There are many types of investment, each
of which has different structures, different tax treatments
and investor implications.
Some of these are Stocks & Shares,
Deposit accounts, Gilts, Insurance Bonds, PEPS, Tessas, ISAs,
Endowments, OEICs, Annuities, Unit Trusts, Investment Trusts,
Zeros, Capital Units, Income Units, etc.
You need to give some thought to is what
your objectives are. This is an area in which compromise
and self understanding are essential.
Everyone wants investments which are safe,
in the sense that they cannot fall in value and which offer
reasonably high returns. This combination is sadly not available
and we recommend that you beware of anyone who claims otherwise.
Sensible investment planning revolves around
understanding what your investment aims are, remembering
that long-term investments generally involve lower risk but
the short-term speculative investment may attract a much
higher risk. If however the money is needed in full in the
near future then the short-term safety of a deposit account
is probably the most appropriate.
It is imperative that you understand this vital area, for
sensible investing and your adviser will help you determine
an investment strategy appropriate for your needs and the
investments best-suited to your investment attitude and
tax position.
Most people understand the need for some
element of investment and funding for retirement, but due
to changes in Government policies, there it is now essential
that individuals contribute to a Private or Stakeholder Pension
or at least create some funds from which an income may be
drawn in the future.
Let us look at the options for creating
such a fund and providing for your future.
There are a range of options available
for the person wishing to invest to generate additional income
or build up a fund for the future. In so doing, the investor
may additionally provide for dependents should you suffer
an unexpected loss or reduction in your earnings.
This is generally dealing in shares, stocks, bonds and gilts
and is conducted through stockbrokers who will buy or sell
shares on your behalf for a commission. Terms will vary
from one stockbroker to another but commission will normally
be charged as a flat fee or a set percentage. Although
the idea of share ownership has grown significantly in
the last 20 years there is often an inadequate view of
the risks and how to minimise them and it is worth looking
at the various options.
If you intend to actively manage your share
portfolio by regularly buying and selling different shares
then the commissions will start to stack up. The shares which
offer the greatest potential for high returns may also present
the greatest risk to your capital. So unless you intend to
invest directly in a broad range of stocks and shares, you
should probably consider a collective investment scheme instead.
The price of a company's shares is determined by the value
of its assets and its potential to generate further revenue.
If shareholders begin to see the estimates of future revenue
as unduly optimistic, or if the value of the company's
assets decline, they are likely to sell their shares and
this may cause the share price to fall. If the reverse
happens, demand from buyers will increase - thus pushing
the share price up. The trade in stocks and shares, facilitated
by market makers whose role is to quote both a buying and
selling price for listed stocks and shares, is known collectively
as the stock market.
Public Limited Companies (plc's) in the
UK are listed on the FTSE All-Share index, with the 100 largest
listed on the FTSE 100 which is usually just referred to
as "the footsie". Companies who want to issue shares
to the public but are not able to go for market flotation
may choose the Alternative Investment Market (AIM) but these
shares carry higher risk than those listed on the main stock
market.
The second principal form of direct investment is bonds and
gilts. Bonds are where the investor in real terms loans
money to the bond's issuer, knowing in advance the sort
of return they will get on their investment. Bonds are
generally regarded as a low-risk investment, compared with
shares.
Gilts are bonds issued by the UK government
so by buying gilts the investor is lending money to the Government.
As the UK is regarded as a safe bet to honour its commitment
to buyers of its stock, gilts are thought to be the safest
forms of investment. The issuer guarantees to repay your
capital at the end of the bond's term, and you get a guaranteed
income or return throughout the investment period.
Bonds pay a predetermined interest each
year to the holder and it important to note that the rate
must be competitive with current interest rate levels at
the time of issue. However, it should be remembers that if
interest rates then rise, the return on your bond might not
be as much as a deposits in a Building Society. For this
reason, bonds are regularly traded in the market place.
However, it is always comforting to know
that you will get your original money back on redemption
as, whatever your political views, the Government is a fairly
safe bet.
Corporate bonds work in rather the same way as Government
bonds - they are issued by companies as a way of raising
money from investors. Again, they pay an interest rate coupled
to a promise to repay the capital on maturity. Like Government
gilts, they can be traded on the market open if investors
want their capital back before the maturity date.
However, with corporate bonds, the return
of capital is not guaranteed. They are therefore a higher
risk option, but pay a interest rate to attract buyers.
So you must assess the guaranteed return
of your capital with a Government bond against the potential
for higher returns offered by the stock market and your view
of the stock market may be that prices are erratic and investors
cannot rely on all companies increasing the value of their
shares.
This is the major potential pitfall of
direct share investment - any company is at the mercy of
conditions in its own particular business sector, and even
companies in generally profitable sectors can fall victim
to bad times. Correctly identifying which companies to invest
in is therefore vital for direct share investment. Warning
against putting all your eggs in one basket may seem a little
obvious, but relevant in this context.
You should keep a close eye on how your
investments are doing. Potential investors often find the
prospect of constantly keeping tabs on their share portfolio
too daunting and for this reason - as well as those outlined
previously - many opt to take their first step into these
markets via collective investment schemes rather than direct
stocks and shares investment.
In the UK there are three principal types of mainstream collective
investment schemes - Unit Trust, Investment Trust and Investment
Company with Variable Capital (ICVC). All three will take
the pooled monies of a large number of investors and put
them in the hands of a professional fund manager. He or
she will choose a broad spread of instruments in which
to invest, depending on the relevant published investment
remit.
Investment trusts are most commonly bought
through a stockbroker but we are also in a position to advise
on their purchase whereas Unit trusts and ICVCs are normally
acquired through an Independent Financial Adviser like ourselves.
Details of funds and fund providers are
published in a range of specialist financial publications
as well as sections of the national broadsheet press but
the coming of the Internet has opened up another access route
for investors. Many fund providers now offer their products
via websites. However, given the range of investments available
it is still a good idea to seek professional advice before
proceeding.
However there are key differences between
the three types of scheme structure as shown below.
An investor in a unit trust 'buys' a number of units, while
an investor in an investment trust or ICVC 'buys' shares.
Unit trusts are open-ended, which means that units can
be issued as demand requires. The price of these units
is dependent on the value of the underlying assets, and
they can be sold back to the fund managers by the investor.
Most UK collective investment schemes are authorised by
the Financial Services Authority (FSA), although this imposes
certain restrictions on what they can invest in.
Investment trusts are structured as companies so their shares
are traded in the same way as any other limited company's
shares and they offer a wide range of investments.
The ICVC is structured along similar lines to the unit trust,
but it differs as it has no bid/offer spread. This means
buyers and sellers get the same single price. Additionally,
the ICVC has an "umbrella" structure allowing numerous
sub-funds investing in different types of assets, so the
investor can switch easily between different investment funds.
Given the range of options of unit trusts,
investment trusts or ICVCs, the choice can be confusing and
we recommend that we get together to discuss the options
before you make your selection.
Through research and analysis an active manager will seek
to identify companies which he or she believes will perform
better than their rivals, or whose current share price makes
them a bargain buy. Potential returns depend on whether the
manager gets it right or wrong.
An index tracker fund tracks a stock market
index. Having decided which recognised market index is most
appropriate, the fund manager will invest in such a way as
to duplicate the make-up of that index. In times of good
stock market performance tracker funds are attractive.
But the critics of tracker funds point
to two potential drawbacks. Firstly, if the index falls,
the fund must go with it. Secondly, the cost of running the
fund - administration fees, management fees, etc. - can mean
that tracker funds' performance is just below that of the
index itself.
Active managers should really produce better
returns than the market average as well as avoiding the worst
of the falls in the market by selling badly affected shares.
There are hundreds of collective investment
schemes to choose from which is where our services can assist
you in negotiating the investment market.
So why should the saver, who has hitherto
been content to build up a nest egg in a deposit account,
move into the riskier field of investment in equity or bond
markets? Well, the main reason is the chance of a higher
return than can be obtained from deposit accounts. If the
potential investor is prepared to be patient - these types
of investment are not for the short term - then past performance
suggests that over time he or she can expect a higher return.
Investor must also consider the question
of risk. In a low interest rate environment the return on
your deposit account may decrease, but there is no threat
to your capital. Investing in shares is different. Potential
returns can be much greater than those offered by cash deposits.
But if the shares in which you have invested were to fall
in price, there is a real threat to your capital itself.
If you are forced to sell your shares at a time when they
are performing poorly, you could actually end up with less
money than you started with.
If you are looking to invest directly in shares or bonds
or collective investment schemes, a tax-efficient method
of doing so is using an ISA. This is actually not an investment
in itself but is a tax-efficient way which you can use to
hold a number of investments.
As the UK's principal tax-efficient investment
plan, an ISA can incorporate a stocks and shares element
within which each person can invest up to £7,000 in
each tax year. Alternatively, you can set-up three mini ISAs,
the components being cash, stocks & shares and life assurance.
The investment limits for mini ISAs are lower.
Within the stocks and shares element of
an ISA you may invest directly in shares or bonds or collective
investment funds and we will help you take full advantage
of the existing tax allowances within your investment portfolio.
In certain cases, offshore investment may be worth considering.
From the UK perspective, offshore funds have traditionally
been used mainly by expatriates. Because UK expatriates
do not generally pay UK income tax, it makes sense for
them to invest in funds based in a low-tax centre such
as Luxembourg or the Channel Islands. However, some funds,
accumulation funds in particular, can offer a tax efficient
use of offshore funds to the UK resident.
If you are a UK expatriate intending to
return only on retirement when your tax status will be more
favourable, there are benefits in keeping your investments
offshore.
Funds based in an offshore centre are generally
not covered by the regulations which govern their UK-based
equivalents. This means that you might not benefit from the
same level of protection offered in the UK. However funds
based in several of the larger offshore centres are deemed
to meet UK regulatory standards where that centre has been
granted "designated territory" status by the UK.
As well as offering tax advantages, lighter regulation in
offshore centres means funds can invest in a much wider range
of markets than most onshore vehicles - a big attraction
for the more adventurous investor.
But do remember that capital and income
values may go down as well as up and you may not get back
the amount invested, also exchange rate variations may cause
the value of overseas investments to increase or decrease.
Past performance is no guarantee of future performance.
But the offshore sector presents all manner
of pitfalls for the unwary, so for investors considering
a move in this direction, getting specialist advice is of
paramount importance.
Here our services with our specialist knowledge
of the offshore market can prove invaluable.
Whatever investments you are considering,
you are strongly advised to talk to a company such as ourselves
so that we can help you identify the best type of product
for your requirements based on a consultation to look at
the interaction between risk and return.
Remember that all investments carry some
degree of charges which can vary fairly significantly so
we will help you through this potential minefield so that
you can fully to understand to options.
It is also important to recognise that
some investments are designed to be long-term investments.
It is therefore essential that we understand your wishes
clearly when it comes to short, medium and long-term investments
and ensure that you understand the risks of your chosen products. |
