In our view, there are five key aspects that you need to address to ensure you obtain the optimum investment portfolio to suit you and your particular situation.
Drawing the analogy between investment planning and gardening may bring a clearer understanding of the important factors to consider, particularly when outside the UK.
Like gardening you often need to start with the idea that not everything you have previously planted is the best for current circumstances. Investment through your various ages has seasons as does gardening. What you planted and grew throughout your life in the UK may be entirely wrong for planting in your new country of residence. You will need to consider your new, often very different, conditions if you are to get your plants to flourish and grow to show off their best on your new patch.
In any event, you will need to carry out regular “weeding” to ensure the long-term growth of the plants you wish to develop and sustain for the future. This is a careful process and will often involve professional guidance for the best results.
In our view, there are five key aspects that you need to address to ensure you obtain the optimum investment portfolio to suit you and your particular situation:-
1. Right tax efficient structure for your residence and personal circumstances
2. Your particular appetite for risk
3. Matching your risk profile to a suitable investment portfolio
4. Diversification. [Repeat.] Diversification!
5. Reviews.
Tax considerations – choosing the right tax efficient structure
A tax efficient structure – such as a pension plan or ISA 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.
That was perhaps easier to achieve in the UK where we are accustomed to the rules, but with a foreign tax system, especially with various changes over recent years, it is really crucial to take advice from someone who is also well-versed in the nuances of the local taxation system and how it can impact your wealth.
Otherwise, you may happen upon an investment portfolio that produces excellent medium to long term returns, only to see them slashed by local taxes – levies that could have been avoided or at least significantly reduced.
YOUR appetite for risk
Of course, no risk often means no returns.
And arguably these days, as we witnessed in recent years, even bank accounts carry risk. Putting funds under the mattress is hardly the solution either!
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 (easily carried out in a face to face meeting with a wealth manager) and consideration of your other assets and the aims you have for you and your family.
Matching your risk profile to the optimum portfolio
Every set of investments can be forecast to display a given amplitude of risk. Low amplitude, less risk but also lower likely returns. A higher amplitude of risk brings greater potential returns. The key is ensuring your investment portfolio matches your attitude to risk. As surgeons frequently will not operate on their own family due to subjective emotional involvement neither should you try to decide on your own tolerance to risk – you will benefit from third party professional objective guidance.
Without such a sound assessment being then matched to the optimum blend of investments, you could find yourself with a portfolio that is too risky or too cautious for you.
As sailors will tell you, a glassy sea means no progress whereas a strong wind and choppy waves can be too risky. The ideal scenario is finding the conditions, or, in this case, investment portfolio, that suits you best.
Diversification
The next critical component is to ensure your investments are suitably diversified to ensure you are not over-exposed to any given asset type, country, sector or stock.
By spreading across different asset types (equities, government bonds, corporate bonds, property, cash) and markets such as the US, UK, Europe and the Far East, 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 should be extended by one further step: utilising a 'multi-manager' approach where several different fund managers are blended together can reduce your reliance on any one investment manager making the right decisions in all market conditions.
You should choose the right tax efficient structure, but that does not mean within it that you have to put all your eggs in the one basket; diversification done properly can reduce your exposure to risk.
Review
Finally, it is also important to review your portfolio around once a year to re-balance it, or delegate responsibility to a reputable discretionary investment manager to effectively do that for you. As asset values rise and fall, your portfolio can shift away from the one designed to match your risk profile and objectives. You may need to make adjustments to re-establish your original weighting, and you also need to consider if any of your circumstances have changed and the implications for your overall portfolio.
Regular re-balancing helps control risk and can have a positive effect on portfolio performance.
So in summary, ensure your assets are put in the right structure to limit potential taxation, 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, and finally, review your portfolio from time to time.
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.
12 February 2014
All advice received from any Blevins Franks firm is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation and / or investment advice.
All information contained in this article is based on Blevins Franks’ understanding of legislation and taxation practice, in the UK and overseas at the time of writing; this may change in the future.
