Investors are increasingly concerned about successfully meeting long-term goals and managing financial risks, but in doing so can often be their own worst enemies. Being too eager can mean that irrational decisions are made that will ultimately negatively impact their wealth or jeopardise their goals. While one investor insists on buying the latest hot stock after there has been a run-up in price, another becomes panicked by market volatility and is ready to abandon a well-designed investment plan.
Historically, the investing process has gone like this: investors identify two or three goals, often with the help of an adviser, and then lump all assets into a single portfolio or ‘bucket’. At that point, they are told to expect a given return based on the historic or expected performance and volatility of various market benchmarks.
Investing or wealth management cannot and should not be done in isolation – it should be an integral part of a well-thought and structured financial plan, otherwise it has no meaning. We do not think it makes sense to identify separate goals and then treat them identically by putting all financial assets into a single bucket. Investors’ financial goals differ in terms of importance and priority, time horizon and the level of risk the investor is comfortable taking. For example, logic would dictate that one can take more risk with long-term goals and less risk with short-term ones. However, this is a gross generalisation and by using simple cash flow modelling software, we may be able to show a client that in order to achieve a long-term goal they don’t actually need to take any risk at all.
Rather than focusing solely on investment management and performance, goals-based investing is oriented around an individual’s lifestyle needs and meeting their objectives. Performance is measured by an investors’ progress toward achieving each stated goal and risk should be viewed as failure to fully achieve each goal.
Another key consideration for wealth management is ensuring tax efficiency and far too often we come across investors who have not made use of available tax wrapper allowances. A tax wrapper is simply a form of investment account which gives you protection from tax, which could be Income Tax, Capital Gains Tax, Corporation Tax (for business owners) or Inheritance Tax.
In the UK there are many types of wrapper allowances available, and from a financial planning perspective, tax wrappers offer an excellent opportunity to add value to your savings and investments. They do this through enhancing the returns your investments generate by shielding those from taxation. Using a variety of wrappers also provides choice as to how you use capital and income to meet your financial needs.
A well designed financial plan delivers a clear strategy to use the available tax wrapper allowances to your best advantage and continues to monitor any changes in these allowances and adapts your personal plan to best effect.