Practical Application

There are five key components to the practical application of our investment philosophy:

Defining your asset allocation

"Asset allocation" is the term used to describe the process of apportioning your invested wealth across a number of different asset classes. In broad terms: how much should be held in fixed interest investments, how much in property, how much in the various equity classes, et cetera.

The asset allocation process is crucial because it determines the level of potential risk and potential reward that you may expect from investments held over the longer term. If the defined asset allocation is not appropriate for you then one of two things may happen:

  • If the asset allocation is too aggressive, then the volatility within your investment portfolio (i.e. the extent to which the value of the portfolio fluctuates in the short term) may be excessive. In which case the risk exists of you abandoning the investment process at the worst possible time.
  • If the asset allocation is too conservative, then your potential reward for holding the investments through the longer term may be too low, meaning that the investments do not have the potential to grow sufficiently to meet your future goals and objectives.

Either of these scenarios brings unwelcome consequences, and it is for this reason that we spend a considerable amount of time assessing your needs and matching the appropriate asset allocation to them.

The process of defining your asset allocation starts at our first meeting. The right asset allocation is a sophisticated mix of your goals and objectives, and your emotional attitude to investing.

During the 'initial' meeting and the 'discovery' meeting we cover all of these areas in detail. We also support the picture we develop by asking you to complete a psychometric questionnaire that is focused on identifying your personal tolerance towards taking investment risk.

The questionnaire is a very useful tool in the process of defining your asset allocation - serving to confirm the conclusions we may already have reached in our meetings, or providing pointers to areas where more discussion and exploration are required.

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Allocating your investments to the appropriate tax wrappers

With the asset allocation established, we then make recommendations as to how your existing and future wealth should be distributed across the various available tax wrappers - ISAs, pensions, offshore investments, etc.

The distribution of wealth across tax wrappers is driven by your present and future (anticipated) tax position, and also by your goals and objectives - when will the wealth will be required, and in what format?

If you have a requirement for immediate inheritance tax planning then this may also play a significant role in dictating the type of tax wrapper used to hold your investments.

We do not believe however that tax issues should be allowed to dominate the analysis and discussion - this would amount to letting the 'tail wag the dog'. Rather, the process of allocating investments to the appropriate tax wrappers must always be a careful balance between minimising the potential tax exposure and ensuring that your wealth (in the form of capital or income) is available to you and your family when it is required.

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Re-organising your existing investments

Almost without exception, new clients come to us laden with an eclectic mix of investments that they have accumulated over the years - PEPs, ISAs, endowments, pensions, bonds, etc.

In order for us to apply our investment process to your investments, we first need to consider whether it is possible to economically re-organise them so that the appropriate asset allocation can be applied and then maintained going forward.

Our experience is that clients are keen to do this in order to immediately begin capturing the many benefits of aggregating their wealth into a co-ordinated and scientifically structured investment plan. A further by-product of the re-organisation process is that we may be able to dramatically simplify your holdings, and create a level of transparency and understanding that has hitherto been unattainable.

However, before such a reorganisation can be considered we first need to ensure that you do not incur any unnecessary costs or sacrifice any valuable policy benefits. To achieve this we undertake a forensic analysis of all of your existing investments. The results of this are then used to confirm that the desired re-organisation is in your best interests.

For many clients this is an eye-opening experience, as for the first time they see all of the costs associated with managing their wealth.

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Ongoing monitoring and re-balancing of your investments

The unique combination of your personal goals and attitude to risk underpins your long-term financial strategy. The portfolio that we construct is a direct product of these factors. If the composition of the portfolio changes over time then it ceases to be aligned with your financial strategy. Similarly, if any of your personal goals or your attitude to risk changes, then the portfolio will cease to be appropriate for you.

Any misalignment between your investment portfolio and your financial strategy means that the portfolio may no longer be relevant to you, and could jeopardise the likelihood of you achieving your goals.

Wandering a couple of degrees off course during a long journey could leave you miles away from your intended destination.

Because each portfolio is made up of different classes of assets, it is inevitable that some of them will perform better than others in any given year. Therefore, at each review we analyse the performance of the assets within your portfolio and, subject to an assessment of the related transaction costs and tax effects, we will “re-balance” them to restore the original composition of the portfolio. This may involve selling part of an asset or fund that has performed well and re-investing the proceeds into one that has not performed so well.

The discipline of re-balancing raises another important aspect of our ongoing client/planner relationship – maintaining investment discipline and structure. For you to achieve your financial goals it is essential that you adhere to your agreed long-term investment strategy. We recognise that there can be a real temptation to sell a particular asset after a period of poor performance, however in doing so you increase the risk of continually buying assets at or near the peak of their value and selling them at or near the bottom – “buying high and selling low” . In addition to this risk, regularly buying and selling assets to chase short-term gains will incur additional transaction costs that drag down the overall performance of your investments.

By encouraging you to hold a truly diversified portfolio of asset classes through the peaks and troughs of their investment performance we maximise the probability that, over the long term, your portfolio will enjoy the market returns of the asset classes in which it is invested, and thus maximise the probability that you achieve your financial goals.

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Using exemptions to reduce your exposure to capital gains tax

If you hold investments outside of a tax-efficient wrapper such as a pension or an ISA, then gains that are made by those investments may be subject to capital gains tax (CGT).

If this situation applies to you then it is important to consider using your available capital gains tax exemption on an annual basis.

The annual process of rebalancing investments can often mean that much of your available exemption is used up, as a proportion of the higher performing assets (i.e. those with gains) is sold. However, even after rebalancing potentially taxable gains may still exist within your portfolio, and some of your exemption may also still be available.

The decision to makes changes to your portfolio in order to use up the remaining exemption is unique to your situation. However if our agreed strategy is to make use of the remaining exemption then we will seek to do so in such a way that minimises your long term CGT exposure without unduly compromising your asset allocation.

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