Investments do rise and do fall in value and we strongly advise that professional advice is taken before investing your money
I was watching a business news programme the other day and they were talking about risk from an investment perspective, what was interesting is that they never considered what the money was being invested in and what the return might be. In simple terms, in order for your money to grow you need to invest in real assets that grow over the rate of inflation, which cash on deposit has very rarely done in my experience.
When considering risk and returns you should consider that as an investor you are effectively investing in companies which has a positive impact through job and overall wealth creation.
Ask yourself this, if someone did not invest in your company then it is likely that you would not have a job or the life that you currently enjoy, so returns cannot always be measured simply by an excel spreadsheet.
So, when considering how to invest your hard-earned money ask yourself what do you want your money to achieve, in addition to growing your wealth and prosperity?
If you are looking for expert guidance to ensure your capital is invested in the most effective way contact us at SM&A today. We can advise you not just on investing for future returns but also doing so in a socially responsible and sustainable way.
For the speculators out there, they are always worrying if the stockmarket is going to drop/ collapse/crash, I even heard a respected Fund Manager who is a regular guest on CNBC (business channel) say that he is ‘dancing nearer to the doors these days’…
I would like to suggest that if you are an investor and not a speculator, there is sufficient data and real experiences to suggest that worrying about short term volatility is a fool's game. In fact, investors like Warren Buffet are not ‘dancing near the door’, rather they would be relishing the opportunity of buying assets more cheaply if the chance was to become available. They see low prices as an opportunity, a chance to buy more of what they like at a good price as opposed to selling at a loss.
Investors have often been referred to as lemmings, meaning that on the whole everyone tends to follow the herd, without thinking rationally. The stock market seems to be the odd situation where if you can buy something at a lower price than previously quoted then it’s no longer a good investment, but surely if it was a good investment before and you can buy it at a lower price then it’s potentially better value now! The unfortunate fact is that the human psyche struggles with this concept when it comes to investing.
The stock market is like Jekyll and Hyde and regularly swings between euphoria and despair. Recognising this fact and not panicking can be part of the path to long-term success!
Yes, the stock market is reaching the ‘mature’ part of this economic cycle, but I would suggest that as this recovery has been manipulated since the Financial Crisis by quantitative easing etc, therefore this cycle is not ‘normal’ by definition. Yes, many things can and do go wrong resulting in sudden market drops, but my view is that at this time, due to the cost of money being low and central bank interventions currently ongoing, this bull market has still more time to run.
In fact a good piece of evidence supplied by Invesco Perpetual as presented to investment professionals says that it is not until the US yield curve has inverted that history shows that a recession is approaching, I quote, ‘However, the lead time between yield curve inversion and the start of recession tends to be quite long: 21 months, on average, over the last five US recessions. Furthermore, there is also a lag of 18 months, on average over the last five recessions, between yield curve inversion and the peak of the equity market; and the capital returns from the S&P 500 Index during that period have been strong (24.3%, on average). Past performance is not a guide to future returns.’
So as always this is not necessarily how things are going to evolve, but this research does indicate until this happens in relation to the S&P 500 index there is likely to be more gains to be achieved, before ‘a recession removes the weak holders and the strong take back their market share’ ready for the next business cycle and in terms of protecting ones portfolio, a move or increase in fixed interest or more value based funds would offer some potential downside protection or even upside wins.
We at SMA continually review academic research and see what relevance this has to our client’s portfolios and are ready to change strategy as and when the economic back drop/investment style changes. If you would like to discuss how we may be able to add value to your portfolio, please do contact us.
Author Steven Mufti is a qualified investment professional and this review is relevant at the time of publication. We do strongly recommend that you take professional advice before buying or selling any investment.
Congratulations, you have just sold your business for a large capital amount, won the lottery or Inherited a large estate, but the sum involved is more than £5 million. You have paid the taxes due (don’t worry we may be able to legally claim some of that money back) and the question is now ‘how do I secure mine and my family’s future’.
A large sum of money is very daunting, if you have been a business owner you have been used to dealing with large sums of money on a regular basis. But all of a sudden, your whole financial future depends upon the decisions you now make. As a business owner you will probably be surrounded by professional advisers such as accountants, lawyers and even a financial adviser, so the likelihood is that you will turn to these individuals in the first instance, but you are now asking ‘do they have the skill and knowledge to manage and advise me on my capital’.
A ‘family wealth office’ can have one client or several very high net worth clients. These individuals or families ‘employ’ by appointing a professional advisor to advise and manage their capital.
By definition these high net worth clients are deemed professional and non-retail clients and they forgo their rights to the financial services compensation scheme (FSCS). The reason that they do this is primarily so that they can make full use of tax structures on and off shore, and access non-mainstream assets.
Depending upon the clients remit and experience no investment vehicle is off the radar, but this is not always advisable.
The best investors in the world are said to be the Endowment funds of the likes of Harvard and Yale universities, etc. They consistently achieve above inflation returns on their ‘portfolios’ due to their ability to invest ‘patiently’ for the long term. As a broad statement they invest a large portion of their capital in ‘Alternative’ assets which can mean ‘anything’ but generally could be termed; private equity or venture capital.
The advantage to an investor is that if you put a portion of your capital into a private equity (small venture) and it is successful your returns can be multiplied many times over, the negative point is that you can lose the lot!
This is why access to a group of suitable professionals is prudent as they can assess the risk and return parameters that you are prepared to take or should take, typically based on income and lifestyle needs and the time that the monies would be invested. They will construct a strategy to meet a said objective, also building in the needs for children (such as schooling, future homes etc) and grandchildren, to have a multi generation investment and tax strategy.
Once you have the plan established the input of tax planning accountants are brought in to the plan along with solicitors to build the legal frame works, such as trusts and special purpose vehicles.
Once the tax structures have been established to minimise tax and cash flows (incomes) are known, then the investment of capital can be implemented, segmenting the capital to target specific goals/objectives and then asset allocation of this capital to investments targeting the required returns/yields.
The above is a broad example of what could be achieved, but the most important thing to do is to appoint an adviser who understands how to invest capital and fully understands your requirements. Do not expect to achieve this at one meeting, it could even take months and years before the first investment is undertaken, particularly if your investment experiences are limited.
We here at SM & Associates do offer bespoke planning for ultra-high net worth individuals, do please call us if we can be of assistance.
When investing your hard-earned money, dare I say that are you investing with the intention of growing your capital!
Now there are lots of investing styles and strategies that you can adopt, which is a whole other topic, outside the remit of this article.
However, for the clients we look after, they tend to focus on losses more than gains, which is a normal human behaviour, that we term ‘loss aversion’. It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gains (Kahneman & Tversky, 1979).
I was reading the Daily Mail (dated 21st April 2018) and its Article on Netflix.
To state the obvious, to make a positive return it is important not to lose money and not to forget this simple but important rule.
When we (SMAssociates) are selecting fund managers we are conscious to focus on managers who have shown consistent investment selection and returns, so that the investment journey our clients are taking is positioned to benefit from potential positive returns whilst minimising losses - easier said than done! So what’s your point Steve I hear you say, my point is this, as I write, US indices are riding high typically focusing on ‘FANG’ stocks (Facebook, Amazon Netflix’s and Google).
Looking at the data on Netflix, which is might I say, the online version of the now defunct Blockbuster video. 'One business you went in and collected your video, the other business delivers through your broadband'.
Using the article's data, the business is valued c$103billion which is similar in value to a long established business, Disney, and over the last 21 years Netflix has had sales of $37.7 bn and banked $2.1 bn. What this says to me is that if I brought the whole company for $103bn (and lets face it, if I did, I would not be writing this article) the person selling me his shares would be doing very well indeed. Up to this point the shareholders only achieved $2.1 bn on the companies sales - not a good return I would suggest, but the capital gain for the shareholder was fantastic. Currently, the company is investing heavily into content for its subscribers (c$5bn) to grow its business and maintain its prospects. Clearly this is what investors must be focusing on as one day these same investors will want the company to be worth more than today’s valuation and producing dividends as a means of shareholder returns.
So here is the conundrum as I see it -
If you are buying this company today, the return that you are receiving is low in terms of company earnings/profits, but you would be buying for future growth expectation which may already be ‘baked into the cake’. Could you for the same money buy another company with good growth prospects which is not as expensive? I would suggest that yes you can. It is this type of analysis that we consider when our fund managers present their portfolios, because expensive (highly rated) companies that fail to meet investor expectations have a high probability of losing investors money.
A speculator I would suggest would pour scorn on my analysis but for a ‘momentum trader/speculator’’ the price may go higher for lots of reasons. Would I be keen for our clients to hold this high-risk investment - no, I would not be keen as the price that you are paying is very steep and it is priced to ‘perfection’ i.e. it cannot make any mistakes or the share price will drop and probably drop substantially.
My Nan would say 'I could get a better return in the bank based on the figures disclosed!' And she would be right, especially when taking risk/reward into consideration. Fads come and go, but what clients want to do is to enjoy their wealth for a long time and even pass it to their children. It is for this reason that we, on behalf of our clients, leave these opportunities to others and scrutinise the risks our fund managers are taking with our client’s monies. It has taken some 15 years plus for the technology funds to recover the loses of the last ‘tech boom’, so if you are a ‘speculator’ be wary, for us ‘investors’ we like the slow and steady.
Steven is a Fellow of the Personal Finance Society, whom is passionate about investing and getting the most from your money.
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