Investments
At Fineholm Financial Services we provide investment planning and portfolio management.
It is our role to advise you on the right investment to help you meet your objectives.
There are various types of investment products available to invest in and it is
best to seek financial advice before investing any money.
- ISAs
- Investment Bonds
- Collective Investments
- Discretionary Portfolio Management
- Equities
- National Savings
Meeting your investment objectives requires a degree of discipline and understanding.
Everyone wants investments which are safe, were they can’t lose their money and
which offer high returns. Unfortunately the world of investment does not work this
way and all investments carry a certain degree of risk.
The essence of understanding risk is to think of two key elements:-
- How long is the investment for?
- Is this money to be oriented towards maximising profits, or towards avoiding loss?
Each part of your money might have a different answer. For example the money in
your pension fund is for the long term and aimed at maximising profits. But with
regard to the money you have set aside as the deposit on a house, ensuring that
there is no significant risk to capital is more important than maximising profits.
It is also likely to be invested on a much shorter timescale – months or a couple
of years.
One area of confusion in investments is to confuse the investment (its likely risk
reward profile and behaviour) with the packaging (which is typically an investment
product designed around various tax laws and legal issues).
For example an ISA (Individual Investment Account) is packaging. The fact that an
investment is in an ISA tells you nothing about the risks or rewards you might run
by buying it. You need to ensure that you understand how the ISA is invested.
- Risk and Reward, Understanding this vital area
- Calculators that show the effect of inflation and growth on a single and monthly
premium investment
- Sensible Investing
In short, we will help you determine an investment strategy appropriate for your
needs, and using the investments best suited to your investment attitude and tax
position.
The first stage of the investment process is determining your risk profile, or the
level of risk you are prepared to accept within your investment. Successful investing
not only requires consistent long term growth, but a degree of protection that will
let you have a peaceful nights sleep. To do this we adopt the Asset Allocation approach
to constructing portfolios for our clients.
Asset Allocation
The asset allocation is determined by using a sophisticated financial model. The
model attempts to determine an optimal combination of different asset classes to
predict the maximum mathematically expected return for your chosen level of risk.
Such an advanced approach to building portfolios is not normally possible for retail
investors and would typically only be done by institutional investors and pension
fund managers.
The asset allocation model assumes investments perform in line with general sector
behaviour. The choice of individual funds, if significantly different from the benchmark,
can lead to a different level of risk.
The first step in deciding the asset allocation is to derive a theoretically optimal
asset allocation from the major asset classes: Cash / Money market, UK Fixed Interest,
International Fixed Interest, Property and UK Equity.
Individual Savings Accounts (ISAs) are tax-efficient accounts, which replaced Personal
Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs) in April 1999.
ISAs can be made up of two different components: stocks and shares (including unit
trusts and open ended investment companies) and cash. The capital from a TESSA maturing
after 5th April 1999 can also be transferred into the cash component of an ISA or
into a stand alone account called a 'TESSA only' ISA, which does not affect annual
ISA allowances.
Quite simply, an investment bond is a way of putting your money into a fund or funds
over the long term. The bond itself is just a framework. Your money is actually
invested in a fund or funds of your choice. A fund is a pool of money that many
individuals invest in and is looked after by expert fund managers.
Taxation of Investment bonds
UK investment bonds pay the equivalent of basic rate tax at source within the fund.
This can be very beneficial for higher rate tax payer’s who defer any potential
liability to higher rate tax. It is tax neutral for basic rate tax payers, but can
be a disadvantage to non tax payers as they can not reclaim the tax paid on the
fund.
Offshore investment bonds do not pay UK tax within the fund. This provides you with
the benefit of gross investment growth. You may be liable to taxation when profits
are transferred back into the UK depending upon your tax situation at the time.
Taking regular withdrawals
Investment bonds allow you to take regular monthly, quarterly or annual withdrawals
from your fund. If these withdrawals total 5% or less of your original investment
in any one year they are treated as a return of capital and are not subject to taxation.
This facility can be used to create a tax efficient “income” for higher rate taxpayers
and people over 65 with age related tax relief as it defers, or removes totally,
the tax liability until the bond is finally surrendered. Subject to the investment
bonds terms you are free to take higher regular withdrawals but these may be subject
to taxation.
That is why many people prefer collective investments such as unit trusts and investment
trusts. In both cases an individual is able to invest in a basket of shares of different
companies, that way spreading his or her equity investment risk.
In the case of unit trusts the investor buys a unit - part of a large fund which
is itself invested in a variety of companies. An investment trust is a company listed
on the stock exchange and whose business is investing in other companies. In both
cases the investor is trusting his or her money to the judgement and skill of the
fund manager.
Collectives can also invest in fixed interest instruments.
These include UK government stock, also known as gilt edged stock or "gilts" for
short. Corporate bonds are also fixed interest instruments and both represent direct
borrowing on the part of the issuer of the bonds. They are referred to as "fixed
interest" because their cost of borrowing is fixed, while the price of the bonds
themselves may float up or down depending on supply and demand.
Traditionally, fixed interest investments have been regarded as a safe option. But
it is important to remember that not only do they fluctuate in price, but also that
the investor risks that the issuer may not be able to pay the interest (coupon)
on the bonds, or the principal when the bonds mature.
For clients who require a more pro-active approach to their investments we use the
services of a major stockbroker to manage individual discretionary investment portfolios,
tailored for each client to meet their investment objectives.
Discretionary portfolio management will not be suitable for all investors, but can
offer an alternative investment to compliment a clients existing investment portfolio.
Both cash ISAs and National Savings products are certainly much less risky than
buying equities, that is to say investing in the shares of companies listed on a
stock exchange. However, equities do offer an upside possibility that National Savings
products do not.
You have the possibility of gaining not only a dividend - a proportion of the company's
after tax profits distributed to shareholders - but also a capital appreciation.
If the price of the shares goes up after you buy them then you have made, on paper
at least, a capital gain.
The bad news though is that the value of shares can go down as well as up, which
means you risk losing your investment if the price of the shares falls.
Some of the least risky of investment options are those offered by National Savings,
which raises money on behalf of the UK Government.
While investment returns are not necessarily spectacular and some involve tying
your money up for long periods of time, they are nevertheless stable and in some
cases tax-free.
They include National Savings Bank accounts and Savings Certificates and various
forms of Savings and Income Bonds.