Investment planning involves carefully examining your objectives and risk appetite to ensure your portfolio is suitable for your current circumstances and strategically placed to achieve your long-term goals.
We often write about the importance of protecting your wealth from taxes, inflation, succession restrictions etc. It is worth highlighting that one key element, whether you are looking at tax planning, estate planning, investments or pensions, is that the arrangements and strategies you use should be designed around your specific personal circumstances and aims.
Otherwise, there may be unexpected consequences in future which do not suit what you had in mind for your family, or your investments may not be meeting your needs, or they could be too risky.
Personalised financial planning
Your circumstances change over time, as can your objectives, at which point you need to review your wealth management. It is important to re-evaluate your financial planning when you retire and also when you move to a new country, to take your new situation, income needs and different tax and succession regimes into account.
A tailor-made strategic approach is key for the success of your investment portfolio. Every investor has different objectives, time horizon and attitude to risk, and your portfolio must be created and managed to meet your requirements.
Many people have portfolios which are not suitable for them and can’t meet their specific needs. They may have built them up over time, buying investments here and there, without an overall strategy. The portfolio may carry a higher level of risk than the investor is comfortable with. They may not have adequate diversification, or own too many illiquid assets, or perhaps unregulated investment schemes.
The opposite can also be true – people can be too cautious which can have consequences in your later years.
Inflation risk
Traditionally, many retirees leave much of their savings in bank deposits, believing it is the safest approach for them. But there are no ‘safe investments’, and you need to consider what impact inflation and low interest rates can have on cash deposits.
Bank interest rates may seem more attractive than a couple of years ago, but we cannot forget that rates were held at historically low levels for over a decade. It is also important to compare your returns with the rate of inflation. If inflation is higher, the purchasing power of your assets is diminished.
Even low inflation rates will erode the value of your savings when compounded over many years. As a basic illustration, if you have €50,000 in a current account with no growth, and inflation is 3% every year, after 10 years its value will have fallen to around €37,000. After 20 years, it’s around €27,500 and after 30 just €20,555 – a 59% reduction in purchasing power.
Managing and balancing risk
Some risk is unavoidable to achieve an investment return that keeps pace with inflation. To avoid undue risk, obtain a clear and objective assessment of your personal appetite for risk, for example, through psychometric analysis. You can then move on to look at the allocation of assets between equities, fixed income (bonds), real assets and cash, to create the most appropriate investment portfolio to match your profile and objectives.
The higher your concentration in particular assets, the less diversification and spread of risk in your portfolio. The tried and tested strategy to mitigate risk is diversification — a well-spread portfolio of investments, not only in terms of asset classes but also by geographic region and market sectors, to limit your exposure to any single area. It’s widely acknowledged that asset allocation is of greater importance than the selection of individual stocks and shares.
It is hard for private investors to establish which are the best managers and funds. Taking specialist advice will help you select the most appropriate investment strategies and asset managers to meet your needs.
If it sounds too good to be true…
Remember, if it sounds too good to be true, it probably is. Investors can be seduced by investment schemes claiming to offer high returns, sometimes with little or no risk. However, time and time again, the bubble invariably bursts and they lose their savings.
Protecting returns from taxation
To achieve the best real returns and protect your wealth, use arrangements which shelter capital from tax; provide a tax-efficient income and facilitate the transfer of capital to your beneficiaries with minimum of bureaucracy and inheritance taxes. These should be arrangements which are compliant in Portugal.
Regular reviews
Finally, you need to reassess your portfolio on a regular basis and adjust the strategy accordingly. Market conditions change and asset prices rise and fall, affecting your original weightings and leaving you with an unbalanced portfolio. Your personal circumstances change too, which can affect your investment objectives and/or risk tolerance.
For peace of mind, get your appetite for risk assessed objectively and matched to the optimum investment portfolio; diversify across asset classes, regional markets and investment views, ensure your assets are in a tax-efficient structure, and carry out annual reviews.
This article should not be construed as providing any personalised investment or taxation advice.
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
