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Alan Kendrick: What is the best investment?
What is the best investment? I dread this frequent question, as a proper answer can usually only be given after, typically, a two-hour meeting, followed by a few hours' research, then another meeting to explain the results.
What is the best investment? I dread this frequent question, as a proper answer can usually only be given after, typically, a two-hour meeting, followed by a few hours' research, then another meeting to explain the results.There is no simple answer to this simple question. Let me explain.
The two-hour meeting is to obtain a snapshot of your financial circumstances. The Financial Services Authority requires that any advice is based on best knowledge of the client. This snapshot consists of knowing your income, expenditure, assets, liabilities, aims and ambitions for the short, medium and long-term. This ensures that advice given fits your circumstances. For example, it would be bad advice to recommend an investment with a five-year life span, if you are going to need your capital within two years, or to recommend an investment for capital growth when you really need it to produce an income every year.
The next stage is to consider your attitude to investment risk; this is a big subject and failure to get this right and to explain the implications is one of the most common causes of complaint to the Financial Ombudsman. I, typically, spend 30 minutes of the meeting on this subject alone asking many questions, and drawing many graphs and charts as an aid to understanding. For this reason, it is not possible to go into any depth here except to say that the higher the risk the potentially higher the return but also potentially greater the potential loss. Also, the longer the investment periods, then potentially the more risk you can afford to take.
Conversely, the shorter the investment period then normally the lower the investment risk. For example, if you have a daughter's wedding to pay for in six months' time, then it would be unwise to put the money into a higher risk investment where it could only be worth say half its value by the time the wedding comes along. The bride's big day may not be a big as she would have expected.
If your earnings or pension is not producing sufficient income to meet your outgoings then you will probably need to invest for income. If your other income is sufficient then you can probably consider investing for growth. An investment for growth can often produce a better return in the medium to long-term.
The next step is to consider the medium of the investment, should it be through a pension scheme, or an ISA, or an investment bond, or should it be direct investment. Taxation is a factor here and not just income tax, but in the longer term, capital gains tax and inheritance tax.
Only when all the above has been discussed and agreed can research be undertaken on the actual investment (often a range of investments) and ultimate recommendation. Then there is the second meeting where all the details of the investment(s) are explained and how they meet your needs.
Finally, despite all this work, we are trying to predict the future and we are not always going to be right. It is, therefore, essential that investments are reviewed on a regular basis, that they are fine-tuned or even wholesale changes made. This may be purely for investment reasons, or it may be because circumstances have changed, or the Chancellor could have changed the tax laws.
So next time you ask a financial advisor: "What is the best investment?" Do not expect a quick and easy answer.
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