Going for goals

Investment is about making as much money as possible, right? Well, no. The real question is: will your investments enable you to achieve what you want? Paul Lindfield, Director of Sedulo Wealth Management, explains why it’s not about going for gold, but going for goals.

Money is useful stuff. It can enable you to buy a house, fund your children’s education, take your dream holiday, plan for your retirement and so much more. What do all these things have in common? They are goals.

It may sound obvious, but money only becomes useful when it’s put towards a goal. So you need investments that are focused on the goals that you have in mind – or your money will be little more than numbers in a bank balance.

Your plan

At the heart of any good investment plan lie a number of factors: affordability, timescale, tax efficiency and risk. Of these, risk is probably the most misunderstood – so we’ll tackle that first.

Risk is not a bad word

The knee-jerk attitude to risk is to avoid it. But in investment terms, risk is a fundamental driver of rewards: the higher the risk, the higher the returns over the longer term. You may tell yourself that you prefer the lowest level of risk (such as cash in a bank account), because you believe that its value won’t go down. Except, of course, that it does go down. Interest rates tend to be far below the level of inflation, so really your ‘safe’ deposit is diminishing all the time. This can drastically affect your long-term goals – so what you thought of as low risk is actually quite high risk, when considered in those terms.

Timing is important

Quite simply, when are you planning to spend this money? If you don’t need it for a while (say, not until you retire) then short-term fluctuations won’t have an impact on you – you’re interested in the overall growth. If you may need the money in the medium term (say, in five to ten years’ time) then such fluctuations may be more important, but still not critical – and so forth. So the timescale of an investment has a direct influence on your acceptable levels of risk.

What can you afford?

Will short-term dips in your investment have an immediate impact on your lifestyle? Can you cope with them psychologically? And do you still have sufficient accessible income to leave long-term investments untouched? Your IFA will address all these questions when working out an investment plan with you.

This is why you must plan in the context of your life goals. By working with you, an IFA can help you discover your true attitude to risk (which may be very different from what you thought it was).

The tax factor

Your own tax position is another key factor, alongside the taxation regime of any given investment. For instance, a higher rate taxpayer (on 40% income tax) will only receive 60% of returns achieved in a bank account, after tax. This means that an ISA (which is virtually tax free) would in this case increase net returns by 40%.

An IFA will identify your tax position and then recommend the most suitable investment vehicles for you, taking into account all your annual allowances such as ISA investment allowance, personal tax allowance and capital gains tax allowance.

Your lifestyle financial plan

Once the above factors are taken into account, your adviser will propose an investment strategy based upon your attitude to risk and your tax position. This will usually involve a diverse mix of assets – lots of eggs in lots of different baskets.

Next, the IFA will test whether this strategy will actually help achieve your goals. They will build a lifestyle financial plan, based on cash flow analysis, to give a probability of you hitting your target(s). If it looks as if you won’t, then don’t worry – this is part of the advice process. You will then have more discussions around whether you should increase your exposure to risk, or otherwise adjust the amounts invested or the timing of your goals. By the end, you should find yourself with a far more robust investment strategy.

Remember, though, that nothing stays the same. It’s important to monitor your investment strategy on at least an annual basis, to see if it is performing to expectations. You can then make any necessary adjustments to ensure that you are still on course to achieving your goals. And your life should end up richer as a result.

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About the author

Paul Lindfield as Director of Sedulo Wealth Management, Paul has over 17 years of financial planning experience. This allows him to advise clients on developing a workable long-term financial plans. After gaining an honours degree in Economics, Paul’s passion for working with people and finding solutions for perceived problems naturally lead to his current role as an independent financial adviser.