This builds on our recent article: 2+4=4. Or does it?

“Hayulp! Hayulp!”

In the famous 1960 Western remake of 1954’s Seven Samurai, Calvera (Eli Wallach) and his group of bandits periodically raid a small village in Mexico for food and supplies.

The village leaders ride to a town just inside the American border, hoping to barter for weapons to defend themselves. There, they encounter Chris Adams (Yul Brynner), who suggests that hiring gunfighters would be a cheaper option.

It’s a great example of why it can be a good idea to use professionals rather than try to do everything yourself!

As financial planners, we’re paid to help people make smart choices about their money.

What do you get for your money?

Qualitative feedback tells us it’s all about peace of mind. However, that is hard to measure. As you know, our approach to investment is more scientific than that.

Quantitatively, the framework we use for wealth management quotes an average figure of an extra 3% in net returns over the long term (Remember, results will vary according to your personal financial goals, timeline and risk tolerance).

Here are the seven magnificent ways we add value:

Asset allocation

Asset allocation and diversification are two of the most powerful tools we use to help achieve your financial goals and manage investment risk.

“It is widely accepted that a portfolio’s asset allocation 
is the most important determinant of the return variability and long-term performance of a broadly diversified portfolio that engages in limited market-timing.”
Davis, Kinniry, and Sheay, 2007

A sound investment plan begins with creating your investment policy statement, in which we outline your financial objectives, annual contributions, planned expenditures, and timeline.

It’s like doing the sanding before the decorating, the foundations before the building, or the mixing before the baking. It may be time-consuming, detail-orientated and tedious, but it’s the foundation that everything else rests on.

As long as your objectives don’t change, your plan stays the same, despite what may be happening in the market.

Rebalancing

Over time, the investments within any portfolio are likely to drift and acquire new risk-and-return characteristics. If they become inconsistent with your original preferences, rebalancing is vital to maintain the asset allocation.

The goal of a rebalancing strategy is to minimise risk rather than maximise return. The task of rebalancing can be an emotional challenge, and there are fees to pay. But any investment strategy that does not rebalance will experience higher volatility and risk.

Whatever happens, we urge you to stay committed to your asset allocation strategy and remain invested in the markets in order to increase the probability of reaching your goals.

Cost-effective implementation

Every penny paid for management fees, trading costs and taxes is a penny less in your potential return. When you pay less, you keep more, regardless of whether the markets up or down.

Costs therefore play a role in our investment selection process, because research repeatedly shows that low costs are associated with better performance.

Behavioural coaching

Investing involves emotion. The hard part is sticking to your investments in the best and worst of times. But you need to maintain a long-term perspective and disciplined approach. It can be costly to abandon your strategy due to the allure of market timing or the temptation to chase performance.

Trusting your adviser to maintain a scientific approach can offset years of fees.

Asset location

Assets that are allocated between taxable accounts and tax-advantaged accounts (such as ISAs and pensions) add value each year as the benefits compound.

Withdrawal order

It’s important to decide when and how to spend from your portfolio, especially when you have a mix of taxable accounts (GIA), ISAs and tax-free pension benefits.

To minimise the total taxes you pay over retirement, you need an informed withdrawal order strategy, so increasing your wealth and the longevity of your portfolio.

This alone could cover the fees you pay your adviser.

Total return v income investing

Retired people with a diversified portfolio of equity and fixed income investments used to be able to live off the income generated. However, yields are at historically low levels so that is no longer the case.

If you wish to live off the income generated by your portfolio, you have three choices:

  • Spend less
  • Reallocate your portfolio to higher-yielding investments and inadvertly increase the risk attributions of your portfolio
  • Spend from the total return, including the income or yield, but also the capital appreciation

We can help you make the right choice.

However, we recommend a total-return approach that considers income plus capital appreciation. The risk is lower, it’s more tax efficient, and the portfolio has a potentially longer lifespan.

In order to serve our clients effectively, we need substantial experience and to undertake thorough analysis of the market – we certainly work hard to earn our fee.

P.S. Did you know a new version of classic movie: The Magnificent Seven  is being released in September? Here’s the trailer:

Tucana Insights

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