Wednesday, 15 June 2016

How can I set investment objectives?



How can investors analyse their investment goals and objectives and align them with appropriate investment strategies. The first step is setting your objectives. Being clear from the start what you are trying to achieve should help you tailor your investments to your personal circumstances. There is no one right set of investments for you, but there are certainly many wrong ways to put a portfolio together.

Your objective should take into account the what – the amount of money you need and its purpose – and the when – when you need the money and how long it must last, however, probably the most important factor to consider is the level of risk you are prepared to take on.

Risk is often measured using volatility but this isn’t necessarily what you or I would perceive as risk when running our own investments. We are more likely to be concerned with whether or not we are losing money, whether or not we are beating inflation, and whether or not we are on track for our goals.  Volatility can help us understand how likely a fund’s value is to fluctuate, but you need to take into account the other questions when putting together a portfolio. You need to consider the potential for the fund to make money in the longer term. You will have to take more risk to get bigger gains, and this means your portfolio is probably going to vary a lot in value during its life.

In asking yourself what your attitude to risk is, you need to decide how you would react if your portfolio lost money; this is a highly personal question that depends on your individual emotional make-up. What if you don’t see the gains you were hoping for? What if you actually see your portfolio lose value? If you think you would react badly to losses and feel inclined to shift everything into very low-risk assets, you could end up with the worst of both worlds: a fall in the value of your portfolio and a set of funds that are likely to take a long time to even make those losses back.

Being realistic and honest is the key: it is easy to be blasé about losses before you first start seeing the real pounds and pence you have won with your hard work slip away from you as a market falls. It may be that you have a number of different objectives and are prepared to tolerate different levels of risk with the funds set aside for each.  Once you have worked out the risk you are prepared to take, look at your objectives again. If you aren’t prepared to take the amount of risk necessary to give you a chance of making enough money to reach your objectives, you need to revisit your aims and rethink them.

The other variable you have is time. With more time you have the potential for better returns with a lower level of risk. On the other hand, if the time you want to draw down the investment is near, you may want to reduce the risk in your portfolio, even if this is likely to leave you with less than you want. This could be preferable to leaving open the possibility of suffering big losses at the last moment.

Each factor affects the other, which means you have to think through the possibilities. Ultimately, you can’t define your objectives independently of considering your attitude to risk, which means taking into consideration the assets and funds that are available and how you are likely to react to their behaviour. 

Thursday, 2 June 2016

How to have enough money for retirement


How to ensure you have enough money for retirement.

An enjoyable and relaxing retirement is what most people spend their working life waiting for, but how does anyone know they have enough saved up to make sure that dream becomes a reality?

This has always been a prominent concern for those reaching their twilight years, but with life expectations now far longer than they have ever been and the recent changes to the pension system it is now a far more worrying question than it has been for other generations. Nevertheless, to break it down more easily, retirees should divide their prospective costs into four manageable categories – essential income needs, known costs, unknown costs and legacy. It is far easier to manage one’s retirement income if it is no longer viewed as a homogenous block and therefore lets run through the different categories

Essential income needs

As it names suggests, this categories relates to all of a retiree’s most basic needs such as paying the bills, buying groceries or even paying off a mortgage.

Given that information, savers should only use very low risk assets as their propensity for loss should be much lower here. These assets could include bonds and other defensive securities, rather than equities. Investors may even wish to consider using part of their pension savings to purchase an annuity, which is a series of equal payments at regular intervals spanning the rest of an individual’s life to help provide the certainty of meeting these income needs as the income they produce will last as long as you live.

Known and unknown costs

Known costs include lifestyle choices, holidays and events. You can think of this category of what you really want to do when you retire, whether this is to travel the world, spending an inordinate amount of time on the golf course or to put the grandchildren through education.

For this category, investors can afford to take a higher degree of risk than for ‘essential income needs’ as they may need to grow their pot of savings in order to pay for these lifestyle choices over time. The types of investments they may wish to consider include absolute return or multi-asset funds which generate their returns from a diverse range of securities.

In terms of unknown costs, these relate to out of the blue payments such as potential hospital bills or an unexpected breakdown. Again, investors can afford to be medium risk for this bracket but may want to build up a six-month cash buffer from their overall savings to make sure they can access those funds easily.

Legacy

Legacy, while relatively sombre, relates to the assets you leave behind for your loved ones.

Given people are generally getting older, investors can afford to take a higher degree of risk initially as these savings may not be needed for another 25 to 30 years. As a result of this, investors can afford a higher degree of equity exposure. Over time they will need to consider reducing that risk.

The past is, of course, no guide to the future but the FTSE All Share index has returned 1,433.70 per cent over the last 30 years so if an investor had put £10,000 into the market, they would have since seen a gain of more than £151,000 today.

Investors should sit down with their children  to discuss this, however, as  any such planning will not only affect the long term  value of a potential inheritance but may help their children with their own savings planning.

As always seek advice where appropriate from a qualified and regulated financial adviser.