RAFTERS ASSOCIATES FINANCIAL MANAGEMENT LTD
This is a very good question.
- Should a 30 year old with a large mortgage be investing for long-term capital growth or should he overpay his mortgage to reduce his debt burden?
- Does it make sense for a wealthy 80 year old to invest when his capital and any gains he makes will be taxed at 40% when he dies?
- Would he be better served by making gifts to his loved ones as part of an Inheritance Tax mitigation strategy (assuming he still has adequate capital and income for his needs)?
The answer will be different for different people; it all depends on your overall circumstances, your objectives and your risk tolerances.
Read the full Why Invest page.
Does Investment Pay? The 54th Edition of the Barclays Equity – Gilt Study 2009 shows that over the last 109 years, UK equity returns have produced averaged annual compound returns of 4.9% per annum over and above inﬂation. This compares to a return for gilts over the same period of 1.2% over inﬂation and only 1% for cash.
Direct Investment in Companies vs Investing via Funds – We have reviewed the advantages of each method of investing and conclude that direct investment is only suitable for investors who really know what they are doing as well as some investors with substantial capital say £2.5m plus. It can be rather difﬁcult to get a sufﬁciently diversiﬁed portfolio of direct investments with portfolio value below this level.
Index Tracker Funds v Actively Managed funds
Actively Managed Funds allow the fund manager to study suitable target companies, carry out all of the necessary research in an attempt to identify good value and choose what he or she decides is the right time to buy the stocks that have been identiﬁed as offering good value (potential for proﬁt). A similar situation, but in reverse is applied with regard to selling stocks.
Index Tracker Funds on the other hand makes no attempt to distinguish between ‘good’ and ‘bad’ companies, predict market movements or forecast future share prices. Index fund managers diversify portfolios to track speciﬁc benchmarks or indices such as the FTSE 100 or FTSE All Share.
Which is Best? Index Tracker investing does have a price advantage, especially compared with typical retail active funds (the type purchased by individual investors and those using an advisory portfolio management service). However, institutional investors (such as discretionary investment management companies) are able to purchase institutional funds and these beneﬁt from lower costs than retail funds. In fact the costs of a well diversiﬁed portfolio of institutional funds will not be signiﬁcantly more expensive than the cost of a similarly diversiﬁed portfolio of index tracker funds.
Our portfolios are built without bias, and thus they typically hold both Index Tracker funds as well as Actively actively Managed funds and thus the answer is that in most cases both indexed and active funds have their place in a well diversiﬁed portfolio.
Furthermore there is no evidence that past performance is a guide to future performance, in our opinion the best investment returns will be achieved by, planning your affairs carefully, deciding upon a sensible asset allocation that takes account of you’re likely, short, medium and longer term needs.
The Importance of Asset Allocation
Getting the Investment Mix Right Investment decision making has often been centred on which funds to choose. However, investment research has shown that, in most circumstances, the asset allocation choice is by far the most important factor in determining investment returns over the longer term.
Ultimately, the right asset allocation for an investor depends on:
- The ability to withstand market volatility (attitude to risk)
- Investment time-frame
- Investment goals
Our investment planning service combines all these factors to help us recommend the most appropriate asset allocation for your needs.