Wealth creation and management – five key elements for success

In our view, there are five key aspects that you need to address to ensure you obtain the optimum investment portfolio to suit you and your particular situation:

1. Right tax efficient structure for your residence and personal circumstances
2. Your particular appetite for risk
3. Matching your risk profile to a suitable investment portfolio
4. Diversification. [Repeat.] Diversification!
5. Reviews.

Tax considerations – choosing the right tax efficient structure
A tax efficient structure – such as a pension plan or ISA in the UK – can keep most of your investments in one place and importantly provide protection to help you legitimately avoid paying too much tax. You want to ensure that as much of your hard-earned wealth as possible is placed in the most suitable structure to limit your tax liabilities.

That was perhaps easier to achieve in the UK where we are accustomed to the local rules, but here in Portugal with a foreign tax system and various changes and tax rises over recent years, it is crucial to take advice from someone who is also well-versed in the nuances of the Portuguese taxation system and how it can impact your wealth.

Otherwise, you may happen upon an investment portfolio that produces excellent medium to long-term returns, only to see them slashed by Portuguese taxes – levies that could have been avoided or at least significantly reduced.

Your appetite for risk
Of course, no risk often means no returns. And arguably these days, as witnessed in recent years, even bank accounts carry risk.

Most of us recognise that for some of our assets, exposure to market movements gives us a better chance of outperforming inflation and producing real returns over the medium to long term.

However, the starting point has to be to obtain a clear and objective assessment of your appetite for risk. Otherwise the result will be an investment portfolio that is not suitable for you.

These days there are some very sophisticated ways of evaluating your risk appetite, involving a combination of psychometric assessments (easily carried out in a face-to-face meeting with a wealth manager) and consideration of your other assets and the aims you have for you and your family.

Matching your risk profile to the optimum portfolio
Every set of investments can be forecast to display a given amplitude of risk. Low amplitude, less risk but also lower likely returns. A higher amplitude of risk brings greater potential returns. The key is ensuring your investment portfolio matches your attitude to risk.

Without such a sound assessment being then matched to the optimum blend of investments, you could find yourself with a portfolio that is too risky or cautious for you.

You need to establish the investment portfolio that suits you best.

The next critical component is to ensure your investments are suitably diversified so you are not over-exposed to any given asset type, country, sector or stock.

By spreading across different asset types and markets, you give your portfolio the chance to produce positive returns over time without being vulnerable to any single area or stock under-performing.

This sound investment approach should be extended by one further step. Utilising a ‘multi-manager’ approach, where several different fund managers are blended together, can reduce your reliance on any one investment manager making the right decisions in all market conditions.

Diversification done properly can reduce your exposure to risk.

Finally, it is important to review your portfolio around once a year to re-balance it, or delegate responsibility to a reputable discretionary investment manager to effectively do that for you. As asset values rise and fall, your portfolio can shift away from the one designed to match your risk profile and objectives. You may need to make adjustments to re-establish your original weighting, and need to consider if any of your circumstances have changed and the implications for your portfolio.

Regular re-balancing helps control risk and can have a positive effect on performance.

So in summary, ensure your assets are put in the right structure to limit potential taxation, get your appetite for risk assessed objectively and matched to the optimum investment portfolio to suit that risk appetite, diversify across asset types, markets and investment views, and finally, review your portfolio from time to time.

Five key principles which applied well can help you have the peace of mind to sleep at night, while your investments and investment managers work to your requirements.

All advice received from Blevins Franks is personalised and provided in writing. This article should not be construed as providing any personalised taxation and/or investment advice. All information is based on our understanding of legislation and taxation practice at the time of writing; this may change in the future.

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. | www.blevinsfranks.com

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