Investments
The foundations of any financial plan will be based on the two different areas:
Interest Earning Investments : such as Building Society Accounts, Bank Accounts and Government Stocks, where the capital you invest is guaranteed and the amount of interest that is applied varies.
Equity Investments : such as shares, property, unit and investments trusts, where there is no guarantee and the value of your investments will rise and fall according to a variety of forces.
As a general rule interest earning funds are recommended for the short to medium term i.e. less than five years and equity based funds for the longer term, whilst there will always be short term volatility, there is long standing historic evidence, though not infallible, that over the long term equity investments have increased to a greater extent and it is they that give any long term financial plan the hedge against inflation.
We feel there are three very important factors to creating long term financial security; time, tax, and professional fund management.
Time
The reason time is so important is the effect of compounding. If you have any doubts use a calculator and add 10% to any figure and keep adding it to the new number, you will find the number grows faster each time, obvious you say, I know this, but have you thought about it in terms of your own financial plan. If you add 10% to 1,000 25 times you should arrive at a figure of 10,834.
Expressed in terms of years and percentage return, have you really thought that by putting off a decision to save £ 1,000 for one year might cost so much as the whole of the initial investment !
Tax
Let us assume that you are a basic rate tax payer and your investment return is 6% in your bank account. In the UK tax for the lower rate tax payer is due currently at 22% this means the net return is actually 4.68%. Underlying inflation is 2.2% which leaves you a real rate of return of 2.46%. As a higher rate tax payer this reduces to 1.4% real return.
If you are therefore able to invest into an area where the growth is free of tax then as a higher rate tax payer you would more than double your real return. This is negligible over the short term but has a huge impact over the long term.
Professional Fund Management
Currently many people are deciding to be their own 'professional' fund managers. Good luck!
In our view, whilst it is fun to have a flutter, there are three reasons to using a professional : Time, Training and Temperament.
- A professional fund manager has the time to dedicate to his decisions, do you?
- Training, there is a lot to learn, do you know it all?
- Temperament, the oldest and wisest managers have seen collapses in the markets before, they are not emotionally attached to your money, how cool will you be when the next collapse comes?
For more information on investments, please use the contact form here.
Financial Fitness introduces to St James's Place Wealth Management Plc which is authorised and regulated by the Financial Services Authority.
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