The investment factor

Investment is the part of financial planning that a lot of clients enjoy talking about most.

Everyone has a view on whether buy-to-let investment is better than the stock market and everybody loves to play the amateur market psychologist, trying to predict how global events are going to affect the movement of the world’s major indices.

The investment industry encourages this focus. Investment is where the money is: platforms, products, funds, investment management or advice.

Most financial advisors charge fees as a percentage of funds under management. There’s a self-interest in the idea that investment strategy is the centrepiece of financial planning.

Of course, we need an investment strategy. Any plan for our life needs the financial resources to support it. Once we’ve figured out how much money we need to support the life we want to lead, and once we’ve created a surplus of income over expenditure, we need to figure out how to invest that surplus to meet our future objectives.

However, this is often simpler than portrayed by the financial services industry. For many professionals there is a default strategy based on low-cost global index funds (also known as ‘passive’ or ‘tracker’ funds) that will work perfectly well. The benefits of more complex strategies are quite difficult to demonstrate, although the extra costs are easily identified.

“My aim is to equip you to make your own decisions rather than designing a strategy for you.”

The discussion of risk in relation to investment strategy is also key, but again the financial services industry often comes up short in this area.

Too many risk profile questionnaires take a very one-dimensional view of risk based on investment return volatility. However, investment risk needs to be determined by four things: first the risk you need to take to get the returns required to meet your goals; second the timeframe over which you are investing; third your capacity for risk — how much you can adjust if things go wrong; fourth your risk tolerance, relating to your psychology, how you react to adverse events and what keeps you awake at night.

It’s important to allow for our own psychology in relation to investments. It’s often said that the best investment strategy is the one you can stick to given that chopping and changing is what can cause significant costs and underperformance. So even if investing fully in equities produces the best long-term return in most cases, if the resulting volatility means we can’t sleep at night and make poor decisions when markets crash, we’d better amend our strategy to one we can cope with psychologically.

In the investment factor I’ll help you understand the nature of different asset classes, their long term returns and behaviour, different dimensions of risk, and how these can fit together as part of your plan, given your expenditure needs.

We’ll also explore common behavioural biases that can lead to poor decision making by individual investors. My aim is to equip you to make your own decisions rather than designing a strategy for you.

How to invest in line with ethical values is an increasingly important consideration but is also something of a hornet’s nest. How do divestment, engagement and impact strategies differ, and which allows you to align your financial needs, investment beliefs and moral values? This is important to cover as part of investment approach.

I will also of course help you understand the role of different practical investment vehicles: pensions, ISAs, platform investments and different ways to use them together to meet investment goals.

Have a look at the next factor — transition.

Questions to start

What investment return do I need to live the life I want to lead?

What’s my capacity to adjust of things go wrong and how do I react to risk?

Is there a better approach than investing in low-cost, globally diversified index trackers?

Start a conversation

If you like what you see, do get in touch to ask a question, share some thoughts or fix a time to chat. I’ll do what I can to help.