New clients are often completely bemused by the idea of investment and do not understand the differences between saving, which they have often been doing for decades, and investing.
Saving in a UK regulated bank or financial institution will be a process of considerable dullness, with low returns, almost absolute certainty and not much to look forward to. The most stress will come from reading the fine print from the few bank accounts offering more than 1.5%, as these will have restrictions based on paying so much money into the account each month and a cap on the interest to be earned. These are often quite complicated and treated as the letter of the law: comply or lose interest returns.
Inflation is bumping around 0.5 - 1.6%, (March 2016), depending on whether you are using the Consumer Prices Index or the Retail Prices Index, so there is a good chance your savings are losing value over time. So much for the security of cash!
What investment does not have is certainty; any ideas of return are estimates, not promises but implied by what came before, what is reasonably expected and the process used to select the investments chosen.
All of which brings us to investment risk; the likelihood of not getting the return you expected. Getting more than you expect is not a problem; getting less is a problem, especially if that is the difference between eating and going hungry. The stand out problem for investment risk is the possibility, however remote, of being worth less at the end of the year or more extremely, losing your stake money.
Investment losses you cannot avoid occur when you are backed into a corner and have to sell an investment asset at a bad time. The key technique for avoiding this is to hold cash for short term needs, near cash assets like government bonds for short to medium term needs and “a diverse portfolio of investment holdings” for long term growth. The whole point of investment planning is to ensure that you do not get backed into a corner and avoid realising losses by selling the wrong asset at the wrong time.
Now, back to the phrase “a diverse portfolio of investment holdings”; reliability of return is in diversity, so this is not just a few UK equity holdings, this is a number of holdings, spread geographically, by asset type, by region and by sector. This is where independent financial advisers, like ourselves can add value, advising the best asset allocations, fund managers and products to hold your investments.
The regulator, the Financial Conduct Authority, is very careful about what financial advisers can say about their services, so we cannot make rash promises or give guarantees of returns from investments, but we can give examples.
After a long period of thinking about it, my clients, a couple in their early 60s went from cash ISAs to a stocks and share NISA account each. Their actual returns have gone from 1.2% to 3.4% after all charges for the last 10 months. I am not trying to produce the biggest return possible; just a satisfactory return with reduced volatility. Trying too hard can increase the chances of unstable returns.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at email@example.com or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.