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Why Invest and not just Save?

From childhood, most of us are told to put away money to save for the future – perhaps for something special, or maybe to be sure that when we really need something, we have the funds to acquire it, without taking on debt. People’s aims are broadly the same; to provide for future needs, and to protect ourselves against unexpected expenditure, events and inflation.

Planning for retirement and / or long-term care are some of the more popular reasons for ‘saving’, but there are other reasons for investing for shorter term needs.

For example, the Bank of Mum & Dad has never been in greater demand than it is at present.

Savings v Investments

Why Invest and not just Save?

Investments are designed to be held for a longer term, usually at least 5 years. You need to be comfortable with tying up this money for a period of time and should not consider investments unless you have savings in place to meet your foreseen expenses and to also have a “rainy day” emergency fund. Most investments are not guaranteed to return your money in full, although do offer the prospect of potentially higher returns than deposit accounts. Returns, risk and volatility are the factors that will determine a suitable place for your investments.

Savings are generally monies that you set aside that can be accessed relatively quickly. These savings are often for a specific need or purchase, like a holiday or a new car. The most common way of saving is into a bank account ('deposit' account) where the money can be accessed in an emergency, and for every £1 you put in, you will get £1 back and possibly some interest. In other words, the original capital is guaranteed.

As you can see just 'saving' for the future is not likely to deliver the results you need, inflation often outstripping the interest received (especially in 2020). This leaves you little choice. You just have to invest.

But how can you invest?

Investment Solutions

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The difficulty in deciding upon which is the correct investment solution is in understanding what the various terms mean, what the products can be used for and what are the differing tax treatments for each product.

Whilst the following “Different Asset Types Section” details some of products and terms, it is beyond the scope of this website to identify and discuss all the available options and their tax treatments Thorburn Wealth Management Limited will be happy to do so when approached.

The Different Asset Types

Asset Allocation

• Bank Accounts – current accounts may offer a very low rate of interest (if any) but they are the most flexible in terms of accessing your money. Banks can also offer savings accounts, with higher interest rates, and also notice accounts with more competitive interest rates, but you may have to give a certain period of notice before making a withdrawal (60 or 90 days perhaps), or you must agree to invest the money for a set period of time.

• National Savings & Investments – these products are backed by the government and operate like bank accounts to a certain extent. There are some tax-free products available and they are generally considered low risk because of the government backing.

• Bonds & Gilts – Bond/Gilt Funds are generally considered to be lower risk than direct equity (share) investment although the value can still fall as well as rise. Corporate bonds are interest-bearing investments issued by companies and are 'rated' according to the ability of the issuer to maintain interest payments and repay the funds lent to it in this way. A corporate bond fund will invest in a wide range of these loans. 'Investment grade' holdings within the fund are rated AAA to BBB, whilst stock rated at BB or below is termed 'junk' or 'non-investment grade' and is sometimes referred to as 'High Yield'.

Government Bonds (known as gilts in the UK) are bonds issued by governments which pay a fixed rate of return and are generally repayable on some future maturity date. It is sometimes easier to think of these as fixed rate fix terms loans to National Government

The income yield that is available from fixed income investments varies according to their quality. Lower quality (junk or non-investment grade) issues usually offer a higher yield to attract investors (as they may be otherwise put off by the increased risk/volatility) whilst gilts generally offer much lower returns; they are underwritten by the government and so the risk of default is much reduced.

The value of both has a relationship to underlying interest rates and their term to maturity and prices rise and fall accordingly.

• Property – The long-term historic performance of commercial property has very little correlation with the performance of corporate bond or equity-based investments. For investors looking to diversify their portfolio, property funds have historically offered attractive returns. Income from commercial property funds is often derived from contractually binding contracts of rent paid by business tenants to occupy property. Consequently, leases are often arranged over a long period and generally include an 'upwards only clause' which ensures that rents are not negotiated downwards during the lease period, even in times of falling markets.

Added to the rental incomes, property has the added attraction of potentially appreciating in value over time, and although property values do fall, the 'bricks and mortar' assets of a fund remain. However, returns from a property fund are not guaranteed and the value of any such investment can fall as well as rise.

Furthermore, because of the nature of property as an asset it may not always be possible to immediately switch or cash-in your investment, because the property in the fund may not always be readily saleable. If this is the case then a Fund Manager may defer your request to cash in for a period of time. You should bear in mind that the valuation of property is a matter of the valuer's opinion, rather than a matter of fact.

• Direct Equities (shares) – Over the long-term equities have historically offered better returns for investors than deposits. Although this is not a guide to the future, it is felt that the increased risk of investing in company shares can potentially be rewarded by investment returns in excess of what is available from traditional bank or deposit accounts or indeed bonds or gilts. However there are no guarantees.

• Collective Investment 'Funds' – Specialist investment managers will often manage a fund (a pool of investments) that invests in one or more of the above categories, the aim being to diversify the risk across a spread of shares, or bonds, or both. There are hundreds of investment funds available, each with their own specific aims and objectives. Investment funds can also specialise in one particular sector, such as only investing in companies that are listed on the FTSE100 index, or only investing in construction and mining companies. There are also funds that invest geographically, perhaps only buying shares in Japanese or American companies. Each sector has its own unique characteristics, and your adviser will be able to explain more about this.

Investment Management Services

Investment Management Services

Typically, these pools of money are run and managed by an investment management specialist in a particular sector, also known as a Fund Manager. The Fund Manager is paid to make the day-to-day decisions of where the pooled money is invested. They use their expertise and the large amount of research they can call upon to make suitable investment decisions in which companies to invest in order for the value of the pooled fund to hopefully grow over time.

These Fund Managers and the research team which underpin them regularly meet with boards of companies they invest in or are interested in investing in to get company financial information and details of their future plans, enabling them to make better informed decisions on their prospects.

Clearly picking the correct Fund Manager has a massive effect on your investment outcomes. That is why you need Thorburn Wealth Management Limited. With a long track record of success in this area, we will undertake this critical task for you.

Another advantage of pooled investments is the ability to have many more times the ability to diversify the investment, whether that is across multiple sectors and or multiple companies within the same sector than any normal investor could ever hope to achieve.

That ability to diversify reduces the risks experienced by an individual investor buying the shares in a specific company which subsequently performs poorly or in a worst case scenario fails completely, causing substantial falls in the value of the investment or possibly even its total loss.

In order to provide greater diversification we can construct bespoke individual portfolios comprising various different funds from a wide group of different fund houses.

We do this to help prevent our clients ever being exposed to any single fund house getting it wrong.

Investment Assets

All types of bonds, shares and other securities have different characteristics and these characteristics are complex. Fund Managers assess and measure these features and make investment decisions based on their knowledge and market experience.

Investment funds will have a particular aim and often belong to a specialist sector which allows them to be compared to other funds of a similar make-up and ensures that the actual assets of the fund remain aligned with the objectives and specification of the fund. This is also facilitates the easy comparison of the returns of that fund against its true peers.

Sectors and Assets – The fund sector identifies the areas in which the fund will invest. This can be based on geographical terms, or in a particular industry sector. For example, there are funds that only invest in UK companies, or Japanese companies, just as there are funds that invest purely in 'technology' companies (IT, telecoms etc). In addition to this, there are sectors that are a mixture of assets. A typical 'balanced managed' fund will have some money invested in equities, some in property and some in fixed interest investments or bonds.

Thorburn Wealth Management Limited – Your Investment Adviser

Although there are no guarantees as to performance or returns from any sector, our knowledge, experience and insight allows us to consider how any investment asset or fund has historically performed and to gain an understanding of the strengths and weaknesses of various Fund Managers.

You Need Financial Planning Advice

As you can see, there are many different types of investment products and an even greater number of Fund Managers and funds. Often a combination of some or all of these products will produce the blend of risk and potential returns sought by clients. Sadly without knowledge insight and experience it is very difficult to select the right investment strategy.

Choosing the wrong path could dash your retirement plans and make your financial goals unobtainable.

Personal Financial Advice

At Thorburn Wealth Management Limited we will take the time to understand your needs and the risk tolerance you are willing to accept in order to meet your long term financial goals. We will regularly review this and adapt the investments to reflect any changes.

Personalised Investment Strategies

We will then prepare the best possible investment strategy, one that is designed to meet your future financial needs and those of your loved ones, both now and on an ongoing basis

Contact us today

Contact us today to arrange your free initial consultation.

Please also see our Frequently Asked Questions on General Investment Advice, Pensions and Family Protection.

The value of investments may fall as well as rise. You may get back less than you originally invested.

The Financial Conduct Authority does not regulate national savings & Investments products