"Wealth is not his that has it, but his that enjoys it"

-Benjamin Franklin

"Wealth consists not in having great possessions, but in having few wants"

-Epictetus

"Time is the most valuable thing a man can spend"

- Laertius Diogenes

"The glow of one warm thought is to be worth than money."

-Thomas Jefferson

"I don't care too much for money for money can't buy me love"

- The Beatles

"Simple, genuine goodness is the best capital to found the business of this life upon. It lasts when fame and money fail, and it is the only riches we can take out this world with us."

-Louisa May Alcott, Little Men

"And though I have the gift of prophecy, and understand all mysteries, and all knowledge, and though I have all faith, so that I could remove mountains, and have not charity, I am nothing."

-St. Paul

"Not he who has much is rich but he who gives much"

-Erich Fromm

"Life is what happens to you while you are busy making other plans"

-John Lennon

"I pity that man who wants a coat so cheap that the man or woman who produces the cloth shall starve in the process"

-Benjamin Harrison

A Guide to Wealth Protection: Investments

wealth preservation for family

Contents:

  • Introduction
  • Inflation and wealth destruction
  • Losses
  • Investment protection
  • Risk management

Introduction

“Look after the downside and the upside will take care of itself”

The very best money managers and investors have an obsession and focus on preservation and exceptional risk management of their positions. A trait which works right across the financial spectrum. How exactly can you go about managing your wealth and your money to;

  • Reduce risks?
  • Protect against running out of funds?
  • Protect you from having an experience which rips your finances to pieces?
  • Protect your wealth through the rest of your life?
  • Protect your family bloodline interests?

Our aim is help you work out what the major risks are and, from there, how you can put in place plans to protect yourself. We look at how to protect a family against death or critical illness; how to keep your pension value intact; how to protect wealth against divorce in the family; how to protect monies in retirement; how to pay for care fees; how to protect your income and savings against inflation and tax rises.

We look at how all families and individuals can benefit from the use of trusts. We explore how and why such a simple mechanism – and solution to so many threats - is perceived as complex, when the reality is different. Every section of this guide is dedicated to providing ideas and information to help you protect your wealth and assets.

Inflation and wealth destruction

Inflation is the hidden but very real threat to many savers and investors. If you have money invested then one of the most important elements is to factor in the real rate of return you are getting. One of the cornerstones of all financial planning is to gain an understanding of the effects of compounding. What may look a fairly benign number can be very dangerous when compounded. An inflation rate of, say, 3% may not seem much in any one year, but rolled up over 10 years it is a significant figure. 3% inflation year on year totals 34.5% after 10 years, which would have the effect of reducing the value of an investment by one third over this period. Many investors would consider a loss of one third unacceptable if it was a straight line loss but ignore it in terms of inflation. At the time of writing inflation has generally been higher than a typical cash return, on average, for many years – therefore those savers/investors who hold cash are losing value because of this.

Losses

The loss of capital can be hard to make up e.g. A 30% loss requires a 43% recovery. Most professional investors tend to have one thing in common: They look to minimize their downside. This is a position which stretches beyond mainstream investing: professional traders will focus on avoiding losses, professional poker players will be adept at getting away from poor hands. In terms of investing, the principle is quite easy to demonstrate: if you place money into an investment, for example £20,000, and it falls by 30%, it becomes worth £14,000. From that point on to get back to its starting value the investment needs to grow by £6,000. This is £6,000/£14,000 which is 43%. This is just to get back to the starting position. This is a very real issue for investors – particularly emphasized through 2008/2009 when many markets tumbled – and history shows this occurring time and time again across all asset areas. There is a great deal written about “buy and hold” and “you cannot time the markets” – many investors have these (and similar) sayings uppermost in their thoughts. However whatever strategy is pursued in managing wealth the focus that is placed on managing the downside position has to be central. It should be the priority if you are seeking to protect your wealth.

3% INFLATION RATE OVER 10 YEARS WOULD... REDUCE INVESTMENT VALUE BY 1/3

Pension investments

Investment Protection

There are many ways that the downside can be protected. These vary from holding cash (but the problem of inflation erosion exists), using structured methods and using highly diversified asset allocation portfolios. The exact method will be determined by your risk position and your tolerance to risk. A paradox of investing is not to get too heavily focused on the downside to the point where there is no upside left. For example holding 100% cash for the long term is quite likely to protect the downside (certainly in nominal terms) but has little upside potential. The way to deal with this and to handle this paradox is to start from the basis of a risk assessment. Historically the convention was to assess risk based on your “attitude to risk”. This is a mistake, the importance of managing the downside should be built around your “tolerance to risk”. Once a tolerance to risk has been assessed then the downside protection can be fully considered and suitable investment products and plans put in place. There are many products which build in a “floor” to the downside and these may well be suitable; alternatively it may be the case that the position can be protected through a diversified asset allocation process.

Risk Management

There is a considerable amount of confusion around, and misuse of, the word ‘risk’. Any financial plan will have an element of risk attached, which means things may not work out as expected. In investment terms risk is most often used to describe the potential for loss; how likely is it that the investment you make will lose money?The problem for advisers and investors is that risk is hard to quantify and is easily misjudged (either up or down). Sometimes investors take on an investment not realizing how risky it is (i.e. how likely it is that they will lose money and/or how much they might lose) or they don’t invest in something (which would otherwise be good to invest into) because they think it is too risky and overstate the risk element. It is a central requirement of any strategy (which aims to protect wealth) that proper regard for risk, the level and the extent of the risk, is made. There are two key elements to this: risk measurement and due diligence. If you are aiming to protect your wealth then you should make sure that whatever investment you make (and generally this applies to all financial transactions) should be subject to an assessment which involves measuring the risk and which contains a due diligence exercise. Too many problem investments (structured products which went wrong, certain with-profits funds, fanciful investments such as exotic property schemes) could have been avoided by the prudent investor simply by undertaking these two steps: risk measurement and due diligence. Have you done this with each and every one of your financial holdings?

Our Position

Over and above looking at our client’s risk position with an assessment of their risk tolerance, we then aim to ensure that each investment type and holding we advise has been subjected to a due diligence exercise and also to assess the level of risk involved. This way we can advise investments that meet our client’s risk position and ensure that this is with holdings (funds etc.) which have been properly audited.

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Interface Financial Planning started providing independent financial advice in 1992. From the beginning it had the aim of providing professional advice and quality service to people with modest income and wealth. Its key value was putting people before profit, and contribution before reward. This mission statement has been our torch to light the path ahead and has been the reason that we have endured for over 24 years. Alan has lead the company with his personal values of: Integrity, Compassion, Respect, & Loyalty, and he is proud that over the years he has worked with clients who share similar values. Like him they want to help others and make the world a little better. Contact us.

Readers should not rely on, or take any action or steps, based on anything written in these guides without first taking appropriate advice. Interface Financial Planning Ltd cannot be held responsible for any decisions based on the wording in these guides where such advice has not been sought or taken.

The information contained in these guides is based on legislation as of the date of preparation and this may be subject to change. We will aim to keep them up to date but inevitably there may be a time delay so current legislation should always be checked.

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