Pro­tect your port­fo­lio... with solid foun­da­tions

A suc­cess­ful port­fo­lio needs some risk – but sav­ings, gold and proper plan­ning are es­sen­tial

The Scottish Mail on Sunday - - Health -

AC­CU­MU­LAT­ING suf­fi­cient wealth to take us into – and through – re­tire­ment usu­ally re­quires a near life­time of pa­tient sav­ing and in­vest­ing.

It in­volves putting money in the build­ing so­ci­ety, buy­ing a home (maybe a buy-to-let too), pay­ing into the works pen­sion, manag­ing a share port­fo­lio and tak­ing out a tax-friendly Isa.

Of­ten the jour­ney is smooth but, on oc­ca­sions, hic­cups de-rail it – un­ex­pected events such as re­dun­dancy and un­nerv­ing episodes such as slid­ing stock mar­kets. Cer­tainly, re­cent sharp falls in eq­uity prices have un­set­tled many in­vestors.

Any­one build­ing long-term wealth must di­ver­sify their as­sets, com­bin­ing risky – but po­ten­tially re­ward­ing – in­vest­ments with cash. Here we high­light some of the foun­da­tions that should un­der­pin any port­fo­lio.

CASH

NO WEALTH port­fo­lio should be with­out cash. It should be there not just to meet fi­nan­cial emer­gen­cies or ne­ces­si­ties – a new car or an un­fore­seen trip – but to pro­vide a counter to risky as­sets. It is the ul­ti­mate bal­last.

For­get that re­turns from cash are mea­gre and be­low the rate of in­fla­tion. Just cling on to the fact that £1,000 saved will mean at least £1,000 back at some stage in the fu­ture, with a steady drip of in­ter­est in the mean­time.

Of course, you need to bat clever and en­sure your sav­ings are pro­tected by the Fi­nan­cial Ser­vices Com­pen­sa­tion Scheme. So do not save more than £85,000 with any one bank or build­ing so­ci­ety.

In­vest­ment plat­forms are in­creas­ingly look­ing to at­tract cash savers. For ex­am­ple, Har­g­reaves Lans­down now pro­vides an ‘Ac­tive Sav­ings’ ser­vice that al­lows clients to save in a range of fixed-term sav­ings ac­counts. It means in­vestors can also be savers un­der one on­line roof, en­abling them eas­ily to keep an eye on a big chunk of their wealth port­fo­lio.

Ac­tive Sav­ings is not with­out flaws. It cur­rently only pro­vides ac­cess to nine providers – rang­ing from the fa­mil­iar, such as Coven­try Build­ing So­ci­ety, to the less well known, such as Close Broth­ers and Van­quis. This means none of the top rates in our best buy ta­ble on page 107 are em­braced by the ser­vice. Also, money can­not be held un­der the taxfree wing of a Self-In­vested Per­sonal Pen­sion (Sipp) or an Isa, though Har­g­reaves Lans­down says this will be pos­si­ble sooner rather than later.

Other cash man­age­ment ser­vices are of­fered by Flag­stone, Oc­to­pus and Raisin. All dif­fer in terms of the breadth of ac­counts avail­able, how they op­er­ate and fees – some charge savers, while oth­ers take fees from the providers. Re­views of all four plat­forms are avail­able at sav­ingscham­pion.co.uk.

Anna Bowes, di­rec­tor of Sav­ings Cham­pion, says: ‘The rise of cash man­age­ment plat­forms is wel­come. It means savers are be­ing guided to bet­ter sav­ings deals. Hope­fully, more choice will be avail­able as the plat­forms grow in pop­u­lar­ity.’

Sav­ings Cham­pion, a rate scru­ti­neer, it­self pro­vides both a ‘cash ad­vice’ and ‘concierge ser­vice’ that help savers max­imise re­turns. Both ser­vices are fee charg­ing.

NA­TIONAL SAV­INGS

LIKE cash, no wealth port­fo­lio should be with­out a sprin­kling of prod­ucts from Na­tional Sav­ings & In­vest­ments. Ef­fec­tively the Gov­ern­ment’s sav­ings arm, no other provider of­fers greater fi­nan­cial se­cu­rity. The choice of prod­ucts is more lim­ited than it used to be, but pop­u­lar port­fo­lio bolt­holes in­clude Premium Bonds (with a max­i­mum hold­ing of £50,000), which of­fer monthly tax-free prizes rang­ing from £25 to £1mil­lion.

In­come bonds re­main a favourite, pay­ing a monthly in­come equiv­a­lent to 1.15 per cent a year (with a max­i­mum hold­ing of £1mil­lion), as does the Di­rect Saver ac­count, a no-no­tice ac­count pay­ing 1 per cent (with a £2mil­lion sav­ings limit).

Pa­trick Con­nolly is a char­tered fi­nan­cial plan­ner with Chase de Vere. He says Na­tional Sav­ings & In­vest­ments is an in­te­gral part of many clients’ port­fo­lios, adding: ‘With NS&I, savers get a name and brand they can trust that is backed by the Gov­ern­ment. They can also ben­e­fit from com­pet­i­tive rates of in­ter­est on some of its prod­ucts’.

GOLD

GOLD is con­sid­ered by many to be a safe haven in stormy times. In re­cent months, as stock mar­kets have un­der­gone a cor­rec­tion and eco­nomic ten­sions have risen, the gold price has ral­lied.

From a 2018 low in Au­gust of $1,180.40 per troy ounce, the gold price has risen to just be­low $1,300. A re­cent sur­vey of pre­cious metal in­vestors by on­line bul­lion dealer Bul­lion Vault in­di­cated that nearly one in four believe gold prices could rise by as much as 20 per cent this year – with the con­sen­sus be­ing for an in­crease of 10 per cent. For in­vestors, there are var­i­ous ways to get ex­po­sure to gold.

The cheapest ap­proach is to buy an in­vest­ment that tracks the gold price. These are called ex­change traded funds, or ETFs, and are pro­vided by the likes of iShares (part of as­set man­ager Black­Rock) and In­vesco. They can be bought through a stock­bro­ker and most fund plat­forms.

Pur­chases will in­cur a deal­ing charge and there will be an on­go­ing an­nual fee on the fund. For ex­am­ple, iShares Phys­i­cal Gold charges 0.25 per cent.

An al­ter­na­tive ap­proach is to buy a fund with ex­po­sure to gold, such as Per­sonal As­sets, Rath­bone Strate­gic Growth or Ruf­fer. More tar­geted funds in­clude Black­Rock Gold & Gen­eral and Ruf­fer Gold.

With the ex­cep­tion of Per­sonal As­sets, these funds in­vest in the shares of gold min­ing com­pa­nies rather than phys­i­cal gold.

Fi­nally, phys­i­cal gold (bars and coins) can be bought from an on­line bul­lion dealer – the likes of Gold­core and Bul­lion Vault – or the Royal Mint. Buy­ers can have it stored – for a charge – or de­liv­ered, though in­vestors tak­ing the sec­ond op­tion will need to have some­where safe to keep it.

The Royal Mint has just launched its 2019 sov­er­eign and half sov­er­eign gold bul­lion coins, priced at £259 and £136 re­spec­tively.

STRUC­TURED PLANS

DO NOT be put off by the un­friendly la­bel. These plans pro­vide re­turns linked to the stock mar­ket, but with built-in pro­tec­tion so they can gen­er­ate prof­its if eq­uity prices fall or go side­ways.

They are best ex­plained by way of an ex­am­ple. Mar­i­ana Cap­i­tal has just launched 10:10, a plan with a max­i­mum life of ten years, but which can end ear­lier, ac­cord­ing to how the FTSE100 in­dex of the Lon­don Stock Ex­change’s hun­dred top shares per­forms.

Three op­tions are avail­able, but all re­quire an in­vestor to sit on their hands for two years. Then when the stock mar­ket closes on Fe­bru­ary 22, 2021, its level will de­ter­mine whether the plan con­tin­ues or ends (known as ‘kick out’).

Un­der op­tion one, which is the least risky op­tion, if on Fe­bru­ary 22, 2021, the Foot­sie is more than 2.5 per cent higher than it was on Fe­bru­ary 22 this year (when the plan starts), the scheme comes to an abrupt end. The in­vestor re­ceives an an­nual re­turn of 9.44 per cent for the two years they have tied up their cash. So on an in­vest­ment of £10,000, they re­ceive £1,888 plus their £10,000 back. The profit is treated as a cap­i­tal gain in the tax year it is re­ceived. Un­der op­tions two and three, the plans ‘kick out’ on the same date if the Foot­sie is at the same level or higher, in the case of op­tion two. In the case of

op­tion three it kicks out if the Foot­sie is more than 5 per cent higher. In these cases, in­vestors get £2,456 and £2,902 re­spec­tively, plus their £10,000 back. These equate to an an­nual re­turn of 12.28 per cent and 14.51 per cent a year re­spec­tively,

If the in­dex lev­els have not been reached (and so there is no kick out), the plans con­tinue for an­other year. Then un­der op­tions two and three, the same test is ap­plied again, re­sult­ing ei­ther in the plan con­tin­u­ing or end­ing, re­sult­ing in a pay­ment of £3,684 (for op­tion two) or £4,353 (for op­tion three).

Op­tion one is more com­plex, as the hur­dle for kick out falls ev­ery year, mean­ing in­vestors are more likely to get their cash back sooner.

For ex­am­ple, on Fe­bru­ary 22, 2022, if the Foot­sie is at the same level or higher than it was on Fe­bru­ary 22, 2019, the plan ends, re­sult­ing in a profit of £2,832. And on Fe­bru­ary 22, 2023, it only needs to reach 97.5 per cent of its orig­i­nal value. But there is a sting in the tail. If at the end of ten years, the Foot­sie is more than 30 per cent down, an in­vestor loses a chunk of their orig­i­nal in­vest­ment equiv­a­lent to the mar­ket’s fall. So if the in­dex has fallen 35 per cent, an in­vestor will get back just £6,500 of their orig­i­nal £10,000. Any fall in the in­dex of less than 30 per cent re­sults in an in­vestor get­ting back £10,000, but of course they have lost the in­ter­est they would have earned if the cash was in a sav­ings ac­count. Ian Lowes, manag­ing di­rec­tor of Lowes Fi­nan­cial Man­age­ment, mon­i­tors struc­tured plans. He be­lieves the prod­ucts are ‘heaps bet­ter’ than they were. He says: ‘They pro­vide de­fined out­comes for in­vestors on de­fined dates and un­der de­fined cir­cum­stances.’ Stephen Wo­mack, a char­tered fi­nan­cial plan­ner with David Wil­liams IFA, uses them for clients. He says: ‘They can pro­vide pos­i­tive re­turns even when stock mar­kets are flat or fall­ing. I also like the kick-out fea­ture which forces an in­vestor to take prof­its. One mis­take many in­vestors make is hold­ing on to in­vest­ments for too long.’

Yet they are not with­out risk. They can­not be eas­ily jet­ti­soned, so in­vestors must be pre­pared to have money tied up for a while. In­vestors can also lose money. In ad­di­tion, not all plans are cov­ered by the Fi­nan­cial Ser­vices Com­pen­sa­tion Scheme. But it is the plans that are not cov­ered by the FSCS such as 10:10 that are most lu­cra­tive.

Here, the key is the fi­nan­cial sta­bil­ity of the in­vest­ment bank be­hind the plan, which is re­spon­si­ble for hon­our­ing the plan’s prom­ises. It is re­ferred to as the coun­ter­party.

If it gets into trou­ble or goes bust, in­vestors could suf­fer big losses, as some did when Lehman Broth­ers – a coun­ter­party to plans set up in the mid-2000s – hit the buf­fers in 2008.

In the case of 10:10 (writ­ten un­der Cay­man Is­land law), the coun­ter­party is Gold­man Sachs. Oth­ers in­clude Cit­i­group, Credit Suisse and HSBC. Though many struc­tured plans can be bought on­line, Wo­mack rec­om­mends tak­ing ad­vice, as the prod­ucts are com­plex. He adds: ‘They might ac­count for 15 per cent of a new port­fo­lio that we rec­om­mend to­day.’

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