Why do we invest? For most people, it is to ensure we have sufficient retirement savings to enjoy the benefits of working hard throughout our lives, making the most of our free time and knowing we have enough in reserve to cover unexpected high costs like healthcare.
Our savings, therefore, need to keep pace with inflation to maintain our spending power as prices rise. Otherwise, our later retirement years may not be as comfortable as expected and extra expenses can become more worrying.
If we want to beat inflation, we need to invest appropriately.
After more than a decade of rock bottom interest rates, cash may appear a more attractive option. But what happens when you compare bank interest rates to inflation? And once inflation is under control, bank rates are likely to reduce. And what will bank and inflation rates be in 10 and 20 years’ time?
Holding a larger proportion of your savings in the bank is risky. Cash has proven to underperform inflation over the long term, while global equities and bonds beat it.
Successful investing isn’t easy, but following proven principles can reduce risk and avoid common pitfalls.
Trying to time the markets
Staying invested over the long term usually gives the best returns, as opposed to trying to time the markets. Buying and selling to chase short-term gains rarely helps meet your longer-term financial goals.
Attempting to enjoy all the upsides and avoid the downside is impossible and fraught with risk. You have to speculate on what future market movements and world events will be and get it right over and over.
Be careful of letting emotions sway investment decisions. If you get caught up in euphoria, you may buy when investments are at their most expensive. If you panic when markets fall, you may sell at their lowest and lock in your losses. If you do sell before shares finish falling, you need to judge when to get back in. Rebounds are often sudden and you miss the opportunity to recover your losses.
Missing the best days
Missing the best performing days can make a considerable difference to returns.
As an illustration, let’s say you invested £10,000 in UK companies (FTSE All Share Total Return) for the 10 years up to the end of 2022. If you stayed invested throughout, you would have enjoyed a gross profit (before fees and charges) of £8,824. If you missed the five, 10 and 20 best days, though, these profits would have dropped to £4,619, £2,415 and -£631 respectively. Missing the best 30 days meant losing £2,700. Being out of the market can carry risk too.
Waiting to invest
We often come across people who intend to invest for the long-term but are holding onto available capital. They’re waiting for external events to unfold first to feel more positive that they won’t suffer losses.
Sitting and waiting for the perfect time to invest is effectively trying to time the market. You may not be rewarded for your due diligence and end up with lower overall returns. If you are particularly cautious, consider the ‘pound cost averaging’ approach where you spread the timing of your investments.
Spreading risk
To earn returns that keep pace with inflation, we have to accept some risk. But you can take steps to reduce it.
Our strategy must be suitable for your situation, time horizon, risk appetite and goals. Then you need layers of diversification. A managed, diversified portfolio covering a range of asset classes, regions and sectors will likely generate better returns with less volatility.
Choosing an adviser who uses a dynamic ‘multi-manager’ approach can help increase diversification.
Your investment plan and maintenance
If you don’t yet have a strategic investment plan in place, start by looking at your situation and objectives. What stage of life are you at? What assets do you currently own? How much risk are you comfortable with? What are you trying to achieve? What are your current circumstances and future plans?
This will influence what your asset allocation should be. Work with an adviser who can objectively assess your attitude to risk to create your suitable, long-term investment plan.
Build a relationship with a trusted adviser to ensure that you are patient and stick to the plan. Your adviser should also review your portfolio annually to keep it on track.
Holding your investment portfolio within an arrangement that is tax efficient in your country of residence will help protect your capital from unnecessary taxation as well as inflation.
These views are put forward for consideration purposes only as the suitability of any investment is dependent on the investment objectives, time horizon, and attitude to risk of the investor. The value of investments can fall as well as rise, as can the income arising from them. Past performance should not be seen as an indication of future performance.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
By Adrian Hook
|| features@algarveresident.com
Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).
www.blevinsfranks.com
