Very few individuals are in the fortunate position to have sufficient cash to achieve their long term goals. As a result, most people will need to invest money in an attempt to achieve these goals and, as such, will expose their capital to risk. We take seriously our responsibility for ensuring we make appropriate investment recommendations based on sound investment principles. These principles are:
• Money you may need in the short term, usually up to 5 years, should be kept in short term savings which protect capital. These include bank and building society accounts, National Savings or Government Gilts.
• You should only consider investing in equities, bonds or property when you have money to put away to meet longer term objectives.
• We adopt a structured and disciplined approach to investing which seeks to manage risk, target returns, minimise tax and above all, help you increase the probability of achieving your financial and lifestyle goals.
• We believe in investing, not speculating. While speculating can be fun, you should not use your investment capital to speculate.
• Our approach is clear in that we maintain a disciplined investment approach that supports the achievement of your strategy.
• High potential returns will almost always involve high potential risks. There are no low-risk/ high-return investments.
• Risk and return are closely related. The more risk you are prepared to accept, the higher the return expectations. Conversely, low returns should be a reflection of the investment's greater security.
• This relationship between risk and return can be depicted as below:
As you move left to right, you take on more risk for increased potential return. The line curves and flattens out as the marginal increase in return diminishes and you take on more additional risk.
• Investment risk comes in many forms, but to most investors risk means the potential for losing investment capital and the duration or permanency of that loss.
• Researchers have carefully defined the risk/ return ratios of all major asset classes and indentified the correlation or interdependence of different types of investments. These findings provide our best approximation of future risk and return for any given asset class or mix of asset classes.
• By including in a portfolio a mix of assets that react differently to any given market condition, you can reduce the risk of significant losses.
• Historically, the returns of the major asset categories, namely equities, bonds and property have not moved up and down at the same time. Market conditions that cause asset category to do well often cause another asset category to have average or poor returns.
• By investing in more than one asset category, you should reduce the risk that you will lose money and the overall investment returns of your portfolio should have a smoother ride.
• The graph below shows the performance over 10 years of some of the key asset classes and as you can see, there is no one asset class that wins year after year.
• Research has clearly established that deciding on the mix and proportion of equities, bonds and cash in a portfolio is a more important determinant of returns that deciding on the individual assets or funds.
• In working out the asset allocation for you, we will consider factors such as your financial needs, your tolerance to risk/ loss and length of time to invest.
• Regular rebalancing of portfolios brings a discipline into the investment process and removes the risk of greed and fear driven decisions.
• Selling assets that have performed relatively well over a period and reinvesting in assets that have performed less well will retain the appropriate asset allocation whilst potentially locking in gains.
• The need to try and achieve the returns necessary to achieve your long term objectives must be considered against the risk of suffering interim declines.
• We believe that, in most cases, your tolerance to risk and loss is more important in deciding on an appropriate investment portfolio than the returns needed to achieve long term goals.
• Unacceptable short term losses are likely to lead to you abandoning your plans and cashing in your investment early.
• We believe that no one can time the market in terms of buying low and selling high and that it is time in the market that counts, not timing the markets.
• It is impossible to predict future returns of the different asset classes. When estimating future returns for asset classes, the long term historical returns are as good a guide as any.
• On this understanding, it is likely that long term returns from equities will be higher than that for bonds and that the return on bonds will in turn exceed returns on cash investments.
• Economic and political uncertainties, random market movements and the rise and fall of individual companies make it extremely difficult for anyone to beat the market in the long term.
• Selecting the fund managers who will beat the market on a consistent basis is extremely difficult, if not impossible.
• On that basis, we believe it makes sense to include where possible lower cost index tracking funds in an investment portfolio.
• By minimising costs, you improve the odds of meeting your investment objectives.
Financial Planning Partners (FPP)
19 Wellington Business Park
Tel: 01344 778990
FPP are committed to dealing with clients and prospective clients in a professional and ethical manner and to that end adhere to the principals laid out in the CII Code of Ethics, a copy of which is available on request.