Smoothing out your porfolio's returns

A time-tested method for controlling risk over time

In the light of more recent historic market volatility, it’s perhaps natural to be looking for ways to smooth out your portfolio’s returns going forward. Investing regularly can smooth out market highs and lows over time. In a fluctuating market, a strategy known as ‘pound- cost averaging’ can help smooth out the effect of market changes on the value of your investment and is one way to achieve some peace of mind through this simple, time-tested method for controlling risk over time.

It enables investors to take advantage of stock market corrections, and by using the theory of pound-cost averaging you could increase the long-term value of your investments. There are however no guarantees that the return will be greater than a lump sum investment, and it requires discipline not to cancel or suspend regular Direct Debit payments if markets continue to head downwards.

Regular intervals
The basic idea behind pound-cost averaging is straightforward: the term simply refers to investing money in equal amounts at regular intervals. One way to do this is with a lump sum that you’d prefer to invest gradually – for example, by taking £50,000 and investing £5,000 each month for 10 months.

Alternatively, you could pound-cost average on an open-ended basis by investing, say, £5,000 every month. This principle means that you invest no matter what the market is doing. Pound-cost averaging can also help investors limit losses, while also instilling a sense of investment discipline and ensuring that you’re buying at ever-lower prices in down markets.

Market timing
Investment professionals often say that the secret of good portfolio management is a simple one – market timing. Namely, to buy more on the days when the market goes down, and to sell on the days when the market rises.

As an individual investor, you may find it more difficult to make money through market timing. But you could take advantage of market down days if you save regularly, by taking advantage of pound-cost averaging.

Savings habit
Regular savings and investment schemes can be an effective way to benefit from pound-cost averaging, and they instil a savings habit by committing you to making regular monthly contributions. They are especially useful for small investors who want to put away a little each month.

Investors with an established portfolio might also use this type of savings scheme to build exposure a little at a time to higher-risk areas of a particular market.

The same strategy can be used by lump sum investors too. Most fund management companies will give you the option of drip-feeding your lump sum investment into funds in regular amounts. By effectively ‘spreading’ your investment by making smaller contributions on a regular basis, you could help to average out the price you pay for market volatility.

Pound-cost averaging
Any costs involved in making the regular investments will reduce the benefits of pound-cost averaging (depending on the size of the charge relative to the size of the investment and the frequency of investing).
As the years go by, it is likely that you will be able to increase the amount you invest each month, which would give your savings a valuable boost. No matter how small the investment, committing to regular saving over the long term can build to a sizeable sum. The key to success is giving your investment time to grow. Choose the amount you want to invest and set up automatic deposits. Once this is up and running the chances are you won’t even notice it going out of your monthly budget.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This information does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. Although endeavours have been made to provide accurate and timely information, Professional Practice Services cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

Professional financial advice you can trust
Regular investing may be ideal for people starting out or who want to take their first steps towards building a portfolio of funds for their long-term future. To find out more about the different options available to you, please contact us.

Call our friendly, knowledgeable team for a confidential, no obligation discussion:
01527 880345
 

Visit our Website at:
www.pps-vet.co.uk
 

Professional Practice Services is a Veterinary Business Consultancy and Independent Financial Advisory Firm. Professional Practice Services is authorised and regulated by the Financial Conduct Authority
The Financial Conduct Authority does not regulate finance, will writing, commercial lending, taxation or trust advice.

Growing your wealth over time

Choosing investment vehicles that match your feelings and preferences is the key

It may no longer be enough to simply preserve what you have today; you also have to build what you will need for tomorrow. When deciding whether to invest, it is important that any investment vehicle matches your feelings and preferences in relation to investment risk and return.

Market volatility in recent years may have left some investors feeling uncertain and many have stepped away from investing in the stock markets. But not all stocks and shares are the same. For those seeking long-term total returns, there still are some high-quality companies – at attractive prices – offering the potential to grow wealth over time.

Long-range financial goals
Diversification is a term that can be summed up with this phrase: ‘Don’t put all your eggs in one basket’. Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. It aims to maximise return by investing in different areas that would each react differently to the same event. Diversification is the most important component of reaching long-range financial goals while minimising risk.

Hence your asset allocation needs to be commensurate with your attitude to risk. Another key question to ask yourself is: ‘How comfortable would I be facing a short-term loss in order to have the opportunity to make long term gains?’ If your answer is that you are not prepared to take any risk whatsoever, then investing in the stock market is not for you.

Asset allocation
If you are going to invest, you need to be prepared to take some calculated risk in the hope of greater reward. Risk is an implicit aspect to investing: shares can fall, economic conditions can change and companies can experience varying trading fortunes.

The process of deciding what proportion of your investment portfolio should be invested in the different types of investment is called ‘asset allocation’.

Asset classes
The various asset classes come with different levels of risk (volatility of returns) and thus deliver different expected returns over the medium to long term. But, no one asset class always performs best over an investment period. Asset classes consist of a group of securities with varying degrees of risk.

There are three main asset classes:

•    Equities
•    Bonds (also referred to as fixed income)
•    Cash

Each asset class has different investment characteristics, for example, the level of risk and potential for delivering returns and performance in different market conditions

Equities
Equities (also known as ‘ordinary shares’, or ‘shares’) are issued by a public limited company and are traded on the stock market. When you invest in an equity, you buy a share in a company and become a shareholder. Equities have the potential to make you money in two ways: you can receive capital growth through increases in the share price, or you can receive income in the form of dividends. Neither of these is guaranteed, and there is always the risk that the share price will fall below the level at which you invested.

Bonds
Bonds, also referred to as fixed income securities, are issued by companies and governments as a way of raising money and are effectively an ‘I.O.U.’ Bonds provide a regular stream of income (which is normally a fixed amount) over a specified period of time and promise to return investors their capital on a set date in the future. Once bonds have been issued, they’re bought and sold between investors without the involvement of the issuer. Bonds are generally considered to offer stable returns and to be lower risk than equities – and hence deliver lower returns than equities.

Cash
Cash tends to be held within a bank account where interest can be gained. Alternatively, cash funds use their market power to get better rates of return on deposits than you would get in an ordinary bank account. They often invest in very short-term bonds known as ‘money market instruments’, which are essentially banks lending money to each other. In addition, cash funds can provide exposure to global currencies, which may not be easy to purchase on the open market and could be costly transactions.

Different characteristics for risk
These asset classes have different characteristics for risk. When you are young you may want to invest in assets with a higher potential for growth but greater risk, because you have the time to benefit from their long-term growth. As you get closer to retirement you may want to choose more conservative investments that are steadier in both risk and return.

There is a wide variety of different asset classes available to invest in and commensurate risks attached to each one. While these implicit risks cannot be avoided, they can be mitigated as part of the overall investment portfolio by diversifying.

Different ‘styles’ of investing
Some assets are said to be ‘negatively correlated’, for instance, bonds and property often behave in a contrarian way to equities by offering lower, but less volatile, returns. This provides a ‘safety net’ by diversifying many of the risks associated with reliance upon one particular asset. It is also important to diversify across different ‘styles’ of investing, such as growth or value investing, as well as across different sizes of companies, different sectors and different geographic regions.

Growth stocks are held as investors believe their value is likely to grow significantly over the long term, whereas value shares are held because they are regarded as being cheaper than the intrinsic worth of the companies in which they represent a stake. By mixing styles that can out- or under-perform under different economic conditions, the overall risk rating of the investment portfolio is reduced. Picking the right combination of these depends on your risk profile, so it’s essential to seek professional advice to ensure that your investment portfolio is commensurate with your attitude to investment risk.

A ‘paper loss’
The important thing to remember with investments is that even if your investment goes down, you will only actually make a loss if you cash it in at that time. When you see your investment value fall, this is known as a ‘paper loss’ as it is not a real loss until you sell.

If you are going to invest, you need to be prepared to take some risk and to see at least some fall in the value of your investment.

While all investments carry an element of risk, the amount of risk you take directly affects any potential returns and losses. Generally speaking, if there is less risk to your investment, your money will grow more slowly, and with more risk, your investment may fluctuate more.

Currency risk
You should also be aware of currency risk. Currencies (for example, sterling, euros, dollars and yen) move in relation to one another. If you are putting your money into investments in another country, then their value will move up and down in line with currency changes as well as the normal share price movements.
Another consideration is the risk of inflation. Inflation means that you will need more money in the future to buy the same things as now. When investing, therefore, beating inflation is an important aim. Investing in cash may not beat inflation over the long term.

Professional financial advice you can trust
Our goal is to help you grow your wealth even in difficult market conditions. The objective of our advisory approach is to ensure that you find the right financial solutions for your situation and to provide you with full access to our investment expertise. To discuss your requirements, please contact us.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This information does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. Although endeavours have been made to provide accurate and timely information, Professional Practice Services cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

Call our friendly, knowledgeable team for a confidential, no obligation discussion:
01527 880345
 

Visit our Website at:
www.pps-vet.co.uk
 

Professional Practice Services is a Veterinary Business Consultancy and Independent Financial Advisory Firm. Professional Practice Services is authorised and regulated by the Financial Conduct Authority
The Financial Conduct Authority does not regulate finance, will writing, commercial lending, taxation or trust advice.

NISAs - A New Phase for ISAs

Individual Savings Accounts (ISAs) enter a new phase from 1 July 2014. At present, ISA contributions for the 2014/15 tax year are capped at £11,880. The entire amount can be invested in a stocks & shares ISA, or up to £5,940 can be saved into a Cash ISA. However, from 1 July 2014, the ‘New ISA’ (NISA) limit will increase to £15,000 and you can invest as much as you like of this allowance in cash, stocks & shares or a combination of the two. Investors will also be able to transfer ISA savings from previous years freely between stocks & shares and cash.

Moreover, from 1 July, any interest on cash held within a stocks & shares NISA will be free of tax. This means that, from 1 July, you could have just one NISA, rather than separate NISAs for cash and stocks & shares. This simplicity might be attractive to some investors although, you should not assume you will receive the best rate of interest on the cash element, and it might be worth having a separate cash NISA if you want a competitive rate. You can also transfer your NISAs freely between providers – subject to any penalties that might be applied by your existing provider – but you can only have one cash NISA and one stocks & shares NISA in any single tax year.

 

Any ISA subscription made between 6 April and 30 June 2014 will be counted against the £15,000 NISA subscription and you will not be allowed to open up a new NISA for the current tax year from 1 July. Instead, you will have to top up the existing account. Do check with your provider’s terms and conditions – particularly if you have already opened a fixed-rate cash ISA.

 

The range of investments that can be held within a NISA is also expanding – for example, investors will be able to hold corporate bonds with less than five years left to maturity. This expansion is likely to lead to an increase in new products from providers that, in turn, will provide greater choice for savers. One thing will not change, however – once it’s gone, it’s gone. At the end of each tax year, you lose any unused ISA allowance, so make sure you act in good time and, if you are unsure about anything, do seek professional advice.

 

Professional financial advice you can trust

Our goal is to help you grow your wealth even in difficult market conditions. The objective of our advisory approach is to ensure that you find the right financial solutions for your situation and to provide you with full access to our investment expertise. To discuss your requirements, please contact us.

 

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. Tax treatment is based on individual circumstances. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. Investment into stocks and shares ISAs does not include the same security of capital which is afforded with cash ISAs.

 

This information does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. Although endeavours have been made to provide accurate and timely information, Professional Practice Services cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

Next Steps

If you have an existing ISA which you wish to review in light of the new legislation, or you wish to start making new ISA savings, then please contact us for a confidential, no obligation discussion: 01527 880 345

 

Professional Practice Services is a Veterinary Business Consultancy and Independent Financial Advisory Firm. Professional Practice Services is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate finance, will writing, commercial lending, taxation or trust advice.