Our Philosophy

The first choice is whether to invest at all. You could leave your money in cash. This is usually an option even if you hold your investments in a pension or an ISA. The advantage of leaving your money in cash is that it will not fall in numerical value. Holding cash is often thought of as the lowest risk strategy and therefore tends to offer the lowest ongoing rate of return.

There may be times when holding cash is appropriate, for example you may need imminent access to the money. If you need the money in the short term, then you may not be able to accept any volatility and if so then cash could the correct holding for you. Having said this, we feel that it may be unwise hold cash for a long period of time as the value could be eroded by inflation. That is to say, the numerical value may not have changed but what you can buy with it may have.

Before we agree your scope to consider volatility and invest, we first aim to ensure that you have enough cash reserves for your imminent liabilities. We call this cash reserve an ‘emergency fund’ as we encourage you to hold an amount to cover known and possible unknown expenses (for example if your boiler breaks down).

Where you hold the cash is up to you. You may prefer to shop around for a slightly better rate of return, or you may decide to simply hold the cash with your existing bank for simplicity.

We often advocate premium bonds as a place to hold your emergency funds as they are capital protected, tax efficient and relatively easy to access. The interest rate of premium bonds is unknown (the interest rate is literally a lottery) but they can also be a bit of fun for you. You probably wouldn’t notice an extra £25 interest in your account but it exciting when you are contacted about your premium bonds to say that you have ‘won’. While it’s possible that the win is no more than £25, there are bigger prizes all the way up to £1million and the more you have the more likely you are to win.

Having agreed on your emergency fund, we may then consider the other three asset classes, fixed interest, property and equity.

Fixed interest does what it says on the tin. You agree to lend your money to somebody, and they agree to pay you the same amount back at some time in the future, along with a fixed rate of return in the meantime. The length of time before you get your money back is called the ‘Duration’.

The likelihood of the borrower defaulting can affect the rate of interest paid to you. For example, if you lend your money to a company (called a corporate bond) you are more likely to receive a higher rate of interest than if you were to lend to the UK Government (called a GILT). The reason for this is that a company is more likely to default that the UK Government.

The value of a fixed interest product can be affected by the current market conditions. For example, if interest rates are rising you may be able to secure a better rate of return from a newly issued product. If so, it is likely that the value of an existing fixed interest has fallen in value as it isn’t offering such an attractive rate of return.

While the value of fixed interest is vulnerable to fluctuations in interest rates, they have historically been thought of as lower in risk than property and shares, as there is an expected return of asset. Also, the amount of fluctuation is less for fixed interest of lower duration (as you wait less time to get your money back, you can make use of the better rates sooner).

Your main residence is your home. It forms part of your plan as you may have a mortgage that needs to be repaid. Conversely, you may be planning to access the equity in your house later in life by downsizing or taking out equity release. We otherwise tend to exclude your main residence from your plans as it is where you live. Ultimately, you may need your home to help fund the cost of a care home, or you may simply pass it to loved ones as a form of inheritance.

Buying an additional property can be a useful addition to your investment plans as it can potentially provide you with both income and capital growth. This type of investment is often called a Buy-To-Let (BTL).

Buying a second property can involve using large sums of money. You may be able to borrow money as a BTL mortgage to purchase a property that you may otherwise be unable to afford. This is called ‘leveraging’ and has the effect of magnifying any gain in value, but also any loss. For example, let us consider that you have £100,000 to spend on a property and you spend it all on one unit. If prices rise by 10% then you stand to gain £10,000 and if prices fall by 10% then you stand to lose £10,000. Now let us consider that instead you decide to purchase 10 similar units of £100,000, each using a £10,000 deposit and borrowing the remaining £90,000. On this later scenario a rise in value of 10% would result in a gain of £100,000. However, a loss of 10% would now cause you to lose £100,000 (your entire initial sum). So, borrowing to fund property can magnify gains but it can also magnify loss, so it is often best left for those with a higher attitude to risk.

Second properties usually suffer a greater amount of income tax, capital gains tax and stamp duty. Any income you receive is likely to be reduced by any agent you have help you. It is also likely to be reduced by the costs of maintaining the property. Any period of void tenancy reduces your return further. BTLs can take time to manage, and they generally take time to sell (meaning they are illiquid).

Some of these issues can be resolved by ‘pooling’ your money with other investors. This means that you don’t need such large sums as you add your money to a pot which others invest into as well. It can also help reduce management, stress and costs, as the fund manager will deal with these things for you.

These ‘pools’ of money are often referred to as a ‘collective’ as all the money is collected by the manager from different investors. One such collective is called a Real Estate Investment Trust, or REIT, and the fund manager can choose to invest in different types of property such as student residences. More common are funds that only invest in commercial property, which have a similar, but not the same, trend to residential property.

Most property funds try to retain an element of cash to cover that which investors may wish to have returned to them through encashment. However, property funds may experience a problem when many investors want their money back at the same time. This is because the fund manager has invested in property, which may take time to sell. In this scenario property fund managers have the right to deny you your money back for a period of time. The fund can become ‘suspended’ which means that no investor can have their money back until the fund is no longer suspended (typically because the fund manager has to sell physical property to provide a sufficient cash holding).

At Prism Wealth Management Ltd, we will independently assess your situation and needs. However, as property funds can become suspended (meaning that you can’t get your money back, if only for a time), we don’t generally recommend holding property funds.

Owning a share of a company means that you may receive a share of the company profits (if there are any) by way of a regular dividend payment. If the company is deemed worth holding then the price it commands may rise, and so you may also make a capital gain (the price you sell for may be higher than the price you bought it). On the other hand, the share may fall out of favour and fall in value. This could mean you make a loss. The fluctuation of value is called the ‘volatility’ and for shares, it is usually the highest of the four asset classes. This can because the company itself become popular or unpopular, or because the market is popular or unpopular (market sentiment). Due, to the relatively high volatility, shares are deemed to be the highest risk of the four asset classes.

There are different ways to invest in stock and shares. For example, you could self-select shares. If this is your preferred strategy, then Prism Wealth Management Ltd may not be best placed to assist you, as we cannot give advice on single shares. Historically, a stockbroker would be used to facilitate this approach but technology has moved on such that the self-selection of shares is easier than it once was.

One disadvantage of self-selection is the costs of buying and selling the shares. Another is the increased risk of holding a relatively small holding of shares which tend to be more volatile. Furthermore, single company holdings may be hard to sell. Most importantly though, you also carry the risk of a company going bankrupt in which case you may lose your entire holding of the stock. This approach also requires more of your time to oversee, and you may choose poorly. Any article that you read to assist your choices could be out of date and is likely to be more interested in you reading the article rather than providing helpful advice. We therefore argue that it is not a suitable approach unless you have a high attitude to risk.

You may prefer instead to engage a fund manager who can buy the shares for you.

A fund manager may be restricted to a certain area such as UK, or sector such as technology. This is so that you have some choice as to where your money is invested. However, it can be argued that the fund is likely to provide the return of the underlying investment (eg a UK fund is likely to generate returns in line with the UK and will likely rise and fall accordingly).

You may feel it is better to engage a fund manager who with a broader remit, can not only buy the shares for you but may also diversify across a range of assets too. This type of muti-asset investment is a manager of manager (or fund of fund) as you employer an overall fund manager to select the fund’s manager for you. The invest lead manager can make some choice as to the best regions, different sectors as well as different asset class (such as fixed interest) and looks for an underlying manager who can assist in each area (or they may themselves use an index if they feel no such underlying manager is suitable).

This can be a more expensive way to invest as you now incur the costs of the overall manager as well as the underlying manager. However, if the manager of manager is well skilled, they may be able to use the flexible mandate to adapt to changes in the market. This could offer you greater peace of mind as you may feel more comfortable that somebody is regularly managing your money.

Such managers still diversify, which can reduce the risk of buying an individual asset that may fail. They may even be able to reduce brokerage costs as transactional costs are averaged across the fund. Of course, you are beholden to the management expertise of the fund manager, who may have a limited remit. This limitation can cause a problem, when markets are falling as the fund manager may not be able to hold a significant amount of cash.

The level of cash held at any one time will be dependent upon the overseeing managers view of the market, combined with their remit (ie a cautious manager of manager is more likely to hold cash and fixed interest compared to a balanced manager of manager). When selecting a manager of manager, it is therefore essential to consider the expertise of the manager combined with their cost and the risk profile of the investment.

Should this possible delay be a concern to you, then we can consider a Discretionary Fund Manager (DFM). As noted in our ‘Service Charter’, we don’t tend to advocate this approach as to do so will require that you pay VAT, on top of all the other costs. However, the main advantage of a DFM is that they can act without your pre-approval and thereby move more swiftly. Not only will they select the assets of funds to be used (often by creating a series of portfolios) they will also make continuous adjustments to the holding based on their research and assumptions. DFM often have a wide remit which can be beneficial if drastic action is required. In some ways this approach is simpler as you are delegating full responsibility for the investment to the DFM. However, they usually require relatively large sums, you incur VAT, you are beholden to the DFM performance, and you may feel you have lost control of your investment.

The above strategies are all ‘Active’ in that a cost is incurred by you for somebody to manage the stock selection for you. Those in favour of active argue that to grow a tree you should not simply plant your seed and hope for the best. Rather, you should continually monitor and assist in the growth.

For active management, you hope that the manager is skilled enough to able to provide a net return above market average. If you do not think this is possible, then you may prefer to adopt a more ‘Passive’ approach.

The main principle of passive investment is that you never know what is around the corner. So, you should hold all assets as cheaply as possible and avoid trying to pick the winners. In this way you may always have the loser, but you may also always have the winner. Ultimately, passive investment relies on the assumption that markets tend to increase in value in the long run (and companies may provide an income in the meantime via dividends).

A passive investor simply holds assets across a spectrum of classes, rarely buying or selling out (until maturity). Passive investors hold for the long term, with the notion that it may be more efficient than regularly trading. The aim of this is to reduce the associated costs of management and trading (for example stockbroker and stamp duty).

For example, most UK fund managers usually restrict themselves to large companies (as small companies may be hard to sell). As such, most UK fund managers hold a significant proportion of the FTSE 100 (the largest 100 registered companies in the UK). It is possible that the returns of a UK fund manager are driven more by what happens in the UK market rather than the managers skills sets. A passive investor therefore will argue that the cost of managing in this way is not money well spent.

In order to reduce management costs, passive investors who want to invest in the UK could instead buy a FTSE 100 tracker which tracks the FTSE 100 (rather than tries to outperform it) and thereby reduce the management cost. This strategy could also reduce the transactional costs as a passive investor would simply hold the asset for the duration. However, such an investment would be reliant on the return of the FTSE 100 as nobody is employed to manage the situation. A passive investor must therefore accept the volatility of the asset purchased.

This may restrict the options available to you and could therefore increase the risk and costs you incur. However, it is becoming more popular for people to invest in an ethical manner as there is a belief that companies are more likely to act more ethically if they are financially rewarded for doing so.

It is usually possible to adopt an ethical stance with either an active or a passive stance, or a blend of each. There are different ways that an investment may be considered ethical though, ranging from their effect on the environment to lack of discrimination. Some managers are ‘positive’ in that they only invest in companies that are good for the environment and some managers are ‘negative’ in that they won’t invest in companies that are bad for the environment.

Whichever strategy you adopt, we recommend that we regularly meet to discuss any changes that we may feel are appropriate. This could be a result of changes in the market, changes in your circumstances, changes in fund management performance or even because a leading fund manager has left the selected fund. Whatever reason for the change, we will be unable to action a transaction without your authority. This is positive in that you will retain control, but it can lead to a delay on the advice we offer (if for example you do not quickly confirm agreement).