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Is it the right time to reassess your investment strategy?

If your investments have been too concentrated, geographically or by asset-type, it might be the right time to have a word with your financial advisor.

Domestic equity portfolios took a hit when the JSE fell by 38% between January 21 and March 19 with even low-risk portfolios being affected. On the flip side, now that many assets are at new lows, it may be a good time to assess and adjust your portfolio.

If with hindsight your investments might have been too concentrated, geographically or by asset-type, it might be the right time to have a word with your financial advisor about your future investment strategy.

When you see a new financial advisor, the starting point must be (by law) a thorough assessment of your assets and liabilities. This is no time for coyness, or for ‘forgetting’ to mention either your debts or the multitude of Kruger Rands tucked away in your bank vault. Such omissions will ensure you do not get the advice that is appropriate for you.

To best advise you, your new financial advisor will need a good understanding of your present and future income-generating capacity, income needs, state of health, your family’s health, debts, financial obligations in terms of children’s future educational requirements and any information regarding the maintenance requirements for ex-spouses or elderly parents.

All of these aspects of your financial requirements will be taken into account when drawing up a financial plan for you and your family. It follows that any changes should be the prompt to see your advisor again. Your investment plan may well be tweaked to take account of your new situation.

The next thing that your advisor will attempt to gauge is your understanding of asset classes, different investment vehicles, their rules and constraints, expected performance and the risks that they may be exposed to. Some types of investment risk are listed below.

Shortfall risk: You will be able to ask your financial advisor about the best way to achieve your long term financial and investment goals. There are dangers in taking too little risk, as well as taking too much risk. You can run the risk of not meeting your objectives if you do not take enough risk to get the higher rewards or if your risk-appropriate investments do not grow as anticipated or lose value just when you were planning to sell.

Risk of inflation: Many people do not understand that while interest-based investments are considered ‘safe’ in that they seldom decline in absolute value, they are at risk of losing buying power. If an investment generates 5% a year, and inflation is 5.5%, the value of money in your pocket erodes over the year. Inflation risk is insidious and is therefore possibly the most dangerous and overlooked investment risk.

Market risk: All asset types are subject to market risk. The value or prices of bonds, equities and cash rise and fall daily, according to changes in demand. While we have history as a guide as to how these asset types have performed in the past, no one can predict future returns.

Tax and regulatory risks: It is crucial to understand the impact of tax rules on different types of investment. For example, tax on the interest paid by interest-bearing assets is payable at the marginal rate and the sale of equity investments attracts capital gains tax, also payable at the marginal rate. The cost of these investments, as well as the timing of the buy and sell decisions, should be factored into investment decisions from a tax point of view as well as from a market point of view. Likewise, some investment vehicles (like retirement annuities) have strict rules about the circumstances under which underlying assets may be accessed by investors.

Liquidity risk: You might experience liquidity risk if you decide to sell an investment at a time when there are no ready buyers. With unit trusts or shares, it might be a matter of settling for a lower price, but in the case of some private equity investments, it may be very difficult to determine the value of an asset and/or therefore to find a buyer.

Country/ political/ currency risk: Countries that are democratic, transparent, observe the rule of law and property rights attract local and foreign investors. Companies constantly assess the investment climate before risking new money in new projects. Corruption, high crime rates and inadequate legal protection can lower the growth rates and keep investors away.

The general rule of thumb is that young, healthy people at the beginning of their careers and those who have greater wealth in absolute terms can take on more investment risk as they have more ‘ballast’, either measured by time or sheer value of assets. Conversely, those who are more financially fragile, either because of age, ill-health, income insecurity, high monthly costs relative to their income should take less risk. However, as we see below, there are many other nuances to take into account.

With your consent, your new team will proceed with assessing how much investment risk would be sensible in your particular situation. They will draw up an investment plan and recommend a range of cost-effective financial products. Also, they may well suggest that you get your personal affairs in order, and assist with drawing up a will, a living will, forming a trust or other legal matters.

It is important to understand that while your team will be able to give you information on the direction of interest rates, the current levels of different stock exchanges around the world and how investments have performed in different scenarios, they cannot predict future returns. Advisors have no control over the performance of investments they recommend. Be sceptical about those advisors that ‘guarantee’ returns, either implicitly or by creating expectations.

When your proposed plan is ready you will be asked to sign a memorandum confirming that you agree to it before it is implemented. The financial advisor’s fees will also be discussed. Post-implementation, most advisors arrange six-monthly check-up meetings and are on hand on an ongoing basis. In particular, they can offer mentoring during volatile markets.

Many financial advisors use risk assessment forms and questionnaires to decide on the investment plans and risk tolerance of their future clients. At Rosebank Wealth Group we have a series of meetings and conversations with new clients before agreeing whether we are the right partners for them, and/or whether we can offer meaningful value in their particular situation.

Most of our clients come to us with a particular need; they may have just sold a business, retired, married, divorced or started a family. Alternatively, they may need advice on how to adjust their portfolio to become income-generating, or need advice on how to further diversify assets across geographies and asset types. Many come with a hodge-podge collection of assets which have been unmonitored for many years and require an assessment and consolidation.

Some are still employed, some have their businesses and some are retired. Some have high-risk businesses and want long term investments that offer a foil against their business risk, while others are senior executives in corporates on the brink of retirement.

Some have complicated private lives and trust funds for children or grandchildren. Some have been ill with serious illnesses in the past, and need the generous life cover, income protection and/or disability cover while others prefer to, and can self-insure. Some have dependent, adult children that they support, while others require investment advice to manage tax liabilities.

Many, but not all, of our clients, already have substantial assets and our advice is highly tailored. If clients need both income and growth assets, we segregate their portfolio into an income portfolio capable of generating the desired income for the specified period and invest the balance of the portfolio in assets higher up on the risk/ reward spectrum.

We take clients’ preferences into account and avoid products that they do not like or have been burnt by in the past. Conversely, we accommodate and make necessary adjustments to proposed portfolios if clients have strong views on ethical or green investments.

We have found that client buy-in, regular written communication and reports, regular meetings and conversations and swift administrative response to queries go a long way to easing the normal market anxiety investors feel.

ADVISOR PROFILE

Trevor Lee

Rosebank Wealth Group (Pty) Ltd

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