of portfolio management:

The ‘discretionary’ Service has been designed for investors who prefer to delegate the management of their capital to a selected investment management company, who will actively manage the portfolio. A major advantage of this service is that the managers are able to respond rapidly to fast changing events.

The ‘advisory’ Service is more suitable for investors who prefer to be consulted before the managers switch assets within their portfolio. Underlying investment management decisions can be taken within asset types but significant changes to major asset classes would normally be made in consultation with the client.

Many investors will hold part of their assets in a discretionary service, and part on an advisory basis. You would need to establish what would work best for you and what you would be most comfortable with.

Tax planning

To achieve the best real returns, and protect your wealth for future generations, when setting up your portfolio you also need to use arrangements which shelter capital from tax; provide a tax efficient income, and facilitate the transfer of capital to your beneficiaries with the minimum of bureaucracy and inheritance taxes.

In summary, therefore, for peace of mind that your investment assets are working as well as they can be for you, you need to get your appetite for risk assessed objectively and matched to the optimum investment portfolio to suit that risk appetite; diversify across asset types, markets and investment views; review your portfolio from time to time and ensure your assets are put in the right structure to limit potential taxation.

11 August 2014

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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