5 step programme

Despite the somewhat miserable weather, the number of runners and cyclists on my route to work appears to be on its annual upturn.

My own good intentions are easily swayed by the biscuit tin, which is why fitness gurus always focus on the importance of discipline and a long-term approach. Fad diets and gym memberships that don’t last the month won’t improve the quality of your health, in fact they can leave you worse off.

Though arguably less strenuous, the same is true of getting your long-term investments in shape. What follows is the Hartey Five Step Programme for Investment Fitness.

While it won’t make you (or thankfully your wallet) any lighter, it is designed to significantly lower your stress, increase the quality of your financial health, and, ultimately, to enable you to enjoy a life well lived.

1. Understand your risk tolerance

The level of risk that you are prepared to accept will ultimately determine what rate of return you can reasonably expect from your investments. It is vital to know your risk profile and you may want to review this periodically, as your attitude or circumstances may change over time. The level of risk that you need to enable the growth in your portfolio that you want may not always be the same as the level you are comfortable with, so a trade-off between risk and return is sometimes needed.

There are two areas of risk that people need to take into account. The first is emotional tolerance to risk and how you feel when things go wrong. The second is your capacity for loss – essentially, how much you can afford to lose. You may feel like you can take more risk than your capacity.

The problem with assessing risk is that it is a very subjective matter. Psychometric risk profiling, a relatively new technique, allows us to get a consistent and objective measure of how emotionally tolerant a person is to financial risk-taking. All our clients go through risk profiling as part of our process – stage one of our Wealth Management Programme – the results can be both interesting and enlightening.

2. Review your financial plans using Lifetime Cashflow Modelling

Lifetime cashflow modelling should be a vital part of your financial planning process. It will help you see into your financial future, removing guesswork and allowing you to make informed decisions.

Making choices about work, property, supporting others or making investments should be done with an understanding of how these may impact your future wealth and security. At Hartey Wealth Management we use Lifetime Cashflow Modelling to help clients plan for the future and become (and remain) financially well organised.

By illustrating the effects of pretty much any financial action or change, at any point in time, our advisers are able to help clients plan ahead for life’s changes and opportunities, whilst considering challenging questions.

The frequency of review and any significant changes need to be carefully managed. Too many short-term adjustments may cause the plan to go from one extreme to another. Too few adjustments and the plan will be out of date. The aim is to follow an investment journey in keeping with the volatility anticipated and the level of risk of the solutions selected.

3. Diversify your investments

Investments are never (and can never be) certain. But knowing your tolerance to risk and building a portfolio that spreads this risk through diversification is the key to generating successful returns. If the two are not carefully aligned there is a strong possibility of disappointment at some stage in the future because either your goals will not be met, because you have taken insufficient risk, or you will have taken too much risk and will be perturbed by market events.

As a financial adviser, I often talk about the best methods for spreading exposure to risk, such as security, geography and asset classes. The core of all of our portfolios include an efficient return-generating range of funds diluted with low risk assets.

Broadly this includes a mix of growth-oriented equity assets including property, which acts as the return engine, combined with lower risk and inflation-protecting assets. Working together in different proportions these form a range of portfolio choices along the risk spectrum.

4. Choose a low-cost portfolio

Only around 1% of funds beat the market consistently. But more significant than their under performance, what is truly shocking, is how much investors are paying.

Perhaps it’s because when you start a pension, retirement is so far off that you’re not too concerned about the impact of charges on an investment you might not need for another 40 years. But another problem, at least here in the UK, is that pension charges are complicated and not always easy to calculate.

The full costs incurred by consumers when making long-term investments are not consistently and comprehensively defined, nor are they understood. It’s staggering that investors are expected to agree to schemes when they are so uninformed about the overall impact it will have on their wealth.

As an investor, you need to fully appreciate that cost percentages are annualised over and over again. As the value of your investment grows, so do the pounds and pence charges you incur. This significantly impacts the value of your return over the lifespan of your investment.

We offer clients transparent and low fee investing. There are no hidden charges or surprises.

5. Regularly rebalance your portfolio

On the whole, riskier assets will deliver greater growth over time and portfolios will become skewed towards these assets. Often this is well beyond the tolerance set for volatility and the potential of further gains will backfire instead towards greater losses. It is sometimes difficult to persuade investors that rebalancing must be implemented to the original allocation on a regular basis. This discipline forces the sale of assets that have done well and reinvests assets that have done less well, which keeps a portfolio’s exposure to risk reasonably constant over time.

For some this may feel counter intuitive but it is the most significant contributor to achieving a sell high and buy low strategy which results in beneficial returns. When markets are on the up, investors often resist rebalancing because they become focused on the short-term gains, but when the markets have taken a downturn investors can overreact and become focused on the fear of short-term losses.

A successful investment strategy must be based foremost on the level of risk you’re prepared to take. Once you understand your financial goals with long term plans, choose a portfolio that fits and then regularly (but no more than twice per year) rebalance your portfolio to realign it with your risk tolerance. Don’t worry about the stock market. You can’t control it. But you can control how you structure your wealth to work for you.

Follow our 5 step programme and you will achieve financial fitness. To find out more contact Hartey Wealth Management today.

Featured in The Hartey Wealth Management Summer 2016 Newsletter