Investment advice

Investing advice Whether you are looking to set up a small nest egg, plan to invest a large sum, or looking for a free opinion on existing planning; we offer a no obligation financial review designed to help you make decisions.

We also offer a service to review your funds on a regular basis. We listen to your needs hoping to establish the level of risk you want to take. We move on to find the most suitable type of product which might for example be the most tax efficient for your situation. We help you quickly narrow down the choice from thousands of funds available, to the most suitable for you.

Because we are totally independent and can deal with the whole of the market, we can advise you on everything from Cash ISA rates and Child Trust Funds up to complex Investments and Trusts and even Off Shore Planning.

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More information on Investment >

More information on Investment

Know why you're investing
Each year you can invest up to £7,200 in ISAs, and not have to pay tax on any profits you make. Question: you should always consider using your ISA allowance each year, true or false?

The answer is "true" - because of the potential tax savings, you should always look at your circumstances each year and consider whether or not to make use of your ISA allowance. However, having considered your position, it isn't necessarily true that the answer should always be "yes". Investing in ISAs simply because of the tax breaks is mixing up ends and means, putting the cart before the horse. Saving and investing should be about achieving defined goals. If ISAs are the best vehicle to get to where you want, all well and good.

The trouble is that there is a bewildering array of investment products available to consumers, covering almost every conceivable need for growth or income, high risk or low risk, tax liability, guaranteed returns, diversification, charging structure and terms.

Without professional advice it is all too easy to start from a false premise such as "I need a unit trust" or "I should be buying shares".

Finally, you should always bear in mind that past performance is no guide to future performance - this is explained in more detail later on in this document.

Growth and income
Most savings and investment products are designed to produce either capital growth or income, not both.

Therefore, when choosing how to meet your future goals you need to make sure that the products you are looking at are designed for your requirements. To make life more complicated, some products such as unit trusts can be geared towards producing either income or growth depending on which fund you invest in.

In addition, within these general categories of growth and income there are an almost infinite number of subdivisions depending on the level of risk you are prepared to take, your tax status, and whether you are interested in guaranteed returns.

Risk
The textbook definition of risk is uncertainty about the future value of an investment. In layman's terms, it refers to the possibility of losing large sums of money.

For example, there have been few 10-year periods where you would have lost money by investing in the UK stockmarket. The problem comes if you need access to your money within the 10 years or, more generally, if you need to extract the money from an investment earlier than expected. Of course, time alone is no guarantee that the value of an investment will rise.

One of the most fundamental questions which any financial adviser asks a client is "What is your attitude to risk?" This can be measured in many ways, and is only ever a guideline.

If you define your attitude to risk as "balanced", or "3 out of 5", or "6 out of 10", it doesn't mean that you should only invest in products which exactly match this risk profile. It's almost impossible anyway, and the aim should always be a portfolio which is collectively appropriate. This can equally be achieved by investing in a range of products with different risk levels, rather than sticking religiously to one category of investment.

It's also worth bearing in mind that it's possible to err on the side of caution. Financial advisers regularly meet clients who claim quite a hearty attitude to risk, while still having large amounts of money in extremely cautious building society and bank accounts. This isn't as inappropriate as punting it all on the stockmarket, but it still doesn't make sense.

Tax
Tax has always been like an arms race between the government and investment companies. Every time the tax rules change manic effort goes in to building new products which minimise tax liability.

The end result is that the range of investment products you can choose from is vast, and some simply won't be suitable for you - they are only designed for higher-rate tax payers, or non-tax payers, or people with inheritance tax liabilities.

In other words, you need to understand not only what you are trying to achieve with an investment, and the level of risk involved, but also the tax implications of the product you are buying.

The simplest example is an ISA (these are explained separately). You can invest up to £7,200 per year in an ISA, and the proceeds are tax-free. Let's say that the ISA doubles in value, and you have a capital gain of £7,200 to add to your original money. Hooray - you don't have to pay any tax because the money was held in an ISA!

The trouble is that you might well not have had to pay any tax anyway. This is because the first £7,200 of your capital gains each year are exempt from tax. This certainly doesn't mean that you shouldn't invest in ISAs, but it does mean that you should look carefully at the tax status of any investments you make and how they will benefit you.

Inflation
How would you feel if you had put £1,000 in an investment in 1970 and it was worth £9,000 now? Deeply unhappy?

You should do. Inflation has been so rampant over the last 30 years that £9,000 buys less - is worth less - than £1,000 did 30 years ago. In the real world, rather than on paper, your investment has lost money over the period.

Although it is almost impossible to find an analyst who thinks than inflation will return to such levels in the foreseeable future, or even rise much above its current rate of about 3%, this doesn't mean that inflation can be ignored. At the very least you always should bear in mind that when an investment company quotes a return of x% per annum on their funds, you can immediately knock a few percentage points off that to give the effect in terms of your pocket.

Saving for retirement
Pension schemes are explained in a separate Guide. This may seem daft - after all, they are a type of investment, designed to produce an income in retirement.

However, retirement planning is usually kept separate from other types of investment for two reasons. Firstly, pensions are usually very long-term schemes. If you start contributing at 20 your pension plan may last you for 45 years.

Secondly, the government tries to encourage people to make their own pension arrangements in addition to what the State provides. This encouragement takes the form of major tax breaks, and their size and nature means that it is sensible to consider pension planning separately from other forms of investment.

Guaranteed returns
There are several types of product offering guaranteed returns - either a specific amount of growth after a certain period, or a fixed level of income per year.

These products range from low-commitment, low-return products such as various National Savings vehicles provided by the government, to products which have higher returns but require you to lock away your money for as much as five years.

While guaranteed returns are clearly attractive, you need to bear a few things in mind:

Companies can only make really attractive guarantees if they know that they will have access to your money for a certain period. Therefore, if you try to withdraw your money from a guaranteed investment before the intended maturity date you will usually have to pay stiff penalties.
For some reason, there is an increasing market for very complex products where the guarantee on offer is not a proper guarantee at all, but is conditional on various factors. If an offer seems too good to be true, check the small print - it may turn out that there are circumstances under which the guarantee does not apply.
The relationship between risk and reward is roughly the same as "you get what you pay for". If you opt to invest your money in a guaranteed form, you can't expect to get the same returns that are potentially available on more risky investments.

Collective investment schemes
Most funds, such as unit trusts, investment bonds and pension funds, are collective investment schemes. Your money is pooled with other people's, and you own part of the pool.

The combined pot is able to invest in a wider range of assets than any individual could do by themselves - this diversification leads to lower risk - and you get expert management of your money (by the fund manager) for relatively reasonable charges.

Most funds have a "mandate" which specifies the geographical area and/or sector of industry they will invest in, and whether their aim is to produce income or growth. For example, a "UK growth" fund aims to generate capital growth for you by investing mainly or only in companies on the London stock market.

A fund's mandate is one of the factors which determines its level of risk. The UK, Europe and the US are commonly perceived to be less risky than emerging economies, and a fund which invests across an entire country's (or continent's) market will usually be less risky than one which concentrates on a particular sector of industry such as biotech companies.

Past performance and future risk
"Past performance is no guide to future performance" - the regulators would like this to be written in letters of fire over the door of every financial adviser.

The trouble with this warning is that it actually means two things. Firstly, and very understandably, if a fund has achieved 50% growth over the last three years there is absolutely no guarantee at all (unless the manager specifically provides one as part of the product) that performance will be the same over the next three years.

For example, a "UK growth" fund is restricted to investing in the UK. While the British economy is booming such funds will do well, but when the economy is struggling performance will tail off. Most funds have a mandate which means that they are constrained by events beyond their control - a UK growth fund cannot suddenly start investing in Japan because the UK economy is in trouble.

Relative performance
Secondly, good past performance is no indication that a fund will continue to perform better than its peers. For example, if you have tossed a coin ten times, and got ten heads, what are the odds on it coming up heads the eleventh time as well?

The answer is evens - no different from the first time you tossed it. Unless someone has been tampering with the coin, what's happened in the past has no bearing on what will happen in the future.

Although fund management should not be a matter of chance, this rule applies to it surprisingly well. The top-performing fund in a sector over the past few years is not guaranteed - indeed, is highly unlikely - to be the top-performing fund over the next few years. Not only is it unlikely to make you the same amount of profit, but it is also unlikely to be among the better performers in its sector.

In other words, when looking at funds' past performance it is wiser to look for consistent returns (and continuity of management) rather than just to concentrate on the top performers in a given sector.

Sectors and relative performance
As mentioned above, most funds have a specific mandate which 2determines the geographical areas and sectors of industry in which they are allowed to invest. This also goes a long way towards determining how risky they are.

When analysing past performance it is normal only to compare funds in the same sector - i.e. funds with the same investment aims. For example, it would be misleading and inappropriate to compare a UK growth fund with a fund which invests in the Pacific Rim, for two reasons:

The Pacific Rim fund will (probably) be much more risky than the UK growth fund.
If a fund can only invest in the UK it can hardly be blamed for doing badly if the UK economy - i.e. the companies in which it has to invest - is suffering at a time when the Pacific Rim may be booming.

This has another side-effect. Fund managers will almost always express their targets in terms of trying to be among the best in their sector, rather than trying to generate a specific amount of growth each year.

Once again, this is due to the limitations of their mandate. If a fund manager is restricted to investing in UK companies it will be very difficult to generate, say, 10% growth in a year when the UK stock market falls. Under these circumstances all fund managers can aim to do is to beat their competitors.

Therefore, the manager of something like a UK growth fund will usually express the fund's target in either or both of two ways:

To be consistently in the top 10% ("decile") or top 25% ("quartile") of funds in the same sector.
To beat a relevant stockmarket index, such as the FTSE 100 or FTSE All-Share for companies which invest mainly in the UK.
In other words, funds express their targets in terms of benchmarks - either the performance of their competitors, or the performance of the stockmarket in which they invest.

Tracker funds
"Daddy, what does a fund manager do?" The obvious answer appears to be that a fund manager turns up at work with a copy of the Financial Times, decides which companies he/she thinks are going to rise, and invests money in them on behalf of the fund's investors (i.e. you).

This is largely true, though it does gloss over the fact that there are many different approaches to fund management, and most funds have a fixed "mandate" which specifies in advance what sort of assets they can invest in - for example, a fund billed as "UK Growth" cannot suddenly start investing in Korean semi-conductor manufacturers.

However, there is a radically different approach to fund management.

As mentioned above, most funds express their targets in terms of trying to beat a stockmarket index such as the FTSE All-Share. It's a regrettable fact that the majority of funds fail to do this each year (though each individual fund will have good years and bad years).

Therefore, so the reasoning goes, why not construct a fund which will always match the performance of the stockmarket index (though will never beat it)? The fund does this simply by buying all the companies which make up the stockmarket index - there is no decision-making by the fund manager about what to invest it. Performance each year is almost exactly the same as the relevant index, and therefore the fund beats most of its competitors.

These are known as "tracker funds", because they track the performance of the index. They are also known as "passively managed", because the fund manager makes no investment decisions, and is simply an administrator.

Unsurprisingly, tracker funds have become increasingly popular, and are worth serious consideration by most investors. However, please note that the marketing of tracker funds is often misleading:

Tracker funds are not low-risk investments. If you invested in a FTSE-100 tracker in 1996 you would have made about 70% growth by the end of 2000 - very pleasant. However, if you invested in 1998 performance would not have been markedly better than many guaranteed investments; from 1999 you would have lost money after taking inflation into account; and during 2000 you would lost more than 10% after taking inflation into account.
Because of this volatility, tracker funds are not usually a suitable way to invest money in the last few years before retirement.
Beware of companies which recommend tracker funds when they are in fact making a virtue out of a necessity - because they are cheap, and can be sold on a "one size fits all" basis without having to provide proper advice based on your financial circumstances.

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