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It’s not easy to outpace markets – here’s how you can try

This year has had more shocks, twists and turns than most, with the Covid-19 pandemic, continuing Brexit uncertainty, US-China trade tensions and a US presidential race. Fortunately, with potential vaccines on the way, the upcoming Brexit due date and a new US President-elect, there looks to be more stability as we head towards the new year.

What markets like is certainty, which allows analysts to plan accordingly. After so much uncertainty in 2020, investment specialists will be hoping for clearer and more predictable conditions in 2021.

For individual investors, however, it is extremely difficult to anticipate and deal with the range and speed of events and issues that impact economies and markets. This makes deciding what investments to opt for – and when – far from straightforward.

When it comes to investing to outpace inflation and protect your wealth, what do you need to think about?

Your risk profile
Before investing, you must be clear about how much risk you are willing to take with your money. In this prolonged ultra-low interest rate climate, some risk is necessary to achieve returns that will outpace inflation, but your investment decisions shouldn’t keep you awake at night. It is, therefore, essential to pinpoint the right risk/reward balance for you.

However, it is extremely difficult to effectively assess your own tolerance for risk. Instead, find an experienced financial professional who can ask the right questions and use appropriate tools to identify a clear and objective risk profile for you.

A custom investment portfolio
The next step is for your adviser to tailor an appropriate, well-diversified portfolio for you. As well as matching your particular risk appetite, this should take into account your current situation, the aims and objectives you have for you and your family, and your current assets (including property and savings). Establishing your timeline for investing is also important; if you are planning to retire soon, for example, you may want to ensure your capital can be converted into a retirement income at the right time.

A diversified approach
Good portfolios minimise risk by spreading investments across multiple, unrelated areas through diversification. You can limit exposure to any single sector of the market by diversifying by asset type – cash, fixed income (government and corporate bonds), shares and ‘real assets’ such as property – as well as by geographic region and market sector.

Remember: last year’s outperformers may be this year’s losers, so never forfeit diversification to chase the latest trends.

The impact of taxation
Choosing the right investment structure is crucial to prevent unnecessary taxation in Portugal and/or the UK on your income, capital gains or estate. It is no use having a good investment portfolio that is suited to your needs if you or your heirs end up paying too much in preventable taxes.

Despite this, many expatriates persist with arrangements that are actually better suited to a UK resident. Such a UK-centric approach – beside failing to meet diversification principles – may become even less tax-efficient once UK assets become non-EU/EEA assets from January. Meanwhile, residents of Portugal can unlock significant tax advantages for capital investments, so be sure to explore your options.

It might sound counter-intuitive, but once invested it pays to sit tight. While markets tend to do well over the longer term, when a market moves up or down suddenly, it is very difficult for investors to react effectively – by the time you try to do so, the market will most likely have moved on.

For example, following news of the Biden presidential win and the Pfizer vaccine announcement on November 9, the UK market moved up by nearly 5% in a single day.

The speed of movement – which also applies when markets suddenly fall – is simply too swift for investors to benefit by acting after the event. Instead, by leaving your investment in a diversified portfolio that matches your risk profile, the likelihood is that bumps will be smoothed out over the longer term.

Ultimately, it is often better to remain invested than trying to time moving in and out of markets; as various studies have shown, the maxim ‘time in, not timing the market’ will benefit most investors. Be mindful, however, that your circumstances and objectives change over time, as do tax rules, so what works for you now may not be suitable in years to come. It is sensible to schedule reviews at least once a year to check that your arrangements keep up with your situation, especially at different life stages, such as retirement or when relocating.

To make sure you are in the best position possible, talk to a locally-based adviser with cross-border experience about your investment options and suitable tax-efficient opportunities in Portugal.

All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice.

By Mark Quinn
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Mark Quinn is a Partner of Blevins Franks in Portugal. He holds a Bachelor’s Degree in Finance, a level 6 Advanced Diploma in Financial Planning from the Chartered Insurance Institute (CII) and is a Chartered Financial Planner.