ISSUE 05 - WINTER 2013/2014GENEVA - LAUSANNE - NEIGHBOURING FRANCE | LIVE WITHOUT BORDERS

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By Gavin Pluck, European Director, Guardian Wealth Management

LUMP SUM OR

REGULAR SAVINGS?The type of investing you do will

determine the best strategy.

WEALTH WEALTH

to making knee jerk decisions on a long-term investment.

Most savers aren’t seasoned investment professionals and will usually make their decisions based on market sentiment. When markets are moving nicely for a number of years a confidence builds up which will inspire the masses to make a judgment that the time is right to invest.

Similarly, when the markets fall and confidence is low, human nature will follow sentiment and the masses will pull away from the markets.

This tends to create a “buy high, sell low” herd mentality that often leads to losses, and leave negative feelings towards investing.

Imagine if we could buck human nature and

As an international IFA (Independent Financial Advisor) we find ourselves advising many different clients with varying needs. However, if I had

to pigeonhole I would say that they generally come in two guises.

1) Those who have money and need to invest a lump sum in order to receive an income or make their capital work harder.

2) Those who don’t have a large sum of money, but need to invest through regular savings to accumulate it.

The key investing principles for these types of investors are, of course, different.

The options available in the past of saving without having to invest are long gone. Bank

deposit interest rates are now so low that savings cannot keep up with inflation, and this isn’t likely to change in the near future.

In order to see savings increase in value, these days some type of investment is necessary. But what kind? Unfortunately, this question is very much down to opinion. So rather than attempt to offer up any thoughts on what investments to make, let’s look at some of the key principles involved when investing.

Two major concerns surrounding most investments are the level of risk versus reward, and the timing.

It’s imperative to understand that longer term investing is not the same as day-to-day stock picking and trading. Whilst maintaining a healthy interest in world events and trends is important, it should in no way lend itself

do the opposite: buy at the lowest point and sell at the highest.

To quote Warren Buffett, the world’s best known investor, on his main investing philosophy, “I choose to be fearful when others are greedy and greedy when others are fearful”. So that’s what the investment gurus attempt to do – and many of them struggle to get it right.

The fact is that even though we know there is little other choice than investing, it is often difficult to get the timing right.

LUMP SUM INVESTMENT PRINCIPLES1. Timing

As important as this is, timing risk is often reduced over longer investment periods.

Without a crystal ball we will never be in a position to time the market, and the worst mistake that can be made is holding back for so long that the investment boat is missed. Thus, the old saying, “it’s not the timing of the market, it’s the time in the market that counts”.

If investing for shorter periods of less then 2 years, then timing will be paramount and risk will increase significantly.

2. Risk Profile

It’s important to understand your attitude to risk and what you are looking to achieve from your investment. Any investment should match this and provide a return in line with your risk profile. If you will have sleepless nights worrying about daily market movement, then you should be considering low-risk options. There are currently a number of investments available where the financial institution will assume much of the risk of loss in exchange for lower returns.

3. Diversification

What sector do you want to invest in? Stocks, bonds, commodities, property, emerging markets, structured products? And what about geographical considerations? The US? The UK? Europe? Africa? Asia?

The reality is that no sector tops the investment charts year in and year out. Of course it will depend on your attitude to risk but Asset Allocation, a strategy that divides your portfolio amongst different uncorrelated assets to give the right balance, is a much more important consideration than picking individual stocks or funds. The more diversified and balanced your investment portfolio, the less volatility you are likely to experience.

4. Understanding the Investment

These days there are so many cleverly structured investment proposals on the market, it’s easy to get confused. There is no such thing as a stupid question when it comes to investing money.

My advice is, if you can’t understand it, then best to steer clear.

5. Biased or Independent?

Although advice should always be sought, it’s important to ensure that the advice you are receiving is independent. If this is not the case, it would make sense to shop around to get a bigger picture of what’s on offer.

REGULAR SAVINGS INVESTMENTMany of the principles that apply to investing a lump sum are very different from those when investing regular savings. Regular investment over a longer term can take many of the timing problems out of the equation.

If a regular investment is made over the longer term, then one can generally afford to take a longer-term risk approach. Market volatility will not affect the investment as it would in a lump sum scenario. In fact, a dip in market movement can often have a positive effect. For example, if a stock or fund that’s being purchased on a regular monthly basis with the same amount of money, were to take a sudden drop by 20 percent, then the next regular amount that is purchased will buy 20 percent more of that stock. This is known as ‘cost averaging’ and can be an ideal way to remove much of the worry that can come with investing.

When applying cost averaging, the investor needs to decide on three key parameters along with the above investment principles: the fixed amount of money invested each time, the investment frequency, and the time horizon. The longer the time horizon, the less the strategy behaves as a lump sum investment.

As with any investment professional advice should always be sought through a fully regulated financial advisor.

Gavin PluckEuropean DirectorGuardian Wealth ManagementTel: +41 22 710 7864www.gwm-intl.com

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