Financial thriving, not just surviving

  • Financial planning
  • 5 minute read

Whenever there are financial headwinds, people look for ways to protect their savings. However, some common survival strategies tend to be counterproductive. Below, John Henderson and Andrew Mackintosh-Walker, Managing Directors at Close Brothers Asset Management, argue that many people who are solely focused on surviving, might overlook strategies that would help them thrive.

The political climate has created a sense of paralysis, as people hold off making financial decisions. One unwelcome consequence is that many people have a large proportion of their assets in cash while interest rates are low. Meanwhile, inflation continues to erode the value of cash savings. Others lose out because they have become “investment collectors” – they have gathered a collection of disparate investments over time, which may not suit their current investment objectives or risk profile. For instance, they could be invested for growth in more esoteric markets when in fact they are approaching a time in their lives where they need their assets to provide them an income, or a scenario where they have become overly concentrated in one company or sector, which can be dangerous in case of a setback.

Here are five strategies investors can put in place to provide firm foundations for their wealth:

1. Invest for the long term

Instead of waiting for perfect conditions, it pays off to invest for the long term. Since 1988, there has only been one year – 2017 – when markets rose every month. In every other year, markets have fluctuated. It is also important to ride out the storms within fluctuating markets, for example, if you invested £10,000 in the UK market at the beginning of 1997 and held it for 20 years, it would be worth almost £30,000. But if you missed the best 10 days in that period, it would only be worth £15,000.

2. Ensure a good cash flow

Look at all of your sources of income and think about your assets holistically. Should you take income from your SIPP or from your ISA or other investment pots? It’s important to ensure a good flow of income and consider all tax efficiencies. Without a well-planned cash flow, you might have to sell your investments at the bottom of the market, which would be detrimental to your wealth.

3. Diversify your assets

“Diversification” is the art of not putting all your eggs in one basket. Instead, it’s wise to invest your savings across a number of different asset classes to lower your overall risk. They say, “diversification is the only free lunch in finance,” and there’s some truth to that. By diversifying your investment across a number of asset classes – such as shares, bonds, alternative investments, and even some cash – you can lower your investment risk without greatly compromising your returns.

4. Take a global approach to investing

Brexit may make you worry about investing but it’s worth remembering that the UK only makes up some 6% of the global market. Worldwide, there are many investment themes that will continue to deliver returns for investors, as demand for related services increases: ageing populations, cashless societies and cloud computing, for example. It’s crucial to select great companies that can tap into these themes. Investing overseas also offers you some protection from any devaluation of sterling.

5. Consider environmental, social and governance (ESG) factors

Many people are increasingly concerned with how companies act in the world. It’s only intuitive that long-term investors look for companies that have good governance, behave well socially, and treat the environment well. After Volkswagen’s emissions scandal or BP’s oil spill, the shares of these companies lost up to 40% of their value. Therefore, it’s not just a matter of investing responsibly – we like to evaluate a company’s Environmental, Social and Governance report card (known as its ESG score), as good ESG companies tend to be less risky investments over time.

We look to adopt these five strategies to help clients thrive, and not just survive.

Your capital is at risk. Investments can go down as well as up.

 

This article was first published in The Week, June 2019.

You may be interested in

The cost of not planning ahead

Speaking to a financial adviser isn’t necessarily top of most people’s priority lists. But the sooner you get round to it, the sooner you can make sure you’re not missing out on valuable financial planning that could save you money.

Read
!

Before you invest, make sure you feel comfortable with the level of risk you take. Investments aim to grow your money, but they might lose it too.