July 2022

How can you best put your money to work? Choosing assets to invest in is crucial when crafting an effective portfolio which moves you towards your financial goals. Yet discerning the unique traits of different assets (e.g. equities and bonds) can be challenging, and the precise mixture you should adopt may not be clear. Below, our financial planning team at WMM outlines some of the key principles to consider when putting the building blocks of your portfolio together.

What is asset allocation?

Asset allocation is the process of choosing various assets for your portfolio – in accordance with your risk tolerance, investment strategy and financial goals. The two primary assets in most portfolios are fixed-income (bonds) and equities (i.e. stocks and shares). However, some people might also invest in commodities like gold, or real estate such as Buy To Lets.

What are some example asset allocations?

Broadly speaking, asset allocation involves identifying what portion of your portfolio will be set apart for different asset types. Your risk tolerance will play a big role here. For instance, a more “cautious” investor may opt for an asset allocation of 80% fixed-income and 20% equities. This prioritises the preservation of capital overgrowth, typically involving less risk. However, a more “adventurous” investor may choose the opposite: 80% equities and 20% fixed-income, or even 100% equities. This opens up more growth potential but involves greater investment risk.

What is internal asset allocation?

Allocating assets is not simply about equity-bond ratios within a portfolio. You also need to find out how to choose assets within these various classes. Investing in equities, for instance, may involve spreading out across a range of companies, sectors, industries, countries and regions. For instance, if you want a portfolio of 80% equities, how should this 80% be apportioned? The greater your diversification across countries and sectors, the less your portfolio will be affected if one market ‘crashes’.

How do I choose assets in line with my values?

Increasingly, investors want to choose assets which also align with their values. Perhaps you want to prioritise businesses in your portfolio if they are engaged in environmental protection, also avoiding those engaged in unethical activities (e.g. sweatshop labour). Here, your financial adviser can help you apply ESG (Environmental, Social and Governance) criteria to your list of possible assets. This helps you identify companies which facilitate good causes such as gender boardroom equality, fair pay, safe working conditions for workers, carbon neutrality and/or conservation efforts.

How do I build an effective asset allocation?

Your investment horizon is important when building a portfolio. How long until you will need the money? Generally speaking, the shorter your investment horizon, the more cautious your asset allocation should be. Your goals and values also should be taken into account. However, it is also wise to consider cost efficiency and performance.

Various fees are involved when investing in most asset classes – such as investment platform fees, trading fees, spread fees, exit fees and account inactivity fees. Regardless of your asset allocation, make sure you find a platform that keeps your costs low (without compromising on performance). Also, make sure your assets are contained within a tax-efficient portfolio. Your ISA, for instance, allows you to generate capital gains and dividends without tax. Investments within a pension are also tax-free until you retire.

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

You may hear a lot of talk in the media about where you should and shouldn’t be investing your money. But what if you haven’t established any kind of savings or investment pot yet? Where do you start?

Some useful points to remember when judging options is that any ‘investment’ should have an expected positive outcome, and anything less is ‘speculation’. Successful investing relies on taking a longer-term view, as markets change quickly and often with magnitude, so short-term ‘offers’ when analysed are ‘little more than gambling’.

In this article, we explore tips and strategies for helping you get started on your financial planning journey. 

Step 1 – Working out how much you can afford to save each month

Unless you’ve been fortunate to be gifted a lump sum, it’s likely you’ll want to start saving monthly to establish your ‘portfolio’.

We usually recommend that at least 3-6 months’ worth of expenditure is retained in ‘ready cash’, before you think about committing any of your savings to investment. This pot of money provides a safety margin, as it can cover unforeseen demands for cash without having to disturb your longer-term savings goal or having to sell any investments at a loss.

Step 1, will therefore be to work out your monthly outgoings, versus your net income (after tax etc). The difference is your monthly surplus income and is, in theory, the amount you can afford to save. We would recommend saving this initially into an instant access savings account, as this will be your ‘emergency fund’. Once you have accrued the recommended minimum level of cash, then you can move on to Step 2.

If the difference between your income and spending is negative then it’s likely you’re getting into debt before the end of the month or dipping into any savings you do have. In this case, you’ll need to reassess your outgoings and identify any areas where you can lower your spending. If not, over time the monthly shortfall could mean you accumulate potentially large debts, which can be a vicious spiral to try to get out of. 

Step 2 – Deciding what you are saving for

If you have a specific savings goal in mind, you will have a target amount and target date to aim for. The target date is an important factor in deciding how you will save towards it. 

If you are saving more generally ‘for the future’ this might give you a little more flexibility. 

Shorter-term – For example, if you want to save, say, £25,000 towards a house deposit in 3 years’ time, you will need to commit to saving around £695 per month for every month of those 3 years. Given the short timescale, you are unlikely to want to invest very much, if any, of it into any stock market investments, such as shares. The value of these investments can go up and down sharply in a short space of time and a dip in value near your target date could ruin your plans.

You might want to set up different pots for your short-term savings, and label the accounts, such as “Holiday”, “House Deposit”, “New Car”, and “Spends”. This could help you stay on track with more of your individual goals, rather than one pot that you might delve into occasionally. 

Medium Term – These would be your savings goals for in, say, 4 to 10 years’ time. Your new car fund or house deposit fund could fall into this bracket, which might allow an element of stock market investing to be suitable, or perhaps childcare and school fees if you’re planning a family. 

Longer-term – If you are thinking much longer term, say your retirement fund, you could have more than 30 or 40 years to your target date. In this case, you could afford to invest highly into equities, for the potential long-term growth, in the knowledge that the upwards trend of stock markets over the longer term will usually compensate for any short-term volatility. 

Step 3 – Deciding where to save

You’ve decided on your budget and your goals, and now you just need to decide where to save. 

For your cash savings, this is easier to choose. Most people will have at least one savings account with their main bank, and you can also shop around fairly easily by using the online comparison tools. 

For your more medium and longer-term investments, where you might be considering some element of stock market investing, we would recommend seeking the advice of a qualified financial planner, rather than relying on the current “sweetheart” recommendations in the media. 

Different investments offer different incentives too. For example, for your retirement planning, you could look at a personal pension, where the Government “top up” the amount you invest by giving you tax relief. A basic rate taxpayer investing £80 per month will receive an extra £20 (based on current tax legislation), equivalent to the 20% basic rate tax they may have paid on the income. This also applies to non-taxpayers and so can be a very efficient way of saving for them in particular.

ISA accounts, whilst new accounts don’t offer an initial incentive, allow your cash to grow tax-free, and the withdrawals are all tax-free too. You can have a cash ISA and an investment ISA, and which one, or combination, you go for will likely be dictated by the time frame you’re investing for.

Again, a financial planner will be able to guide you on the right path for you. 

Invitation

Interested in finding out how we can help you establish your financial plan and investment strategy? Perhaps you already have a plan in place and you’re interested in getting your children into the savings habit. Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.  You can call us on 01869 331469.

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).