Preparing for a secure financial future
March 24th, 2010 | Financial Planning News
Since the global financial crisis many investors have turned their interests from risky share market investments to instead preserving their capital. This preservation is of particular importance to savers approaching retirement and current retirees, due to the fact that they have less time to make up any losses.
Some of the following options may help you to protect your hard earned money.
Leaving capital in cash is one of the simplest ways to protect it. Given the current situation of low cash rates this may not seem like the best idea, however banks see cash as a stable source of funds and therefore pay well for customer deposits and are offering high rates to attract customers’ cash.
For peace of mind and slightly higher rates or return you could opt for a high-quality fixed income option.
Bonds usually generate a higher rate of interest than cash because the investor takes a risk that the borrower will repay the principal. For this reason investors ought to be cautious of the types of bonds they choose to invest in. For example a government agency will have a much higher probability that the principal will be completely repaid when compared to a small third-tier company.
It is important to always limit your losses. A stop-loss order or mechanism can be used to limit potential losses for investors. If the shares fall below a pre-determined price, e.g. 10 per cent below the price paid for the stock, the broker will automatically sell these shares. It is important to keep in mind though, that orders cannot be guaranteed. For instance if the share price drops rapidly through the limits and trigger prices, the stop-loss limit order may not be executed.
These investment products offer capital guarantees, however the products are often equity linked and subsequently can have large price tags. When the market rises the investor will benefit from capital growth. Providing protection against falls in the equity market is costly, due to their volatility.
Although most products have similar features, the mechanism that provides them can differ. Products can guarantee the return of all, or a percentage, of an investor’s capital on a fixed date. The return is linked to an index or a managed fund which is usually equities based.
If worse comes to worse, the investor can leave the product, retaining the entire principal minus withdrawals, but not have gained any capital growth.
Capital Protected Loans
To preserve your money you may choose capital-protected loans, they allow savers to take out a loan up to 100 per cent of the share portfolio value.
In this case you will never owe more than the amount of capital originally borrowed even if the shares are worth less than the loan when it matures. The investor is able to return the shares to the lender as complete repayment of the loan and walk away having only lost the interest costs.
However, if the value of the loan rises the investor is able to keep the difference between the loan and the portfolio value. They are also entitled to keep any dividends received during the loan period.
The interest rate for capital-protected loans can be double or more the standard margin loan interest rate and are not entirely tax deductible. So whilst the benefits can be great, you should consider if this product is suitable for your situation.
Annuities provide a regular income stream throughout a pre-determined period of time. Here a person invests in annuities which will generally pay a set monthly income over the period of the investor’s life or for a set number of years.
Inflation linked annuities are there to ensure the investor’s cash is not reduced by rises in consumer prices, instead the person invests directly into a product to ensure a rate of return. There are also annuities with exposure to the equity market.
Lifetime annuities don’t have longevity risk. They provide a guaranteed income for the entirety of a retiree’s life as opposed to an allocated pension where people may live longer than expected and run out of money before their lifetime is up. However, if a retiree dies early, his or her money belongs with the life company.
Put options are similar to buying insurance for your portfolio. The downsides however are that, there is lots of paper work involved and fresh policies will need to be constantly taken out because options expire.
Time is a great element when it comes to investing. If the investor has a good quality, well diversified portfolio the damage caused by falls in financial markets should be limited. If the investor understands that investing is a long-term game the portfolio should work to their advantage.
Here at The Quinn Group our experienced team of Financial Planners, Accountants and Lawyers can provide you with the total solution and assist you with all your financial planning needs. For advice about preserving and increasing your capital and to get the best chance at the lifestyle you want, contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.