an intelligent investment solution

Transcription

1 an intelligent investment solution

2 2 investing money today Investing money has never been easy, but these days it seems especially difficult: Uncertainty - Investment markets don t seem to be behaving normally. Exceptionally low interest rates mean bank deposits aren t even keeping up with inflation. Stock markets have been volatile. Property values have fallen. Too much choice - There is a huge choice of investments. Some look simple and attractive, but are actually complicated and risky. Choosing an investment can be a minefield. Time - There is never enough of it. As a result many people end up taking a piecemeal approach to investing by selecting different products at different times rather than following a thought out strategy. When investments are taken out they don t have the time to monitor and review them sufficiently. Choosing an investment can be a minefield. Added to this, for most of us investing money is now a serious and long-term issue. We are all living longer and having to take more personal responsibility for our retirement fund and how it is invested. In some countries it is possible for pension funds to be taken entirely as a cash lump sum which then gives people the worry about how the money should be invested at retirement to provide income for the rest of their life, and ensuring it doesn t run out before they die. At efpg we help our clients meet their investment needs through our unique and market leading financial planning and investment management service - efpginvest. To assist you, we have produced this plain English guide to introduce to you our intelligent approach to investing.

3 what does investing really mean? The answer to this may seem obvious, but a true understanding of this question is the first step towards investing successfully. When you make an investment you are actually doing one of three things. You are either: investing - in the true sense of the word, lending or speculating What do we mean by this? Put simply, saving and investing is about deferring spending from now to some time in the future. The question then is what to do with the money that is set aside? If we do nothing with it and leave it under the bed it gains no value, and, indeed, because of inflation it will lose value in real terms. As an alternative to this, true investing is about using our money productively as part of the wealth creation process in the economy. If we were all entrepreneurs running our own businesses we would invest our time and money in an enterprise that grows and creates wealth for ourselves. However, not everyone is or wants to be an entrepreneur, so in practice we invest in others - individuals or companies - who create wealth for us. Company shares and stock markets have been developed to make this possible. The investor who invests in this way benefits from investment success in the form of the income and capital gains he receives, but his investment is also at risk if the enterprise fails. The second type of investing lending - also puts money to productive use but on different terms. By lending to an individual or business on agreed terms the investor has more certainty about what rate of return he will receive and when. However, the price paid for this greater certainty will be a lower return. It is only natural and right that the greater risk of investing in shares should be rewarded through receiving a greater return. Lending includes such investments as bank and building society accounts, government savings schemes and fixed interest investments such as government gilts, debentures and corporate bonds. Generally speaking, short-term lending over two years or less provides higher degrees of capital security, but longer term lending arrangements come with relatively greater investment risk. The third type of investing in effect speculating - has become more widespread in recent years. This can be in various forms, for example hedge funds and so called structured or guaranteed products. Other examples are investing in gold or currencies. Gold is an example of an inherently unproductive investment. It pays no income, and its value lies solely in its perceived desirability in the eyes of other people. Speculation has no place in the efpginvest approach to investing. In our view the most effective way to invest over the long-term is through a combination of investment into company shares, and short and longer term lending, and to avoid speculating. For any individual the proportions of money invested into the two categories of shares and lending should depend on three factors: the timescale over which the investment is being made, the level of investment risk the investor wishes to take, and the investment return that they require. Unfortunately the second and third of these factors sometimes conflict, and so compromises may need to be made and understood before any investment is made. True investing is about using our money productively as part of the wealth creation process. 3

4 tolerance to investment risk Before explaining our preferred approach to investment in more detail we would like to explain two inter-linked aspects to investing - investment risk and investment reward. The whole issue of investment risk is a difficult one. Being overcautious and avoiding investment risk prevents many of us from doing as well as we could financially. On the other hand ignoring investment risk, or failing to properly understand it, can lead to unpleasant financial consequences. A problem for many potential investors is to fully understand the risks associated with different types of investments. Things are not helped because there is no standard definition of what a high risk and a low risk investment is. Much depends on the circumstances and perspective of the person making the investment. Being overcautious and avoiding investment risk prevents many of us from doing as well as we could. Risk can also change meaning depending on timescale. Some simple examples illustrate this. Should you invest in the stock market money that you will need in one year s time to buy a new car? The only sensible answer is No. Holding the money on deposit with the bank would be more appropriate since whilst there is little opportunity for gain there is no chance of a loss. If the money was invested in the stock market there is the risk that over one year the value of the investment could fall. Should you invest in deposit account money that you need in 35 years time to provide for your pension? Again, the only sensible answer is No. Although stock markets are riskier than deposits in the short term, they pay superior returns over the longer term. The risk to the investor of missing out on these superior longer term returns is more important than the risk of a fall in value in the first year. So the definition of investment risk will also depend on the investment timescale concerned and the needs of the investor. Unsurprisingly, without assistance many people find it difficult to best assess their own tolerance to investment risk, and what level of investment risk they should take. efpginvest takes particular care when advising clients in this area. To establish with our clients their tolerance to investment risk we use an independent risk profiling system. 4

5 investment return Compound interest has been described as the Eighth Wonder of the World. This comment has even been attributed to Albert Einstein, although there is no direct evidence of this. The point to make about compound interest is very simple. objectives. Increased investment reward always comes at the price of increased investment risk. Any investment that appears to offer high returns and security should be scrutinised carefully. As the saying goes - If it looks too good to be true then it probably is. 100,000 invested over 10 years earning 5% per annum compound will grow to 162, ,000 invested over 10 years earning 7% per annum compound will grow to 196,715, this is 20% higher 100,000 invested over 20 years earning 5% per annum compound will grow to 265, ,000 invested over 20 years earning 7% per annum compound will grow to 386,968, this is 45% higher The moral is that over the longer term even quite small differences in annual percentage returns can have a very significant effect on the final outcome. Over the longer term even quite small differences in annual percentage returns can have a very significant effect on the final outcome. The implications of this are particularly significant when people save for their retirement. Under these circumstances money may be invested for 30 years or more prior to retirement and a further 20 years or more once actually in retirement. A good deal of thought needs to go into establishing what level of investment risk an investor wishes to tolerate, and perhaps should be prepared to tolerate to achieve their 5

6 our approach to investment efpginvest s view is that the most effective way to invest over the long-term is through investing in a combination of company shares and short and longer term lending arrangements. Investing successfully means establishing the most appropriate balance between these two types of investment. The table below lists for investors with different tolerances to investment risk, what the balance between these investment types might be. Tolerance to Allocated to shares Allocated to medium/ Allocated to short investment risk % longer term lending term lending % % High Higher Balanced Cautious Low Nominal We consider that investing according to these proportions - and then ensuring that these proportions are maintained - is essential to achieving a successful investment outcome. 6

7 Tolerance to investment risk is important in its own right, but it must also be considered in association with the investment returns needed by the investor, and the timescale over which the investment is made. generally, further performance can be achieved by modest additional investment into higher returning sectors such as the smaller companies, emerging markets, and the value sectors. Once the above percentages have been established, the question then arises how best to implement investments within these categories? All of the above can easily be achieved by investing in funds selected to meet the above criteria, and which are available to efpg. Investing in the stock market Investment in loan investments When it comes to investment in shares efpg s preferred approach is straightforward: We again believe in the principles of investing widely, diversifying to reduce risk, and keeping investment costs to a minimum. We believe that very few professional fund managers consistently beat the performance of the market generally, especially after fund management costs are taken into account. Therefore efpg believes in the simple approach of buying the market so as to capture the returns that the stock market as a whole provides. This means investing in as many shares as possible. This also diversifies and reduces investment risk. We also believe in minimising the costs of investing. This means buying and holding shares rather than trading them in the attempt to make gains. We believe that whilst most stock market investment should be in core shares that reflect the stock market We believe that the main distinction that needs to be made with this type of investment is between very short term investments which offer a higher degree of security (albeit at lower yield), and longer term investments which are comparatively riskier (although less so than company shares). Again the above can easily be achieved by investment in funds selected to meet the above criteria. Once investment is made it is very important to retain an investment portfolio s structure in terms of its balance between shares and loan-type investments, since by doing so the investment portfolio retains its originally agreed risk/reward characteristics. 7

8 our investment proposition efpginvest s investment proposition consists of two elements: the upstream financial planning and investment advice, the downstream investment implementation and maintenance The planning and advice stage takes place as part of a detailed appraisal with our clients of their financial planning and investment needs and the establishment of an agreed financial plan. This covers: iii) lower costs component 2 - the investments themselves, which are bought and maintained on the investment platform component 3 - efpg s services in providing agreed periodic reviews of our client s financial planning and investment portfolios, and ensuring investment portfolios remain correctly structured to meet their agreed objectives defining the overall saving or investment objective establishing how much is to be saved or invested to achieve this the time frame involved the amount of investment risk with which the investor feels comfortable (established with the help of a scientific risk profiling system) the investment return required by the investor in order to meet their objectives whether this return is achievable bearing in mind the investor s risk tolerance and the economic and investment climate. If not these aspects are reconciled how investment can be made most tax efficiently. Once these issues have been considered then a specific investment plan with targets can be set. The above process provides fullest possible reassurance to investors that their investment plans are realistic and achievable The investment implementation is the actual buying and management of the investment portfolio. There are three components to efpginvest s investment implementation: component 1 - the establishment of an investment platform through which investments are purchased and administered. This can include clients other investments, trusts and pension arrangements The advantages for an investor of an investment platform are: i) just one, instead of potentially many contract administrators ii) just one, instead of potentially many valuation statements fullest possible reassurance to investors that their plans are realistic and achievable. 8

9 9

10 in summary efpginvest s investment proposition: harnesses the investment markets in an intelligent and effective way so that they become an ally in meeting investors objectives rather than an adversary. provides a strategic and complete financial advisory and investment solution - not a hotch potch of individual investments is low maintenance is low cost To find out more about how we can help you, contact: Paul Garner paulgarner@efpg.net Anthony Drew anthonydrew@efpg.net t