Investing does come with some risk, but most investors accept that they need to take some risk in order to have the best chance of achieving their longer-term goals. Successful investment is crucial to your future financial wellbeing and has significant potential for increasing your wealth. Therefore, when developing your investment strategy, it is important to understand the reason for making each investment aswell as understanding the individual circumstances of the as no one situation is ever the same. You can invest conservatively or cautiously aswell as aggressively. Investment is not a one-stop shop, but sitting behind any investment are some key pillars that will be applied consistently.

Having been a client of St. James’s Place long before I became a partner of the organisation I have long subscribed to these key principles of an investment strategy:

1. Cash – Making sure you have sufficient cash easily available to meet your short-term needs, including an allowance for emergencies.
2. Timeframe – Taking a clear view of the timeframe for which you’re able to invest your money. Typically, I would consider 1-3 years as short term and not really suitable to the type of investing that I support.
3. Inflation – Not overlooking the impact that inflation can have on the spending power of your money.
4. Diversification – Spreading your investments across a number of different asset classes and investment managers, to reduce the risk of all your investments falling in value at the same time.

Choosing not to invest your money also carries risks. Inflation reduces the spending power of money over time. The key to successful investment is not to avoid risk entirely, but instead to find an appropriate balance of risk and reward to help you meet your investment objectives. Risks should be considered over the period you’re looking to invest. Some investments may pose a higher risk in the short term, leading to initial losses which could be reversed by longer term gains. In contrast, short-term, stable growth may be undermined by exceptionally high periods of inflation which leads to erosion of the real value of an investment. It takes vision, planning, commitment and discipline to become an investor, but I aim to make that transparent for any clients take the workload away from them, bar open discussions.

Investing for the future could make a critical difference to your financial wellbeing, and, having considered the items above, the choice of where to invest becomes an important decision. It’s important to bear in mind

1. Your readiness and capacity to withstand loss.

You need to be prepared to consider investments which may fall in value, in return for the possibility of better growth over the longer term. We will agree how much risk you can accept without having a major impact on your day-to-day life. This means ensuring adequate cash reserves are set aside before investing, and assessing whether, if the worst were to happen and you lost a large proportion or all of your investment, it would have a detrimental impact on your standard of living either now or in the future. If you do not have other assets sufficient to withstand any fall in the value of your investment, or are simply not prepared to accept the risk, you should consider very low-risk investments. National Savings and Investments (NS&I) are an example of a very low-risk option. You should, however, be aware that the real value of your investment is likely to be eroded by the effects of inflation over the longer term.

2. The time horizon for your investment

When assessing which funds and investments may best meet your needs, it is important that you consider the effect that your time horizon has on the amount of risk you’re willing to take. Typically, when investing for the longer term you can afford to take more risks as any loses will have time to recover.

Combining these two points above can help you understand the level of risk you could take. For example, if you have a medium capacity to withstand loss, but a relatively short time horizon, this will scale back the extent to which you will be willing to accept risk within your investments. What else should you consider when choosing to invest?

I mentioned above about diversification of asset classes. The main asset classes for your investment strategy will be cash, bonds, equities, (commercial) property & alternatives. The aim of diversification is to spread your investments across different asset classes so the potential losses in one asset class could be offset by gains in another. Overall, this could help reduce the combined risk of your investments, even though the risks specific to each individual asset class remain unchanged. There is, however, no guarantee that this strategy will work all the time as the effect of changing economic conditions is complex and the performance of one asset class can impact on another.

Cash – This includes bank and building society deposits. Other investments, such as money market instruments, are also often included within this asset class. Although the risk of a fall in value is typically low, interest rates can fall and returns on cash investments are unlikely to keep pace with inflation over the longer term. In times of low interest rates, returns may not be sufficient to cover the charges that are deducted from the investments.

Bonds/Gilts – This includes government and corporate bonds. Typically, these investments offer fixed returns over various terms and are used by governments and companies to borrow money from investors. The capital invested is usually returned in full at the end of the term of the bond. However, the capital value and level of income provided by bonds are directly linked to the financial strength and stability of the organisation involved. Bonds tend to provide higher levels of income than cash, but their values will fluctuate more. They are sensitive to changes in interest rates, inflation rates and investors’ views about the security of the government or company borrowing the money. For example, an increase in interest rates or an increase in inflation will usually cause the current market value of bonds to fall, although it will not usually affect the maturity value. Bonds with shorter terms are typically less sensitive to these changes than bonds with longer terms. Gilts (UK government bonds) are normally the lowest-risk bonds, as the risk that the UK government will default on its obligations to pay interest or repay capital is very low. Indeed, the UK government could, if it wanted to, simply print money to meet its obligations to investors.

For corporate bonds there is a greater chance that some of the companies that issue the bonds will fail to make interest or capital payments in future. This would reduce the value of your investments, either due to the company missing payments, or because the value of the bond has fallen when investors believe the security of the company has reduced. ‘High yield’ bonds carry a higher level of risk than bonds classed as ‘investment grade’, which have been issued by more financially secure companies. In general, companies which are financially less strong need to pay investors more by way of an income to compensate for the extra risk that they may, in future, not be able to meet their commitment to pay the income or repay the capital when the bond matures. The income generated by high yield bonds is therefore typically greater than that generated by investment grade corporate bonds, which, in turn, is typically greater than that generated by gilts. By investing in a range of companies, you’re able to dilute the risk of any one company defaulting.

Equities

These are shares in the ownership of companies, with the value of a company’s shares being directly linked to its success and profitability. The value of investments in equities will usually fluctuate more than the value of investments in bonds, but historical equities have provided higher returns over the medium to long term. However, it is important to remember that these returns are not guaranteed and there have been periods when equities have fallen significantly in value. Some types of equities are riskier than others. For example, shares in companies in less developed economies, often called ‘emerging markets’, tend to fluctuate in value more than shares in companies in developed economies, such as the United Kingdom.

Property

An investment into a diversified portfolio of commercial property will tend to fluctuate in value less than an

investment in equities, but can still fall sharply from time to time. The value of property is generally a matter of a valuer’s opinion until the property is sold. Also, commercial property cannot always be readily sold, so investors may not be able to access their capital quickly. Property tends to generate a higher level of income than cash, making it an attractive investment over the long term for investors seeking income.

We understand the responsibilities we have when you ask us to manage your wealth.

Alternatives

Assets which do not fall into any of the previous categories are often referred to as ‘alternative investments’. These include commodities such as gold, oil and timber. For most investors, such assets would form only a small proportion of their overall investments. Some funds also invest in derivatives. These are contracts, issued by investment banks, whose values change depending on the value of underlying assets such as equities, bonds, commodities or currencies. Derivatives can be used either to increase a fund’s exposure to certain assets or with the aim of reducing the volatility of returns. Derivatives carry the risk that the institution from which a derivative has been bought might fail to meet its obligations when they are due, which would impact the value of the investment.

In conclusion, an investment strategy should be more than a hunch. In an ideal world, all the components above will be considered and then reviewed throughout the timeframe of the investment. Of course, there is a place for hunches, we are all human, but I would suggest this is for your “casino money” not for future lifestyle planning.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested.

 Andrew Varley Financial Planning is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.

Sources:

https://www.sjp.co.uk/products-and-services/investment/investment-management-approach

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