DIY InvestorMagazine
/
March2014
DIY InvestorMagazine
/
March2014
12
13
ALONGTERMPLAN
FORYOUR ISA
With over 30 years experience in Financial Services David (DAN) Norman has worked for 10
different firms, most recently the CEO of Credit Suisse Asset Management (UK) he founded
the specialist multi-asset passive boutique, TCF Investment, in 2009. Here he gives his
thoughts on the best long term strategy for your ISA.
STARTWITHTHEEND INMIND
Investing is like any other long term activity – it needs
a clear destination or purpose (tomake sure you can
monitor your progress), you need to understand the
risks that might be faced along the way (and what you
might need to do to reduce or to respond to those risks)
and it needs some determination to stay the distance.
A clear plan of what resources you will needed for later
life is critical – as the famous conversation in Lewis
Carroll’s ‘Alice’s Adventures InWonderland’ highlights:
Diversification, the idea that spreading your investment
between different asset classes and between different
stocks within each asset class, can boost your returns
has been around for many years, but is as valid today as
it ever was.
Often described as a ‘free lunch’, you can boost your
returns and reduce your risk by diversifying and re
balancing regularly (bringing your portfolio back into
line with its long term asset allocation).
As a rule of thumb, more often than annually and less
often than quarterly is a good guide – the costs of re
balancing being a key factor. Spreading your investment
between assets classes (equities, bonds, property, cash,
commodities) leads to a lower risk profile.
The same goes for spreading investments within asset
classes between different geographies (e.g. UK and
Overseas) and sectors (e.g. energy, financial and retail
company shares). Index funds are an excellent way to
achieve this diversification at very low cost – they hold
a very broadmix of bonds or shares.
And rebalance very efficiently. The latest generation of
low cost multi - asset funds also offer diversification
across asset classes and can be very cost effective.
THERISKS
There are some obvious and less obvious risks that all
investors face. Chief among them are inflation, volatility
(the ups and downs) and cost – though I would argue
that costs aremore of a certainty than a risk.
Every investment has a different risk profile. Cash isn’t
volatile but it is poor at beating inflation. Equities beat
inflation in the long run but aremore volatile in the
short run. Understanding your own risk profile is critical
as it is the only way to build a portfolio that will meet
your long term goals – you need to know:
EGGS, BASKETS
&OMELETTES
AS A RULE OF THUMBMORE OFTEN
THAN ANNUALLY AND LESS OFTEN
THANQUARTERLY IS AGOODGUIDE
– THE COSTS OF REBALANCING
BEING A KEY FACTOR.
“WOULDYOU TELLME, PLEASE,WHICHWAY I OUGHT TOGO FROMHERE?”
“THATDEPENDS AGOODDEALONWHERE YOUWANT TOGET TO”,
SAID THE CAT.
Spending some time to develop this plan is probably
themost important stage in investing.
Without a plan howwill you knowwhether you are on
track? This is an area where a good financial adviser
can really help. And any plan will of course need to
understand the risks.
•
Your attitude to risk (your appetite for risk if you like)
•
Your need for risk (howmuch return do you need to
meet your goals?)
•
Your risk tolerance (can you afford short term losses
in pursuit of longer term goals?)
Many investors underestimate the impact of inflation or
as Neil Rossiter (Certified Financial Planner) describes it
‘the hidden tax’.
Many people aged 60 today will live into their 80s and
beyond. To keep pace with inflation at just 2.5% pa your
investments need to grow by 85% over a 25 year period.
Your investment plan needs to take account of this.
