RH Investment Services
Autumn Edition
RH Investment Services welcomes you to the latest edition of Investment Bulletin, our
update on developments in the world's finance sector.
We hope you find the contents of interest. If you have any questions, or would like to
discuss any of the points raised, please give us a call.
Investing for beginners
Many investors are happy to earn a return from their money simply by sticking it in a
savings account. For those who want their money to work harder, the stock market can
offer greater potential, although the reward is dependent on the amount of risk you are
willing to take.
By investing in the stock market, you’re buying shares (or equity) in a company in the
hope the company will perform well and the share price will go up. Of course, it can go
down as well, which is the extra risk you take on. Stock market investments should be
viewed over the medium to long-term and most professionals will advise you to keep
them for at least three to five years.
If you’re looking to invest directly into a company’s shares, then you should concentrate
on companies whose businesses you understand. It helps if you can keep on top of
market news and have some knowledge of the way in which the stock market operates.
This is difficult for many investors who don’t have the time, experience or capital to
invest directly. As an alternative you can invest in equities by putting your money into a
collective investment scheme, such as a unit trust or an OEIC (Open Ended Investment
Company). Your money will be pooled with that of other investors and the fund manager
will select which companies to invest in. You will pay a fee for this service.
Some funds aim to provide you with an income, while others are designed to deliver
capital growth. Some funds simply track a stock-market index and have no element of
stock-picking. Other funds are actively managed and target a particular sector of the
stock market, or geographical region. These funds tend to carry higher fees as a result.
The advantage of the collective investment route is that with a smaller amount of
investment capital, you can achieve a more diversified portfolio. With a professional
stock-picker at the helm, you would expect your money to outperform the returns of a
Contact Us: savings account. However, to ensure that’s the case, it’s worth doing some research
into a number of products to see which one best matches your own financial
RH Investment requirements.
Services Ltd
KIC Millennium Way
Thanet Reach There are many products on the market and if you’re looking at investing in equities, you
Business Park should consider how much risk you’re willing to take and whether you feel confident
Broadstairs enough to pick your own stocks – or would prefer a professional to make your choices
Kent for you.
CT10 2QQ
Tel:01843 609261
Building a portfolio
Portfolio is the term for a range of investments which is owned by a single person
or organisation. It is generally spread across a variety of assets, including
shares, bonds, property and cash, the allocation of which has been determined
in relation to that investor's objectives.
Ultimately, a portfolio’s success is dependent on its performance – but one
investor’s idea is never the same as the next. Your attitude to risk is highly
personal and the solution you choose must reflect that.
Risk is key to helping determine which asset classes you select, and in what
proportion. For example, cash is virtually risk free and the interest that it earns
provides you with a regular income. However, because there is no risk attached,
the income payments are generally quite low and change in line with Bank of What is a
England base rates. There is also zero opportunity for capital growth.
portfolio?
At the other end of the scale we have equities, ie: shares which allows you to A portfolio is the collective term
participate in company profits. Equities generally offer greater long term income
and capital growth opportunities as a successful company will increase not only for the total of all your
dividends but also reinvest in itself, increasing its value. However, unlike cash, investments, which might
equity prices are highly volatile as they react to changes in market sentiment. In
include a range of asset
addition, if things go wrong for a company, you may end up getting back less
than you originally invested. classes, such as equities,
bonds, property and/or cash. Its
Making this decision, ie: how much of your portfolio goes into each asset class,
success is dependent on the
is known as asset allocation. Combined together, asset classes can actually
complement each other, helping to smooth out some of the peaks and troughs of way it performs, although one
investment performance. Perhaps surprisingly, different asset classes tend to investor’s definition of
perform in different ways, and this lack of correlation between them means that
one will often compensate when another is having a difficult time. performance may differ from
another as we all have a
A good portfolio should generate the maximum possible return for you for your
different outlook. Hence, there
given level of risk. Of course, you should always remember that investment is for
the long term and performance is not guaranteed. Indeed, you may not get back is no catch-all solution to fit
what you invested, particularly if you withdraw after only a couple of years. everyone’s investment needs. A
However, if you have allocated your portfolio in the right way, you are in a much
good portfolio should generate
better position to maximise your opportunity and lower your long term risk.
decent returns while keeping
within your risk profile. This is
Common mistakes
We are all human and in all walks of life, we make mistakes - which for investors, done by selecting an
costs money. Therefore, if you know the most common ones, you can avoid losing appropriate mixture of different
out where others have lost before. For example, don't follow the herd – remember
when people piled into dotcoms in the late 1990s? Don't sell out on a downturn assets, bearing in mind not just
without serious reason - you are crystallising your loss and may miss out on a risk but also your age, your
rebound. And never chase a quick profit, thinking you can time the market – this is
needs, your timelines and your
no different to gambling on horses. Investment should be planned and should be
for the long term. Any other approach makes it a highly risky business. financial position.
Building the core
A core investment is a series of holdings around which you can construct the
rest of your portfolio. The theory is you will keep this investment for the longer
term, while tailoring other parts of your investment portfolio to follow more short-
term gains or higher risk strategies. Although dependent on your specific attitude
to risk, the principle of a core investment is that the majority of your portfolio is
invested in mainstream funds which can offer a diversified mix of assets and can
provide stable low-risk returns.
This can be supplemented by a satellite strategy comprising a smaller
percentage of your portfolio, focusing on more specialised areas designed to
increase overall returns. For example, you could target a specific industrial
sector, such as commodities, or a type of overseas stock such as emerging A long term view
markets equities. It is important to remember that portfolio risk is a highly
personal element which varies from investor to investor and you should be Over the long term, the stock
comfortable with the overall level of risk you are taking. Core funds are designed market has tended to
to act as a central focus around which others parts of the portfolio can be
outperform cash. However, it is
planned. Whichever type of core holding you select, it is worth ensuring you
remain invested for the longer-term and choose a provider that will be able to also volatile, which has a
keep your investments on track even if your requirements change. tendency to scare investors -
perhaps even tempting them to
sell. However, selling after a
sharp fall can be a knee jerk
reaction. Falls can often be
followed by upward movements
and, over the long term, short-
term corrections should have no
serious impact on your
objectives. The nature of share
prices means they do go down
as well as up, but think before
you act. Have your needs
changed? Has your attitude to
risk changed? Has your overall
view of the market changed? If
your portfolio is structured to fit
your aims, time should be all it
needs.
Pensions and ISAs What is a
With longer life expectancies many investors’ are concerned about their retirement PEP?
income. Some are now looking to boost their pension funds, either by topping up PEPs were the
company schemes, or using alternative vehicles. One such vehicle is the Individual predecesors to ISAs.
Savings Account (ISA) which can also help to ensure your retirement income is as Introduced in 1987,
healthy as possible. PEPs (Personal Equity
Plans) were tax-
ISAs and pension plans are both seen as tax efficient investment vehicles. however, efficient vehicles and
there are big differences between the two. For example, when you put money into your there were two main
pension plan, the contribution qualifies for a tax rebate up to your highest rate which, for types: the single
a higher rate taxpayer can add a significant amount to their investment. However, in company PEP; and
exchange for this benefit, you must keep your money invested until at least age 50, and the general PEP
on retirement, the income you receive is taxable, and counts towards your personal allowing a selection of
allowances. investments. Although
you cannot take out a
With an ISA, the money you invest comes from taxed income and no rebate will be new PEP, any you
given. However, ISAs have no minimum term - so you can withdraw the proceeds, or an have can continue to
income before you reach 50. In addition, any income you do withdraw will be tax free and exist with similar levels
will not count towards any personal allowances. Which approach is best for you of tax-efficiency to
depends entirely on your personal situation. Call us if you would like to find out more. ISAs - and the ruling
dividing the two types
of PEP has been
abolished. If you own
any PEPs it’s certainly
worth ensuring they
work as hard as
possible and, using the
robust PEP transfer
market, you can
search investment
managers to provide
competitive
performance in the
What is an ISA? same way as ISA
investors.
An Individual Savings Account (ISA) is basically a
tax efficient wrapper which you can place around a
Issued by RH
wide array of assets or investment funds to protect investment Services
them from Capital Gains Tax on growth and any which is authorised
additional liability to Income Tax on income. There and regulated by the
Financial Services
are two types – the mini and the maxi – and in this Authority. The
tax year (2007/08), you can invest a total of up to contents of this
£7,000. A maxi ISA allows you to invest all £7,000 newsletter do not
constitute advice and
into stocks and shares – either directly or via should not be taken
collective investments. Using mini ISAs, however, as a recommendation
you can split your £7,000 across assets, with up to to purchase or invest
in any of the products
£3,000 going into deposit based savings accounts mentioned. Before
and up to £4,000 being available for investment in taking any decisions,
stocks and shares. we suggest you seek
advice from a
professional financial
adviser. All figures
and data contained
within this document
were correct at time
of writing.