We often hear the complaint, particularly with pensions, that they just haven’t performed very well. Our response is “that is because the investment funds that have been used over the years have not been managed”.
If you buy a car you know it is sensible to have a regular service to ensure that it is properly maintained the aim being to avoid it breaking down and you having to pay nasty repair bills. It is the same with your investments. When you first invest your money the adviser will have spent much time researching which funds to use to provide you with an appropriate portfolio that is appropriate to your attitude to risk. Over time some of those funds may fall out of favour which may be for numerous reasons: the fund manager may change, the fund may alter its investment strategy or the geographical sector may stop performing. Also over time your own attitude to investment risk may alter and the original appropriate portfolio may no longer be suitable.
Reviewing your investment portfolio is essential if you want your money to work as hard as possible for you. It is a service that carries a cost but it is well worth the price. Our evidence below shows that even in the toughest of global financial markets, consistent management and regular reviews pays for itself as there are always gains to be made somewhere. Here are a couple of Savvy Financial Planning’s own self-built portfolios vs RPI.
Note: the performance results are before any costs and charges are taken into consideration.
Retail price index (RPI) is a measure of inflation published by the Office for National Statistics. It measures the change in the cost of retail goods and service.
Inflation is the amount by which prices rise over time and gives us a snapshot of how much prices have risen over a 12-month period.
Therefore if RPI is rising faster than your savings or investments then you are in fact losing money because the cost of living is growing faster than your money.
In regard to the cost of having your investments professionally managed people often ask whether it is worth it. Understandably no one wants to pay for something if they are not getting value for money, below we have provided figures on actual client pension portfolio returns, over a 5 year period, before and after charges as well as the average annual return. You can see that even though these clients are paying a fee to have their portfolios managed the profits are very respectable and the returns more than outweighed the costs. As a comparison, the average annual return of pension funds has been 5.98% over the same period.
(For average pension fund comparison the 20%-60% share index has been used)
The other advantage with having your investment portfolio reviewed is to ensure that the correct level of risk is maintained. A good portfolio will be diversified, meaning that it will have a spread of investment across different sectors i.e. Equity, Fixed Interest and Property, and also different geographical locations. Different sectors will perform better than others at different times, the idea being that you will obtain steady growth over time, whatever the market conditions dictate. If a portfolio is left unchecked you may find that it becomes overweight in certain sectors which will mean that either your portfolio ends up higher risk, i.e. your exposure to equities is higher than it should be, or that it is not maximising its potential, i.e. your exposure to Fixed Interest and Cash is too high. When your portfolio is reviewed there may be no need to alter any funds but there could be a need to rebalance and bring the portfolio back in line with your attitude to risk.
The graph above shows the performance of 3 portfolios with 3 different risk levels over the space of 3 years. The results give a good example of risk vs reward as the most adventurous portfolio has experienced the largest growth and the more cautious portfolio the least. When the performance has dipped the fall is slightly sharper for the Adventurous portfolio compared to the cautious. This is likely because the funds are a higher risk and therefore more volatile to changes in the market.
The benefits of investment management are:
* Past performance is not a guide to future performance and as with any investment, the value of funds can go up or down and may be worth less than what was paid in.
The Moneytree Corporation Limited Registered in England number: 4350758. Registered Address: 14 Gipsy Lane, Warminster, BA12 9LR. Savvy Financial Planning is the trading name of The MoneyTree Corporation Limited which is authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate taxation and trust advice. We are entered on the FCA Register No: 504571 at www.fca.gov.uk/register. The information contained within the website is subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK. The value of investments and income can go down as well as up and you may not get back the full amount invested. Should you have cause to complain, and you are not satisfied with our response to your complaint, you may be able to refer it to the Financial Ombudsman Service, which can be contacted as follows: The Financial Ombudsman Service, Exchange Tower, London, E14 9SR. Tel: 0800 023 4567 or 0300 123 9123, www.financial-ombudsman.org.uk.
Savvy Financial Planning, Hinton Business Park, Tarrant Hinton, Blandford Forum, Dorset, DT11 8JF