Investing to meet your
long-term objectives

The formula for success needs to consider much more than just how much you are likely to be able to earn from your investments.

The secret to success is having a portfolio that not only builds your wealth, but protects the wealth you create as you go. This involves understanding your attitude to risk – your real attitude, not an assumed one – and choosing the assets you include in your portfolio accordingly.

Aligning your assets and attitude to risk will involve a detailed initial talk with your financial adviser and will be influenced by your investment objectives. Are you saving for school fees? A down payment on a property? For your retirement?

Risk does not just relate to volatility in the markets either, it is also important to understand how you would feel if your investment objective is not met.

Each of your objectives could represent a different time horizon at which you need to access that money. School fees might give you a maximum of 10 years, retirement could give you anything up to 40 years or more. Both would create a different strategy that you should follow to achieve your goal, and is why you should work closely with an adviser to get this right.

Only when you are happy about the timeframes and the reasons you are investing can you start to really build the proper asset allocation for you. You need to have more than just one or two types of assets to build a properly diversified – and therefore more protected – portfolio.

There are a variety of different assets to choose from and within each there are various sub-options, whether differentiated by risk, geography, investment sector or theme.

The following asset summary is for generic information only and is not to be deemed as a recommendation to the individual reader. Individual circumstances and suitability must be taken into account prior to any recommendation and you should seek professional advice before proceeding with any course of action. Past performance is not a guide to future performance.

In general, they are:

  • Equities – Also known as stocks & shares, historically they tend to provide better returns over inflation in the long term, but higher volatility in the short term. You need to be aware of this and understand how these will help your returns.
  • Bonds – These are loans an investor makes with set returns over a fixed period, but the interest you will usually get from them is lower than the total returns you tend to see from equities.
  • Cash – Any portfolio should have some cash within it for emergency access. It is widely suggested that three months of income is sufficient to provide a cash buffer in case you need money in a hurry.
  • Real estate – Property is a British obsession and both commercial and residential property have provided good returns over the years. Whether held directly or through a fund, real estate can be illiquid, but can be useful, as it rarely behaves like equities or bonds. 
  • Infrastructure – buildings, roads, railways, hospitals and so on is a fall-back position for any government looking to boost a slowing economy. Getting access to these projects through investment in the companies involved in them or funds that target them can, in certain circumstances, help to protect your portfolio when the economy is less predictable.

More specialist asset classes can include art, fine wine and other collectables. These are only likely to be appropriate for relevant higher net worth investors with a bigger portfolio.

If either through personal knowledge, expertise or interest you can accept the higher risks associated with their ownership, you are more likely to invest in higher risk investments when you have a long time before you need the money. Investment markets can fall unexpectedly and can cause difficulties if you need the cash right away.

As you get closer to your investment target, you may need to move your money away from equities and towards assets with greater protection.

You should start to invest for any objective as soon as you can. The sooner you start and therefore the longer the term, the greater your choice of assets will be. For example, starting late might mean either investing less in equities, or increasing your equity exposure if you want to meet your objective with the associated rise in risk you are taking with your money.

 

Asset allocation is not easy, and should be revisited regularly depending on how your different assets have performed, which is the main reason to use a financial adviser as they can do the heavy lifting, and help you make the right decisions for you.

 

With more than 25 years of experience and over 160 advisers nationwide, AFH Wealth Management is one of the UK's leading financial firms.

 

If you would like to learn more about inheritance tax, or to discuss your financial portfolio, please call us on 01527 577775 or fill in the enquiry form below and we'll be in touch.


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