Fundamentals of Investing

Introduction


Investment is about putting your money to work now to provide a source of income and capital for the future. Most individuals invest in order to generate a profit or positive return over a reasonable time frame. The higher the return generated by an investment, the greater chance you have in achieving your financial goals.


In the past, investors have been encouraged to invest in specific products or funds that promise high returns over the long term. These may not be suited to your circumstances or take account of your risk preferences, and can result in disappointing returns. Investments inevitably carry some form of risk and understanding your tolerance for risk is therefore important in the financial planning process.


When disappointing returns occur, it’s natural to respond cautiously. This may result in selling an investment at the wrong time. More damagingly, it can discourage investors from investing in the future.


To avoid disappointment, it’s common for investors to remain heavily invested in cash. However, cash itself is not risk-free. While the capital value may be secure* , it is easy to overlook the impact of inflation over time, which reduces the purchasing power of each pound. In fact, investing in cash may also lead to long-term financial disappointment because savings rates tend to be lower than inflation, meaning prices rise faster than the value of your savings.


In order to invest successfully, you need a clear understanding of your financial goals as this will help you decide how to balance current against future spending. Your Adviser can then help you to establish an investment portfolio that will give you the best chance of achieving those goals, at a level of risk you are willing and able to accept.


To be comfortable making important investment choices, it is vital you understand investment principles and the concept of risk and return. This document explains the principles of investing and key considerations for managing risk.

Why should you invest?


The foundation of any successful investment strategy is a clear understanding of your short, medium and long-term financial objectives.
The most common objectives tend to be mortgage repayment, saving for retirement or paying school and university fees.

Short-term goals

Goals which fall within the next 5 years where you need easy access to funds. For example, paying for a wedding, a new car or home renovations.

Medium-term goals

Goals you wish to achieve within the next 5 to10 years, for example, paying university fees or providing a relative with a deposit for a house.

Long-term goals

Goals you wish to achieve beyond the next 10 years, for example, paying off your mortgage or maintaining your desired standard of living through retirement.

Next, you need to understand the following:
• What financial assets you already have that you can use to achieve your goals.
• What investment return you require to achieve your financial objective.
• Whether additional savings may be required now or in the future.

This prompts two questions: How much risk are you willing to take to reach your goals? Could you make up the difference in returns if an investment suffers from unfavourable market conditions?


No two people are the same. So to help your Financial Adviser build a portfolio you’re comfortable with and provide the best chance of achieving your goals it is essential you understand the basic concepts of investment risk and return.

* Subject to the criteria of the Financial Services Compensation Scheme limit. Please contact your Financial Adviser for details or visit www.fscs.org.uk

The concept of risk and return


Nothing in life is without risk. We choose to take additional risk only if we believe we will be rewarded for doing so. Investing is no different. Your expected investment return is the financial reward you expect to receive for accepting a degree of investment risk. So what is investment risk? Put simply, it is a measure of how much uncertainty there is about the return an investment may deliver. The more risk you take, the wider the range of potential outcomes. Taking additional risk can therefore lead to higher or lower actual returns than you would otherwise have achieved. So you must balance your desire to receive a potentially greater return from a riskier investment with a lower return from a less risky investment.


Your ability and willingness to accept risk will determine the suitable range of assets for your investment. Understanding the risk associated with your investments is crucial. If you are not comfortable with or do not understand the risk you’re taking, you should not invest.


Despite the promises of some investment products and funds, you cannot expect high returns without accepting a greater possibility of loss. What’s more, no investment is risk-free, even bank deposits are potentially at risk. Many people choose to leave a significant sum in cash, oblivious to how inflation reduces its value over time. This strategy may lead to long-term financial disappointment.

The cost of goods that could have been bought for £10,000 in 2010 had risen to £11,385 in 2015. Over the same period, £10,000 invested in a typical deposit account would have grown to only £10,209. So the buying power of the money fell by almost 12% in just 5 years

When it comes to investing, risk is inevitable. However, there are techniques for managing it and the most common is through asset class diversification.

 

By investing in different asset classes, different parts of your portfolio react differently to market events. This reduces the negative impact of the worst performing asset classes. As with all things, this benefit comes at a cost - it also reduces the positive impact from the best performing asset classes. However, by blending the asset classes, the portfolio often becomes less volatile and is able to benefit from higher potential returns for a given level of risk.

 

Deciding which assets are right for you can be challenging, because the investment universe is vast. To keep things simple, assets can be broadly divided into five groups: 


Cash: This includes deposits with the banks and building societies (investments backed by Financial Services Compensation Scheme and within the size limit are the most secure). Liquidity (the ability to get your money out of an investment) is a risk factor so generally the more liquid an investment, the lower the return. Hence instant access accounts tend to offer lower returns than those which lock in your money for years.


Bonds: Bonds are loans to specified entities that are paid back at a certain date in the future after a series of annual or semi-annual interest payments are made. UK government bonds, called gilts, are almost certain to be repaid on schedule but that does not stop the price from fluctuating as investors weigh the attractiveness of those payments against all other potential investments. Corporate bonds represent loans to companies so typically present a greater risk of non-repayment than government bonds. They are also less liquid than government bonds so are typically considered riskier.


Property: Investing in property can include direct or indirect investments in UK residential property, UK commercial property or property abroad. Returns come from both rents and capital appreciation.

What we do?

It is the nature of our world today that financial arrangements are more complex and confusing than ever. Independent Financial Advisers, Planners and Wealth Managers are ideally suited to be the most important and useful guides in helping you achieve your goals and in gaining financial clarity and security.

Our process

During and after the initial meeting we will look to establish what is important to you and what your key objectives are. Once we have this information, along with some hard facts about yourself, we will then move onto our research and production.

Service levels

We specialise in helping family orientated clients who are usually over the age of 50, have assets in excess of £500,000 to invest, have recently sold or are in the process of selling their business and / or are within 3 years of retirement, or already retired from a business or one of the professions such as accountant, solicitor, engineer or senior management.

Affinity background

Affinity Integrated Wealth Management, a trading style of Buryfield Grange Ltd, was formed in 2002 and has grown steadily by building long term trusted relationships with clients ever since. Although formed in 2002, the origins of the business go back much further than this as Ian Painter, our Managing Director, has been advising clients for well over 25 years now.