You’ve sold your business and are now planning what to do for the rest of your life.
Perhaps it will be a relaxing retirement full of sunny holidays, looking after the family finances or straight back into business with a new money-spinning idea.
Whatever your aims you need to consider how to best protect and ideally grow the value of your newly enriched finances. There are two main options open – saving the money in a bank account or investing in the stock market.
Both have their benefits and risks. Savings will keep your money secure, but the value could fall over time because of inflation and taxation. Investing comes with more risk due to the volatile nature of the stock market but provides a greater opportunity for growth and income over the longer term.
Shares have risen
According to the Barclays Equity Gilt Study 2019, the after-inflation return for those who invested in UK equities over the last decade was 5.8% a year. The return from UK government bonds was 2.7% but those who invested in cash saw a drop in real terms of 2.5%.
Despite this Phil Woodcock, Head of Investment Communications at St. James’s Place Wealth Management, says that holding a cash reserve is a vital component in an overall investment strategy.
“Regardless of whether interest rates are high or low, you should have a comfortable cash cushion to meet short-term needs and give you the peace of mind to take more risk with money invested for the longer term,” he says. “Whilst relatively low at present, inflation remains a constant threat to the value of your money and very few savings accounts are offering inflation-beating returns. What’s more, the further delay to Brexit could have pushed back any rise in interest rates until the second half of next year, so there is little respite for cash savers. Just as when you were in business, you need to take some risk with your capital if you are to achieve a decent return.”
How to invest
But where do you start on the investment path?
Phil advises keeping at least six months income requirements in readily-available cash and “maybe a little bit more if that helps you sleep more easily at night!”
He adds: “There is no hard and fast rule, but you need to be comfortable that you can meet any expected, or unexpected, short-term expenses from cash. That way, you can avoid the need to cash in long-term investments at what might be the wrong time, for example, when markets have fallen.”
When determining the shape of your investment strategy you must start with the end in mind. What do you want to achieve and when?
“Do you need income now or in the future when you retire?” says Phil. “Are you saving for another specific purpose such as your grandchildren’s education or to buy a second home? With that focus you can then work out the plan needed to meet that goal.”
The main investment options are shares, bonds, commercial property and alternatives such as gold, timber and other commodities. These are most easily accessed via an investment fund, which pools your money with other investors and spreads your investment across different regions, economies, hundreds of individual companies and other assets.
Having a diversified investment approach is crucial. “You should spread your investments as widely as you can to manage the risks. That way, whilst they may not all be going up at the same time, they are unlikely to all be going down at the same time either,” Phil explains.
As previously stated, investing can be risky as traded assets are regularly hit by both domestic and global economic, operational or political uncertainties. Share values can fall in an emerging market as a government swiftly changes a law or puts up tariff barriers. Holdings could be wiped out if a business goes into administration. Property prices could plunge, or a government could collapse, hitting bond values.
A financial adviser can help you determine your attitude to such risks and how that will affect your investment strategy.
“You need to understand your capacity for loss – in other words, how will you react to a market fall?” says Phil. “How achievable are your goals based on the level of risk you’re comfortable taking? It’s also possible that you may have different risk thresholds depending on what you’re investing for. For example, you might be prepared to take more risk with money you’re investing long term for grandchildren, compared to money needed for your own retirement in maybe five or 10 years’ time.”
Your age can also affect your strategy, as your risk tolerance reduces as you get older.
“You might be tempted to invest in areas like emerging markets that have the highest return potential,” says Phil. “However, that comes with increased risk of short-term volatility. As you get older, you have less time for your investments to recover significant losses, so it normally makes sense to rein in your risks as you approach retirement.”
If you take a sensible approach to investing – both through cash management and taking account of investment opportunities and risk – then you will boost your financial power.
“By investing in assets like shares for the next 10 or 20 years, you will greatly improve the chances of being better off than you are today,” says Phil. “You will have done a better job of maintaining the real value of your wealth.”
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.