IN THE past, you may have held a selection of investments such as equities, bonds and saving deposit accounts. Perhaps you held some from each category at the same time, or just one type for some of the time.
It is possible that you cashed them in to pay for a car, home improvement, or even to help finance your emigration from the UK. You might have transferred the funds to put into something new on the market – the latest investment on offer. Or maybe you sold out because the particular type of investment you held had underperformed. You panicked. You wanted to cut loose and run before all was lost.
But markets are ever changing, moving up and down over time spans, giving good returns on high swells and less on low tides. One of the crucial elements in getting the most out of your investments is to diversify and allow your finances to ride out the highs and lows, so that a steady, cumulative profit is seen.
Life’s situations are also ever changing. If you have retired, the amount of money you have to invest is probably quite different than that of earlier years. Possibly your personal circumstances will have changed too. Your expenses may also be different to when you were working. In fact, your entire budget is likely to have changed – how much you have to spend and how much you need to save to earn that spending power.
Many retirees change their attitude as to how much risk they are prepared to take with their life’s wealth. As a salary is no longer coming in, investments need to do the earning.
Often, retired people move money from higher risk schemes to somewhere safe, like a high interest bank account, which feels comfortable and is easily accessible. But when interest rates are low and inflation is eating away at the capital in these accounts, is that a good idea?
When you retire or approach retirement you should take a hard close look at your finances and review your situation. Taking advice from a financial adviser will not go amiss. He/she will be able to explain all the choices available in which to invest and what suits your circumstances. They will also be able to keep a cool head when you might be tempted to ‘sell out’ too soon.
I’m sure that they will recommend diversification to preserve your capital, lessen the risk and to produce stable and steady returns. It will also keep your blood pressure down when interest rates drop or the stockmarket takes a dive!
A financial portfolio that contains a wide range of investments and is effectively managed is good to have. You need to include elements that will grow your capital as well as elements that will produce income. You should also bear in mind that you need protection from inflation and exchange rate movements. Structures to legally reduce the amount of tax you will have to pay could also be included.
A good mixture in your investment portfolio should include a spread of equities, bonds and cash. Within those groups, you should also consider a selection from different corporate categories and geographical areas.
Some people only think of investing in the UK stockmarket, but US equities and those from emerging markets should be thought about too. Why not include blue chip companies that are likely to provide steady dividends, as well as smaller, lesser-known companies that have the potential to expand?
Equities are considered to be a medium to long-term investment that can average out to have produced a steady yield above the average bank interest rate.
It is very likely that your portfolio will benefit from a bond element. Bonds pay a regular income and thus are a useful, if not essential, factor in your portfolio. They are rated as a safer investment than equities, even though you can select both high risk and low risk bonds, according to the company’s credit worthiness. A company with a low credit rating will offer attractive yields, which are usually described as High-Yield Bonds.
To reduce the risk further, you could invest in a bond fund where your capital is pooled with other investors and used to buy into companies from varying sectors with varying credit ratings. An advantage of a bond fund is that if you do not require the income, you can leave it in the fund to accrue.
Or, you could go for government bonds, otherwise known as gilts, which in countries like the US and the UK are considered safe as houses.
You could include a guaranteed bond, one which offers a 100 per cent guarantee on your capital. This means that you will get your capital back whatever happens, plus any yield on top of that.
Of course, you still need some cash on hand for that unexpected expense and this is where the high interest deposit account comes in. Your money is still accumulating some return but is also available for a rainy day.
Building a good cross section into your financial portfolio will spread the risk of stock exchange and corporate declines, while also exposing it to the highs and periods of healthy yields.
Your local financial adviser will be able to help you with this portfolio planning, as well as suggesting legitimate structures to protect your investments from as much tax liability as possible.
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