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Are your savings and investments suitable for you today and your future plans?

We often write about the importance of protecting your wealth, from taxes, inflation, succession restrictions, etc.

It is worth highlighting that one key element, whether you are looking at tax planning, estate planning, investments or pensions, is that the arrangements and strategies you use should be designed around your 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 are too risky.

Personalised financial planning

Your circumstances and objectives change over time. It is important to re-evaluate your financial planning when you retire or move to a new country, to take your new circumstances, income needs and tax regime into account.

A tailor-made strategic approach is key for the success of your investment portfolio. It should be created and managed to meet your objectives, time horizon and attitude to risk.

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 too many illiquid assets, or perhaps some unregulated investment schemes. Or the investment choices or combination of them may not 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.

The inflation risk

Many retirees prefer to leave much of their savings in bank deposits, believing it is the safe approach for them.

But there are no ‘safe investments’ and you need to consider the impact inflation and low interest rates can have on cash deposits.

Interest rates were at historically low levels for over a decade. The Bank of England base rate was less than 1% from 2009 to 2022, and while it is now above 3%, this is to combat high inflation – currently 10.5% in the UK. This wipes out the gain and the spending power of your capital is falling. While inflation will not remain this high, even low inflation rates will erode the value of your savings when compounded year after year, over many years.

As a basic illustration, if you have €50,000 in a current account with no growth and inflation is 3% every year, after 10 years its value will have fallen to around €37,000. After 20 years, it’s around €27,500 and after 30 just €20,555 – a 59% reduction in purchasing power.

Managing and balancing risk

Some risk is unavoidable to achieve an investment return to keep pace with 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 look at allocation of assets between equities, fixed income (bonds), ‘real assets’ (e.g. listed property or infrastructure) and cash to create the most appropriate portfolio to match your profile and objectives.

The tried-and-tested strategy to mitigate risk is diversification – a well spread portfolio of investments, in terms of asset classes, geographic regions and market sectors, to limit your exposure to any single sector. It is widely acknowledged that asset allocation is of greater importance than the selection of individual stocks and shares.

To take advantage of the expertise of the world’s best investment managers, you need a thorough, critical analysis of funds and fund managers to select the best managers for each area of investment. While most private banks and other wealth managers advocate this ‘open architecture’ strategy, in reality, often 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 regions and market sectors.

It is hard for private investors to establish which are the best managers and funds to use, so specialist advice is essential to select the most appropriate investment strategies and asset managers to meet your needs.

Protecting returns from taxation

To achieve the best real returns and protect your wealth for future generations, use compliant arrangements which shelter capital from tax, provide a tax-efficient income and facilitate the transfer of capital to beneficiaries with minimum of bureaucracy and inheritance taxes.

Regular reviews

It is essential to reassess your portfolio regularly and adjust the strategy accordingly. Market conditions change and asset prices rise and fall, affecting your original weightings. This can leave you with an unbalanced portfolio which will change the portfolio risk.

Changes in personal circumstances can also affect your investment objectives and/or risk tolerance.

For peace of mind, get your appetite for risk assessed objectively and matched to the optimum investment portfolio; diversify across assets markets and investment views, ensure your assets are in a tax-efficient structure, and carry out annual reviews.

You can find other financial advisory articles by visiting our website here

By Adrian Hook
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Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008.  He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).