Howard Goodship, Chartered Financial Planner offers financial planning advice in Ringwood, Hampshire. In this article ‘Understanding your investment choices’ Howard Goodship reviews your choices and considers when it is right to own investments.
Howard Goodship, independent financial adviser and member of the Ringwood financial planning team said:
‘I am going to flip the question around to first answer “Why should you own them?”. To which there is a one -word answer; Inflation! Inflation is the silent assassin to a comfortable retirement and currently stands at between 2.7% and 3.5% per annum (depending on its measure). It reflects the price increase of a basket of goods & services and at 3.5% prices double every 20 years- unhelpful for people on a fixed income in retirement. It is usually vital that savings are able to at least keep pace with inflation, otherwise your capital on paper might be growing but its purchasing power is actually diminishing. If your savings can grow at a higher rate than inflation, you will require less savings in the first instance or they will last longer during retirement.’
What are Investments?
“Cash is king” is a correct statement for short term expenditure, ie for any capital required within the next 3 to 5 years. It is low risk, relatively secure and provides liquidity. However, the returns are low and won’t combat inflation. Below are the three main asset class alternatives for medium or long term investment. For more information please refer to the Lonsdale Wealth Management - A Beginner's Guide to Investing.
Fixed Interest Investments
Government Gilts & high-quality Investment Grade Corporate Bonds are a way for the Government (Gilts) and Corporations (bonds) to borrow. They are issued for a fixed term and offer a fixed level of interest (coupon), usually at a higher rate than cash. They won’t beat inflation but are a way to earn more interest than cash whilst taking a low level of risk.
Residential and Commercial Property has the ability to appreciate in value over time. It can also generate an income (buy-to let residential or as a commercial landlord). Therefore, it can be effective as an asset to beat inflation but can also go through periods of decline and at these times can be relatively illiquid.
A way to purchase a small piece of a company and share in the company profits. A company will usually reinvest part of their profits for future growth and pay a proportion to shareholders as a dividend. Over time, rising profits should lead to a rising share price & dividend payments, which help meet or beat inflation. However, over the short-term prices can fluctuate up or down significantly depending on many external factors.
Howard Goodship, independent financial advisor and member of the Ringwood financial planning team continued:
‘Clearly there are risks associated with each asset class, which is why owning a combination of them all is often the most effective way to invest. How much you have to invest, your proposed lifestyle, your sensitivity to fluctuations in the value of your capital and your timescale will dictate how much you invest in each asset class. As Benjamin Graham (Warren Buffett’s mentor) said “Successful investing is about managing risk, not avoiding it”.’
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The Financial Conduct Authority does not regulate some forms of Buy-to-Let. The contents of this article are for information purposes only and do not constitute individual advice.
For more information read other articles in the Understanding Investments series: Howard Goodship, chartered financial planner, CFP, Ringwood - Understanding Investments - Managing Risk and tax to earn a higher return, Understanding Investments - Fees costs and value, Understanding Investments - Tax Efficient Investment Income