From the largest drop in 30 years at the onset of the coronavirus pandemic to the recent effects of Russia’s invasion of Ukraine, short-term volatility has affected the stock market a great deal of late.

Yet, with inflation rising and savings rates low, investment is an increasingly attractive option compared to the potential for a real-terms drop in the value of cash savings.

Keep reading for everything you need to know about why your clients might consider investment, why diversification and asset allocation are key, and what the “right” allocation might be for the investments they hold.

Investments offer your clients the potential for inflation-beating returns – with risks attached

The impact of inflation

The Office for National Statistics (ONS) recently confirmed that the Consumer Price Index (CPI) for February 2022 stood at 6.2%. It is expected to peak at 7.4% in spring and only return to the Bank of England’s (BoE) target of 2% sometime in 2024.

With the cost of living rising, potentially plunging 1.3 million Brits into poverty, clients with a long-term goal to focus on might find that investment is the answer.

A risk-managed portfolio has the potential to keep pace with, or even beat inflation, with the added risk that its fund value can fall as well as rise. With high inflation and interest rates low, the biggest risk your clients could be exposed to is not taking enough risk.

Understanding attitude to risk and capacity for loss

Short-term volatility in the markets is the reason why investments should only ever be entered into with a long-term goal in mind. A goal at least five years in the future allows time for a fund to recover from dips, allowing your clients to focus on the long term.

As well as a definite goal, your clients will need to understand their attitude to risk and their capacity for loss. At Boolers, we can help them understand both.

Diversification

Diversification is the way that investments within a portfolio are split between asset classes, sectors, and geographical regions. Each choice will come with its own level of risk attached, but diversification is designed to spread that risk.

While a rise across all allocations is to be hoped for, diversification means that should a drop occur in one sector, region, or class, it can be offset by a potential rise elsewhere.

The importance of the “right” asset allocation in your clients’ investments

Stocks and Shares ISAs

One tax-efficient way for your clients to invest is through a Stocks and Shares ISA.

Investment returns are usually subject to Capital Gains Tax (CGT) at 10% for basic-rate taxpayers and 20% for those on the higher rate of tax. Gains made in a Stocks and Shares ISA, however, are free of both Income Tax and CGT.

There is a limit on the amount that can be invested in an ISA each year, which stands at £20,000 for the 2022/23 tax year.

For clients with more than £20,000 to invest, deciding what funds to place inside and outside of the ISA wrapper can be difficult, but could make a huge difference to potential returns.

A higher-rate taxpayer with a diversified portfolio of low-risk government bonds and higher-risk shares, for example, could save thousands of pounds through tax-efficient asset allocation alone.

Asset allocation: Bonds versus shares

Bonds are generally lower risk than shares and so a crucial part of your client’s portfolio, but recent figures published in the Telegraph suggest they might be best kept outside of an ISA wrapper, and in a general investment account.

The analysis looked at the tax payable on holdings of shares and bonds split equally between an ISA and a general investment account, compared to holding all shares within the ISA and all bonds outside. The report concluded that the tax saving on a £40,000 investment over 10 years could be more than £2,000 if the latter allocation were adopted.

Note: This assumes a 3% return from bonds and 9% from stocks for an additional-rate taxpayer, paying a 45% tax on income, 38.1% on dividends, and 20% CGT.

This strategy clearly wouldn’t be right for everyone but the importance of asset allocation – holding investments in the “right” place for each individual to reduce tax and potentially increase returns – is clear, and it’s something that we can help your clients with.

While bonds are often a safe choice for long-term pension investment, for example, individual attitudes to risk might favour bonds within the ISA wrapper.

Asset allocation will depend on an individual’s goals, the term of the investment, and their overall risk strategy, and we can take all this into account. We’ll then review your clients’ investments regularly to ensure it is still on track.

Get in touch

Investing can seem daunting for first-timers and doing so tax-efficiently can be complicated even for seasoned investors.

At Boolers, our decades of experience mean that we can assess the risk profile and capacity for loss of your clients, helping them to build an investment portfolio aligned to their goals.

If you have clients who would benefit from investment advice, please get in touch. Email enquiries@boolers.co.uk or call 0116 240 7070.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.