In the modern market there is a wide range of savings and investment vehicles to choose from. Making the right decisions about which will be the most appropriate investments for you means understanding your financial goals, limitations, and attitude to risk.
What Should I Think About Before I Invest?
- Am I willing to take risks in order to gain from potential rewards?
- How much can I afford to invest?
- What is my financial goal? Is it to provide a regular income or capital growth?
- Can I afford to invest money on a long-term basis?
- Can I afford to lose part or all of your investment capital if things don't turn out as expected?
- What are my time horizons? Am I seeking a long-term or a relatively short-term investment?
- How will my investments be taxed?
- What areas or assets do you feel comfortable investing in?
Answering these questions may not be straightforward, which is why Investment Solutions offers a free initial consultation to help you understand your priorities. Constructing an investment portfolio takes care and attention; following a detailed personal review of your current financial circumstances, aspirations and objectives, Investment Solutions will assess all of these factors with you before making recommendations for your asset portfolio.
Managing your investment portfolio, often referred to as wealth management, is an important part of the process. Investment Solutions will seek to meet regularly with you in order to ensure the best chance of your financial objectives being met. Depending on the kind of investment, the term and your objectives, we may recommend annual, half-yearly, or quarterly reviews.
The following information outlines some of the general investment solutions you may have heard and is by no means a summary of the entire investment market. Financial institutions are constantly innovating and bringing new financial solutions to the marketplace, each with different features and benefits. A full financial review with your adviser can help establish what sort of investment strategy is right for you.
Risk and Reward
There are many different types of investment and each can have different risks associated with it. Different people have different attitudes towards risk and you will need to be clear about the degree of risk you are willing to accept before undertaking any kind of investment. The following chart provides a basic view of the deemed risk associated with different kinds of investment:
As part of your initial consultation and during your regular investment reviews, Investment Solutions will ask you to complete an 'attitude to risk' questionnaire in order to help establish the degree of risk you may be willing to take with your investments. We will discuss the results of this with you in full in light of any objectives and any time horizons you may have.
Investment Solutions recognises up to 10 unique risk categories ranging from 1 (Highly Risk Averse) to 10 (Highly Acquisitive). We will allocate your portfolio into various different asset classes and financial markets in accordance with our financial modelling of these profiles, which should then be reviewed on a regular basis in light of any changes to the macro-economic climate or the performance of certain assets, markets or investment funds.
Risk and return is a highly complex area, and different organisations take differing views on levels of risk. Ultimately, it is important to remember that you are in control, and we are here to guide and advise you.
Investment Platforms are innovative, transparent and sophisticated tools which have become very popular over the last few years. They are usually designed as web-based systems which can streamline the investment and ongoing administration of client portfolios. The key benefit for investors is that everything can be seen, valued and administered from one central location, rather than being scattered across a range of companies offering limited access to investment funds and facilities.
Rather than marketing and selling their own financial products, an Investment Platform is a 'conduit' through which a client can invest into a range of assets e.g. shares, investment funds, bonds, ETFs and also take advantage of multiple tax-wrappers such as ISAs, Onshore and Offshore Investment Bonds, and Pensions.
Collectives - Unit Trusts
Unit Trusts are a popular method of investing. They are 'open ended collective investments' which put the cash of many investors into one 'pooled fund'. This system allows investors to invest collectively, which has the benefit of spreading and reducing risk and keeping costs under control. Unit Trusts allow you to invest in the stock market but enable you to spread your risk and benefit from expert investment management.
There are many unit trusts to choose from across a wide range of investment sectors. For example, a fund may specialise in:
- A particular geographical area such as UK Equities, US Equities or Asia Pacific Equities
- A range of investments targeting a low, medium or high level of risk
- Particular kinds of asset such as Gold, Natural Resources or Property
Collectives - OEICs
Open-Ended Investment Companies (OEICs) are a modern day and flexible equivalent of the Unit Trust. Whist the legal structure of an OEIC is different to a Unit Trust they combine the same elements of Unit Trusts and Investment Trusts, enabling you to pool your investments along with other investors. This helps to spread the risk and enables you to take advantage of the skills of a professional managing the fund.
Much like Unit Trusts, OEICS can have the same range of objectives or may specialise in investing a certain market or asset class.
OEICS can usually be accessed directly with the OEIC investment manager or via an Investment Platform.
An Investment Trust is a company that has been set up to invest in shares of other companies. By buying shares in an investment company, the investor is in effect spreading the risk that would normally by associated with a single share investment because the value of the Investment Company's shares are directly related to the spread of investments it is making.
From a tax perspective, investing in investment trusts is treated the same as investing in shares.
Investment Trusts can usually be accessed directly with the investment manager or via some investment platforms.
Individual Savings Accounts - ISAs
ISAs benefit all taxpayers as any income or capital gains received from investments held within an ISA do not have to be declared to the tax man. Please note, however, that tax legislation is subject to change and regular alteration.
There are two kinds of ISA: a cash ISA which can invest in cash only; or a Stocks & Shares ISA in which you can hold longer-term investments like Stocks & Shares, Unit Trusts, Investment Trusts, Open Ended Investment Companies OEICs, Fixed Interest Securities, ETFs or any share quoted on a stock exchange recognised by the Inland Revenue.
The annual ISA investment allowance is now £15,000 for tax year 2014/15. All of your allowance can be invested in stocks and shares, or you can split it by investing in cash (the maximum permitted) and the remainder in stocks and shares with either the same or a different provider. You can invest in two separate ISAs each tax year – a Cash ISA and a Stocks & Shares ISA, so long as you remain within the allowances for each. You can transfer money saved in a cash ISA to a stocks and shares ISA but you can't transfer money the other way.
You will also be able to transfer money saved in previous years’ cash ISA holdings to stocks and shares ISAs without affecting your current year’s allowance. Since 1st July 2014 you are able to transfer stocks & shares ISAs to Cash ISAs without affecting your £15,000 allowance.
ISAs can usually be accessed directly with the provider or investment manager, or via an investment platform.
Onshore and Offshore Investment Bonds
Investment Bonds are normally single premium, non-qualifying whole of life insurance contracts, although some do offer a ‘top-up’ facility.
In certain circumstances, both Onshore and Offshore Bonds can prove attractive as part of a wider financial planning strategy as they are considered primarily as insurance contracts rather than pure investments.
The key benefits of using an Investment Bond are:
- 5% can be withdrawn without giving rise to a tax charge
- These withdrawals are treated as a return of capital and not income, so no income tax is due
- Can be used to ‘top-up’ an income without income tax implications
- Underlying investment funds can be switched without giving rise to Capital Gains Tax
- Bonds can be assigned or taken in joint names, unlike pensions and ISAs
- Bonds can be used with trust arrangements
The tax treatment of Onshore Bonds and Offshore bonds varies, and it is best to speak to an Independent Financial Adviser at Investment Solutions who will understand your objectives and recommend how to best arrange your investments.
- The above illustration is for guidance only
- Different institutions have different means of categorising and assessing risk
- You need to be clear about the degree of risk you are willing to accept
- There is a balance between reward and potential return. Generally, higher risk investments can potentially offer higher returns but also carry a higher risk of suffering capital losses. Lower risk investments generally offer lower returns but with greater security of capital, although the value of your capital in real terms may be eroded by inflation
- Risk is also related to how long the investment is undertaken. With Stocks & Shares you should always take a long-term view and we strongly advise a 5 year time frame as a minimum
- Risk can also be in terms of how you invest. Investors wishing to minimising risk would consider a broader investment spread as opposed to investment in a specialist area
- Remember past performance is not a guide to future returns. The value of investments and the income from them can go down as well as up
- The level of tax benefits and liabilities will depend on individual circumstances and may change in the future
- Exchange rate fluctuations may cause the value of underlying overseas investments to go down as well as up
- Some Funds investing in specialist sectors or areas carry greater risks due to the potential volatility of market sectors into which the funds invest
- You should not invest without consulting a Key Features Document and supporting literature