We are often asked to express in simple terms examples of how to construct an investment programme, be it for growth and/or income.
It must be confirmed that what is written must not be taken as advice, as advice is always specific to the individual person or entity concerned.
Basic and simple considerations prior to investing
Firstly, it is essential that all investors consider their personal needs, such as their income position and income requirements, expenditure against income, along with their capital position – setting an objective for the capital and surplus income to be invested (in terms of % results) against the risk an investor is prepared to take, over the medium to longer term.
A starting point, which forms the basis risk focus when advising investments clients, is to complete a Risk Profiling process which identifies an individual’s personal risk tolerance, financial goals and capacity to suffer loss.
If capital is being invested for income, a goal needs to be set, based upon the cashflow needs of the investor, which will ultimately drive the selection of investment funds and products in order to match and produce a suitable investment solution.
As an advisory business, when engaging with investors, it is a regulatory requirement to ensure that the product solutions recommended are suitable to meet the needs of an investor. Of course, products can fail or fail to deliver to expectations, even after taking advice, but the holistic balance of an investor’s financial position must be considered, which is carried out through the ‘know your customer’ process, so that a failure of a product to deliver to ‘ones needs’ does not decimate an investor’s overall position.
After all, investing is not often a ‘guaranteed outcome’ across all products and investment strategies. As all investors know all too well; past performance is not a guide to future performance and prices of assets can fall as well as plummet….
The ‘know your customer’ process involves gathering hard facts, along with personal ‘soft facts’, which help an adviser to fully understand the personal position of an investor, looking beyond what is simply black or white…..
Liquidity – cash available for unforeseen expenditure and emergencies
As a general rule, it makes sense for investors to maintain a minimum of 6 months regular expenditure plus known immediate requirements for cash burn. This ‘contingency pot’ is best held and available for unplanned for or unseen needs.
This ‘6 months of expenditure’ number assumes income to meet with budgetary needs is maintained.
We recommend using instant or 1 month access accounts for this, while ‘shopping around’ for competitive rates. There are a number of ‘up to date’ sites that provide information in this space – check out Moneyfacts – https://moneyfacts.co.uk/savings/easy-access-savings-accounts/
Using Tax Allowances is essential. A considerable ‘drag’ on investment performance can be created if investment plans are not effectively invested in tax efficient investment product solutions.
Check out our links to the tax planning articles below:
Once a decision has been made to invest, in line with the needs and tolerance to capital loss of the investor, an expert adviser looks at the construction of a portfolio to ‘suit the needs’ of the investor. As Best Price FS are independent financial advisers we have no product or fund access restrictions – selecting best of breed investment solutions from the investment universe, using tax effective investment ‘wrappers’..
Dislikes and likes – when producing an investment programme
We don’t like single strategy investment solutions, where exposure to one fund is used within an allocation to a sector – as even the best quality long term fund managers suffer from making what turns out to be the wrong investment positioning within their funds. Neil Woodford has had a torrid couple of years …. https://www.bestpricefs.co.uk/blog/investment-views-update-from-woodford-asset-management/
Even the best in the business – Warren Buffet gets it wrong … look at Tesco’s and recently Kraft Heinz Co.
We like a spread of fund managers across asset allocation sectors, so to mitigate risk and balance styles – trying not to develop duplication of the underlying stocks, where possible. (In order to fully understand this position analysis tools are required, along with professional practising experience, where the styles of the managers are understood).
For this very reason, we do not like targeted sales of funds on transactional platforms such as Hargreaves Lansdown, as they ‘sell’ a fund very well but that’s the end of their process… the rest of the process is down to the investor – so it’s a ‘finger in the air’ as to how a fund will perform, as I have said in previous communication – like ‘throwing a dart at a dart board!’ – monitoring is key to best outcomes … https://www.bestpricefs.co.uk/blog/spot-the-dog-fund-report/
Take a look at the broad fund exposure used in a typical risk model within the body of the above link. Risk management, via quality reporting tools, is essential – ensuring that the volatility of the various risk models are in line with expectations, suitability and the relevant benchmark – https://gallery.mailchimp.com/03161d6ca4cecca6092a0798c/files/65f1c355-1bc2-4fcf-9db1-a6bcf75f8814/Risk_5_Model_Portfolio.pdf
Structured Products and Structured Deposits
We must highlight the difference when buying a Structured Product or Deposit Plan; which is very different to managing and holding a basket of ‘long only’ investment funds.
A Structured Product/Deposit is a buy and hold contract arrangement that, once purchased, there is little more – in fact, nothing to do – from an ongoing management viewpoint. An investor purchases the contract terms on offer and simply maintains holding the product in line with the terms.
We very much like complementing Structured Products and Deposits with investment portfolios.
We obviously like the plans we promote via our website; we love the plans offered by Tempo – on a risk adjusted basis.
It is important that we provide clarity in relation to counterparty/issuer exposure nevertheless.
Exposure of more than 20% of an investor’s capital to Structured Products is generally not advisable, where the common sense approach of counterparty/issuer exposure is 10% of investor’s capital.
Structured Deposits are generally capital safe – protected up to £85,000 by the FSCS, so for lower risk investors using an increased weighting into a Structured Deposit Plan, rather than using a Structured Investment Product, would be correct.
Note that the headline rates are ‘potential returns’ governed by the contract terms explained in the Key Information Document of all issued products.
If an investor wants to invest £1 million for growth in a medium risk programme of investment over the medium to longer term, i.e. 10 years. Using 5-10% into two quality Structured Deposit Plans would be suitable, with a further 10% held between a number of quality Structured Product plans – take a look at our Structured Product plans – https://www.bestpricefs.co.uk/structured-products/
Don’t forget the risks
Depending on the individual’s risk profile (and risk acceptance as a priority) and tax position, products such as VCTs and EIS’s should also be considered.
We are able to access tax products for our clients at the best price. (For your information, we offer ‘advice’ at the price that some distributors offer products without regulated advice – Best Price indeed…..!
If you wish to purchase a VCT or EIS simply get in touch so we can assist you and advise accordingly.
Generally, exposure to less liquid, generally higher risk products should be limited to 10% of investable assets for a typical medium risk investor (which means, in simple terms, 5 on a scale of 1-10).
The balance of investable assets are generally best placed into a risk managed portfolio where ongoing reviews are carried out, in line with investment risk, needs and importantly reviewing the funds held – over time, making sure they meet the needs of the investor, identifying the failing fund solutions at times. This requires discipline, focus and, of course, the tools and experience to do this job. This is not about ‘buying and holding’ it’s about management….. and process …….
This is a simple overview of what is a complex job. If you would like to know more or take action, simply get in touch so we can assist you.
Best Price FS Team
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