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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.
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