We often write about the importance of protecting your wealth, from taxes, inflation, institutional failure etc. It is worth highlighting that one key element, whether you are looking at tax planning, estate planning, savings and investments or pensions, is that the arrangements and strategies you use should be designed around your specific personal circumstances and aims.
Otherwise there may be unexpected consequences in future which do not suit what you had in mind for your family, or your investments may not be meeting your needs or could be too risky.
Your circumstances change over time, as can your objectives, at which point you need to review your wealth management. So, for example, it is important to re-evaluate your financial planning when you retire, and it is critical that you carry out a thorough review when you move to Portugal, to take your new circumstances, income needs and the different tax regime into account.
A tailor-made strategic approach is key for the success of your investment portfolio. Every investor has different objectives, time horizon and attitude to risk. So it is vitally important that your portfolio is created and managed to meet your particular requirements.
Too many people have portfolios which are not suitable for them. They often carry a higher level of risk than they are comfortable with, even though they may not realise this. They may not have adequate diversification or own ‘unregulated collective investment schemes’ or illiquid assets. Or the investment choices or combination of them may not actually be appropriate to meet their specific needs.
The opposite can also be true – people can be too cautious and this can have consequences in your later years.
Traditionally, many retirees have preferred to leave much of their savings in bank deposits. However, interest rates today are close to zero, so no risk means no returns. And when you take the effects of inflation and withdrawals into account, the capital in your deposit account is likely to erode.
Some risk is unavoidable to achieve an investment return that will outpace inflation. However, to avoid undue risk, you should obtain a clear and objective assessment of your personal appetite for risk, for example through psychometric analysis.
Once you have your risk profile, you can move on to look at allocation of assets between money market, fixed income (bonds), equities and ‘real assets’ such as property to create the most appropriate investment portfolio to match your profile and objectives.
The higher your concentration in particular assets (or asset classes), the higher the risk. The tried and tested strategy to mitigate risk is diversification – a well spread portfolio of investments, not only in terms of asset classes but also by geographic region and market sectors, in order to limit your exposure to any single sector of the market.
It is widely acknowledged that asset allocation is of far greater importance than the selection of individual stocks and shares.
If you want to take maximum advantage of the expertise of the world’s best investment managers, the key to success is a thorough, critical analysis of funds and fund managers in order to select the best managers for each area of investment. While most private banks and other wealth managers advocate this ‘open architecture’ strategy, very often, in reality, a significant part of their portfolios is placed in their own ‘in-house’ funds. As part of your diversification strategy, if you use multi-manager funds, they will be managed by several different fund managers, each selected for their expertise in specific market sectors.
It is hard for private investors to establish which are the best managers and funds to use, so specialist advice is essential in order to select the most appropriate investment strategies and asset managers to meet your needs.
Also, always remember that if it sounds too good to be true, it probably is. Investors can be seduced by investment schemes which claim to offer the alluring combination of high returns with little or no risk. However, time and time again, the bubble invariably bursts and they lose their money.
Finally, to achieve the best real returns, and protect your wealth for future generations, you need to use arrangements which shelter capital from tax; provide a tax efficient income, and facilitate the transfer of capital to your beneficiaries with minimum of bureaucracy and inheritance taxes. These should be arrangements which are compliant in Portugal.
So, for peace of mind, you need to get your appetite for risk assessed objectively and matched to the optimum investment portfolio; diversify across assets markets and investment views; review your portfolio from time to time and ensure your assets are in a tax efficient structure.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers.
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