The pandemic has helped lots of younger investors get started, but they should look beyond DIY options to see the really transformative changes early – and proper - wealth management can make.
So many people waste their youth from a wealth management perspective. Here, George Haggas, Investment Manager at Smith & Williamson Investment Management LLP, makes the case for starting as early as possible and explains why enlisting the professionals can powerfully magnify your gains.
It is a sad fact of life that the best time to start financial planning is usually a decade ago. Rather than waiting until their thirties and forties, young professionals should seize the opportunity to get started with proper wealth management today. Early planning can give you freedom and flexibility later in life, so it is well worth considering your options as soon as possible.
The time that could make most difference to our long-term term wealth is the time most of us aren’t thinking about our finances at all – in our twenties. £1,000 saved at age 20, growing at 5% a year, would be worth an impressive £7,360 at age 60. The same amount invested at 40? Just £2,710.
Those who manage to save early not only have these compounding returns in their favour, they have more investment flexibility
Those who manage to save early not only have these compounding returns in their favour, they have more investment flexibility. They have many years to ride out volatility and therefore don’t need to worry too much about the shorter-term ebb and flow of stock markets. This should help them generate stronger returns over time.
Starting early can also help impose good financial habits for life. The pandemic has seen a lot of people start to speculate in financial markets, whether on Bitcoin or GameStop. This kind of speculation is fine if it’s a sideline, but it’s a poor way to build long-term wealth. Major platforms say that 65-75% of their retail investor accounts lose money when trading spread bets and Contracts for Difference (CFDs)*. Building a long-term, regular savings strategy early on is likely to do far more for your finances over time.
Investors have a huge range of options when they start investing and this can be overwhelming. In particular, there has been an explosion in online or “robo-advisers”. These will generally offer a series of ready-made portfolios based on an individual’s age, life stage, financial goals and tolerance for risk. Managed online, they can be a cheap and convenient way to build a long-term savings plan.
However, we would argue that there are still real benefits in having your portfolio managed professionally. Perhaps most importantly, it can help you avoid some key pitfalls before you grow more comfortable with stock market investing.
However, we would argue that there are still real benefits in having your portfolio managed professionally. Perhaps most importantly, it can help you avoid some key pitfalls before you grow more comfortable with stock market investing
Perhaps the most important pitfall is the instinct to panic at the first sign of trouble. 2020 illustrated this well. When it became clear that the Covid-19 virus would hit Europe every bit as dramatically as it had hit Asia, markets sold off rapidly. The temptation may have been to sell as uncertainty mounted. However, by the end of August markets had recovered all the ground they’d lost and most were up on the start of the year. Those who had moved into cash might well have missed this rally.
This pattern is not unusual. Markets often rally sharply after a period of weakness. Missing those rallies can be a disaster for long-term wealth accumulation. We believe that having someone familiar with market volatility, who can explain these movements and give clear advice and direction on potential changes to a portfolio, provides you with a level of reassurance not possible from robo-advisers or DIY platforms.
We believe that having someone familiar with market volatility, who can explain these movements and give clear advice and direction on potential changes to a portfolio, provides you with a level of reassurance not possible from robo-advisers or DIY platforms
It is also valuable to have someone who is familiar with your individual circumstances and can help you construct a financial plan. They can help you decide whether, for example, it is more advantageous to increase mortgage payments or contribute to your ISA/pension. You can also talk to them if your circumstances change: if you are planning to get married, buy a home, or have children.
They can help you with tax planning where necessary and ensure that you have the right protections in place should you fall ill or be unable to work.
They can help construct an active portfolio that is forward-looking and meets your personal goals, rather than one that simply tracks an index
They can help construct an active portfolio that is forward-looking and meets your personal goals, rather than one that simply tracks an index. For many investors, environmental and social criteria are becoming increasingly important. They recognise how their investments can influence the world around them and want their investment manager to take note. We have years of experience in incorporating these ethical considerations into client portfolios.
It is important for you to have a financial strategy that is designed for you. That sounds self-evident, but too often, financial planners will base their strategy on the needs of older clients, whose circumstances may be very different.
As a younger investor not only will you have a different attitude to risk but you may need to be more careful on areas such as the Lifetime Allowance
As a younger investor not only will you have a different attitude to risk but you may need to be more careful on areas such as the Lifetime Allowance. This is the total amount you can hold in your pension pot before higher taxes start to creep in. It’s currently £1,073,100 (Tax Year 2020/21), which sounds like a lot, but strong investment growth can take you over the limit.
With plenty of years saving ahead, you are also in a position to build up an ISA portfolio, which could deliver a tax-free income stream. This may be useful at retirement, but it could also be useful if you decide to take time out at some point during your career, either for caring responsibilities, to retrain, or even to travel.
To our mind, tax mitigation and financial planning are twin pillars of proper wealth management. A firm with a broad range of financial planning capabilities can combine your financial planning and investment needs. No robo-adviser can provide a similarly integrated service
We believe tax is an important consideration in all wealth planning. You may gain far more taking advantage of tax planning options such as pensions and ISAs than by finding the best-performing investment. To our mind, tax mitigation and financial planning are twin pillars of proper wealth management. A firm with a broad range of financial planning capabilities can combine your financial planning and investment needs. No robo-adviser can provide a similarly integrated service.
Wealth planning is a long-term enterprise. It needs to adapt as your life changes. We believe it is important to have someone who understands your goals and preferences, who can help you plan. Equally, if you want to start a business, or change career, or take time out, we can offer that expertise under one roof. At Smith & Williamson, we believe enduring relationships bring the best possible outcomes.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Investment does involve risk. The value of investments and the income from them can go down as well as up. The investor may not receive back, in total, the original amount invested. Past performance is not a guide to future performance. Rates of tax are those prevailing at the time and are subject to change without notice. Clients should always seek appropriate advice from their financial adviser before committing funds for investment. When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.
Smith & Williamson Investment Management LLP
Authorised and regulated by the Financial Conduct Authority. Tilney Smith & Williamson Limited 2021.