Why Diversification Matters

County Financial have been recommending Discretionary Investment Management for over 11 years. Our responsibility is to analyse different investment firms to ensure that their processes are robust, their charges are reasonable and that they perform well against a given benchmark.

This has become even more important in recent weeks in the light of headlines concerning Neil Woodford’s fund. He was once the “darling fund manager” who could do no wrong when he managed money with Invesco Perpetual, but his performance has suffered badly in recent times, causing him to issue a public apology. However, this probably hasn’t gone far enough in the minds of some investors who are unable to withdraw their funds and are now nursing significant losses.

This is why we, at County, use investment companies that have expertise in Discretionary Fund Management where investors’ money is spread across many different funds and have a strict volatility management process. In our experience, investing in a variety of assets offers the opportunity of mixing both higher returns with lower risk. Put simply, this form of diversification is a risk management strategy that mixes a variety of investments within a portfolio.

This means that Discretionary Investment Managers can get on and operate without having to worry about whether you should be in UK Equities, US Bonds or Commercial Property, as long as they are not breaching the parameters that were set at the inception of the investment . More importantly, it ensures that your exposure to any one individual fund is extremely limited.

We also recognise that as soon as active investing gets a difficult press, people are drawn to banks as a place to save their money, opting for the chance to get some interest and a sense that they are somehow protecting their capital. But, in a time of rising inflation, this strategy may result in you watching your money devalue over time.

The wealth of many people in the UK is under threat as inflation is outstripping savings account returns by around 2%, thereby slowly reducing the buying power of this asset. With cash suffering from a steady decline as time goes on, it may be better to look at other avenues to diversify your savings and help them grow.

There is no question that for the purpose of security or as a guarantee of capital, cash is an excellent asset class. It’s the ideal place to hold money in the short term or to ringfence for a specific purpose. However, it very rarely offers any more than that. It is important, therefore, to consider your savings as part of your overall investment strategy, to ensure that you hold cash for the right reasons.

We will continue to encourage clients to invest within diversified risk rated portfolios, always looking long term whilst ensuring cash is set aside for an emergency and contingency fund, as well as for planned expenditure. This robust process then leaves you to get on with more important matters, like deciding how you will spend your money.

Remember, it’s not how much money you have, but what you do with it that matters!

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Making Inheritance Tax Planning a reality

We recently ran an Inheritance Tax Workshop for some clients who wished to consider this subject matter in more detail. The aim was to discuss some of the nuances of the legislation, but more importantly, we wanted to make the topic more practical, rather than just simply looking at Allowances and Tax Avoidance.

One of the subject matters that we discussed at some length was the different ways in which you can physically reduce the value of your Estate. We considered the rules concerning the Gifting of money and also discussed some of the implications of physically spending your money.

Gifting was an interesting discussion. The IHT rules for this area are relatively simple. Any money that an individual gifts to somebody will be deemed as still being part of the Estate for the purposes of Inheritance Tax. The gift is called a “Potentially Exempt Transfer” and won’t fall outside your Estate unless you live for a further seven years.

However, there are some allowances that can be used immediately, and these include the £3,000 annual exemption and certain gifts for birthdays and weddings. 

In addition when a gift is made to charity, this will also fall outside of your estate immediately, no matter the size of the gift. We had a detailed discussion about the ability to reduce the actual level of IHT from 40% to 36% if provision is made in a Will to leave at least 10% of the estate to charity. 

In our experience, the biggest concern of many people is the fear of giving money away and then needing the asset later on, potentially to pay for Care or other such matters. This highlights the value of planning and we often discuss how important it is to be able to balance the need to manage your IHT liability with the future requirement of your assets. It is the balancing act that makes planning so important and why regular reviews are necessary.

Coming back to the workshop, we also discussed the implication of spending money as a means of reducing the value of your estate. Whilst most people recognise that spending your hard earned cash on yourself can be a good thing, it may not be the perfect solution to an IHT issue. Many purchases that we considered either moved the asset value from one part of your estate to another or even had the potential to increase the value of your estate in some way. A good example of this was the purchase of a new kitchen which may reduce your cash levels, but could very likely increase the value of your property. 

However, this shouldn’t stop you from being able to enjoy using your money. We concluded that one of the best solutions was to spend money on experiences, such as trips overseas. Not only does this feel more enriching and rewarding, but HMRC will not tax you for this! 

At the end of the workshop, clients had come to the conclusion that any Inheritance Tax issue is best managed by a long term plan, which aims to maintain the balance between living for today AND looking to tomorrow.

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