Financial Planning and Investing - How we do it...

Between the age of 20 and 30, most of us are just getting ourselves sorted; employment may be erratic, study could still be demanding, and life in general will be “distracting”. By our early 30’s, careers and families are cemented and we’re now in a pattern (of sorts). By our mid-60’s, we’ll have spent thirty years in and out of debt; buying houses, baches, cars & holidays… maybe even a business. If we have children, they’ll need an education and perhaps they’ll get married - we may even have grandchildren. If we reach age 65, we could make 85, and maybe older! We could easily be thirty years in “retirement” and we’ll need to rely largely on the investments we’ve made.

Financial planning often relates to retirement planning, while investment planning could be for entirely different objectives. Part of our process is to identify your financial objectives, which involves an analysis of your current financial situation and your tolerance for risk. It’s all about planning for your short, medium and long-term financial and investment goals.

Financial planning is about making financial priorities. As it stands, KiwiSaver won’t fully fund your retirement (and there’s an elephant in the room, being the NZ Universal Superannuation in its present form). Other provisions will be necessary, and so we need to figure out how to balance tomorrow’s needs with today’s demands.

Building a portfolio of investments means we’ll decide on an allocation of capital that best matches your particular future objectives, aligned to your tolerance for risk, over a specific time. We invest in different assets and sectors in varying proportions, to arrive at a “balance” best suited to meet your objectives.

We’ll prepare a tailored Statement of Advice, which formalises your goals and offers specific direction, as well as outlining the initial investment recommendations. This report will likely look to your broader financial well-being, but fundamentally, it will detail the strategy for investing, covering the four main asset sectors, being:

Cash: Money in the bank, including bank term deposits out to 90 days.

Fixed Income: Fixed income investments encompass a range of products that are intended to provide investors with regular payments of interest. Capital is repaid on maturity. Fixed income securities or bonds are typically issued by government, local authorities and companies (including banks). We may also include simple bank term deposits in this asset class. We will shy away from mortgage or finance companies, or indeed, any security with a credit rating less than A- as determined by Standard & Poors (both the issuer and the security need to be Investment Grade).

Shares: Equities provide investors with part ownership of businesses, the long-term performance of which is linked to economic growth. In general, shares are higher risk investments than cash and “Investment Grade” fixed income. Accordingly, equity returns will be more volatile; however, they do tend to provide superior returns over the long-term. We will target both local (NZ/Aust) and international shares, we may even target different speciality sectors (i.e. Healthcare, Infrastructure, Technology etc), or, specific regions of the world (i.e. USA, Australia, Asia etc).

Property: We access Real Estate investments through listed property vehicles (which provide an exposure to the underlying property assets); rather than investing in direct property, where liquidity constraints can amplify the risk of this asset class. In our view, listed property vehicles provide superior liquidity, transparency and diversification (across NZ and indeed the world), as compared with local direct property holdings. That said, we are not against direct property investments and many clients will hold these assets outside of their managed investment portfolio (still forming a part of their overall financial plan). Direct property is also often leveraged.

Once a portfolio is in place, it is important that it is monitored and reviewed on a regular basis.

In Summary, markets are dynamic and at times the portfolio will require adjustment, either to take advantage of specific opportunities, or to reduce risk, if the market fundamentally changes, or the investors priorities shift. Having the ability to “change” is a key part of the monitoring process.

We will layer a portfolio with different types of assets. We will usually underpin the strategy with a foundation of managed investment funds, either listed or unlisted, but purposefully included to provide a wider diversification. Holding a narrow concentration of direct stocks may deliver superior returns, but it likely amplifies risk. So, for most investors we’ll hope to blend specific and broadly invested listed investments with some rather special (boutique) Managed Investment schemes.

No one truly knows when the best weeks or months of the market are to be found and so, investing requires time in the markets. We may try to time the degree of our commitment into certain sectors or stocks, but we will look to remain invested throughout the economic cycle. A number of studies have been conducted, which prove over a number of time periods that if the investor is out of the market on the best ten days, over say twenty years, then the total return is around 40% lower. How can anyone know when those best ten days will be, looking ahead for the next twenty years? We’re better to be fully invested, but initially, as we start the investing process, ‘averaging in’ can provide some protection.

If you’re not planning to use some part of your capital for at least seven years, then some part of that capital needs to be invested in the capital markets. To get the best returns, we should embrace in part or full, investments that will almost inevitably experience some kind of short-term volatility. If the value of that money intended to be cashed out many years from now shifts in value today, does it really matter? If we can wait for tomorrow’s price, we may find it worked entirely as planned.

Tony Munro CFPCM AFA

The views and opinions expressed in this article are intended to be of a general nature and do not constitute personalised advice for an individual client.

A disclosure statement is available on request and free of charge.

#getgoodadvice #buyqualityinvestments #independentadvice #longterminvesting #diversify #financialgoals #financialplanning

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