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Investments

How To Diversify Your Portfolio

How To Diversify Your Portfolio

“As in most subjects relating to money management, there’s a wide diversity of opinion on portfolio concentration versus diversification” – Whitney Tilson

3 min read

How To Diversify Your Portfolio

“As in most subjects relating to money management, there’s a wide diversity of opinion on portfolio concentration versus diversification.” – Whitney Tilson

3 min read

You will often hear that diversifying your investments is a crucial strategy to mitigate risk(s).

What you will find less often is exactly how to do this.

Read on to find out how you can diversify your portfolio, considerations you need to make, and what to look for as you continue, or begin, your investment journey.

What is Diversification?

First of all, it is important to know just what diversification involves.

In brief, it involves spreading your investments across various asset classes, sectors, and geographies, with the goal being to reduce exposure to any single investment, thereby minimising the impact of poor performance in one area on your overall portfolio.

Using equities as an example, you would invest in more than just one single company.

Why Diversify?

The reason you may want to consider diversification is quite simple.

It aims to reduce risk, enhance returns, and achieve a good balance for stability in all market conditions.

Asset Classes

There are many asset classes, even beyond what you will see below.

However, the first step in diversification is understanding the main different asset classes. 

These include:

  • Equities
  • Bonds
  • Cash
  • Real Estate
  • Commodities

Equities represent ownership in a company, and bonds are loans to governments or corporations.

Cash includes savings accounts and money market funds.

Real estate investments are in property, and commodities invest in other physical assets like gold or oil.
How Do You Diversify?

There are many methods of diversification, including between sectors, geographies and within asset classes themselves.

Sector Diversification

Investing in various sectors would mean spreading risk between sectors such as technology, healthcare, energy. and consumer goods.

Each sector offers different advantages (and disadvantages) such as high growth but volatile, steady but less growth, etc.

Geographical Diversification

Geographical diversification does what it says on the tin; spreads risk between different countries and regions.

This can help with risk associated with economic and political instability.

Domestic investments include those within your country of residence.

International investments include exposure to global markets.

Diversifying Within Asset Classes

Diversifying within asset classes helps you differentiate between large-cap stocks, small-cap stocks, growth stocks, or value stocks.

Large-cap are generally established companies, small-cap are, you guessed it, smaller companies (but with high growth potential and more risk), growth stocks are those that are expected to grow faster than the market, and value stocks are companies trading below their intrinsic value.

Investment Funds

Investment funds like mutual funds and exchange-traded funds (ETFs) are excellent tools for diversification.

They pool money from many investors to buy a broad range of assets, providing instant diversification often at a very low cost.

How Much Diversification Is Too Much?

This question is an entirely new article in itself!

There are many debates over how much is too much, but one thing is for certain: it depends on your personal circumstances.

If you want to know the answer that is best for you, make sure to get in touch with us today and book your initial, no-cost and no-obligation meeting.

Your successful financial future awaits!

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Categories
Financial Planning

How Does Risk Change With Age?

How Does Risk Change With Age?

“Risk is how much can you lose and what are the chances of losing it” – Seth Klarman
 
3 min read
How Does Investing Risk Changes With Age

How Does Risk Change With Age?

“Risk is how much can you lose and what are the chances of losing it” – Seth Klarman

3 min read

Investing is a crucial part of financial planning, but the you take approach can vary significantly based on age.

However, it is not as easy as saying that younger investors can take more risk and older investors can take less risk. 

What is more prudent to consider is that younger and older investors have different risk tolerances and investment strategies due to their varying financial goals, time horizons, and life stages.

This could lead to older investors taking less risk than younger investors, but also younger investors taking less risk than older investors.

As with most things, there is no one-size-fits-all solution. Understanding the differences is key to crafting a suitable investment plan as, unfortunately, the answer to how much risk you should take is not quite so simple!

Risk Tolerance at a Younger Age

Younger investors, typically in their 20s and 30s, have a long investment horizon. This allows them to take on higher risks, as they have more time to recover from potential market downturns. The focus for younger investors is often on growth and accumulating wealth over the long term, though this is a generalisation and not true for everyone.

Due to an extended time horizon, younger investors can typically then afford to invest aggressively. They are more likely to allocate a larger portion of their portfolio to stocks, which, while volatile, offer higher potential returns.

This strategy aims to maximise growth during the early years of investing and can be seen as a comfortable way of investing when they have many years to recuperate any losses.

Risk Tolerance in Later in Life

Older investors, typically nearing or in retirement, naturally have a shorter time horizon. Their focus often shifts from accumulation to preservation of capital and generating income. This reduced time frame makes them less tolerant of high-risk investments, as they have less time to recover from potential losses.

However, this is again a generalisation and you could in fact have varying degrees of risk for different parts of your portfolio, subject to your needs.

To mitigate risk, older investors can adopt conservative investment strategies. This means that they allocate a larger portion of their portfolio to bonds, cash, and other fixed-income securities. These assets provide stability and predictable income, essential for funding retirement expenses. Please note, no investment is without risk and you could withdraw less than you invested.

Balancing Risk and Reward

Regardless of age, diversification remains a fundamental principle of investing. You can diversify to spread risk across various high-growth assets, or diversify to protect your portfolio from market volatility and preserve capital.

As investors age, it’s common to gradually shift their portfolio from aggressive to conservative. This strategy, known as “life-styling,” adjusts the asset allocation to reduce risk as the investor approaches retirement. This ensures that the portfolio is aligned with changing financial goals and risk tolerance.

The Importance of Personalised Financial Advice

It is easy to think “I am older now, I should reduce my risk tolerance” or “I am young and should take as much risk as I can.”

Well, individual circumstances differ and the above statements are not necessarily true.

Things such as financial goals, income needs, and personal risk tolerance should always guide investment decisions, no matter your age.

Whilst online resources can only take you so far, talking to a Patterson Mills Financial Planner can help you discover where on the risk scale you fit, regardless of age.

In fact, if you are young but plan to buy a house within 3- to 5-years, you may wish to consider a lower risk profile.

If you are older and envisage your portfolio lasting 20- to 30-years, you could consider a higher risk profile.

No matter your age, if you have financial goals you wish to meet sooner in life, and those you wish to meet later in life, you could take a proportion of your portfolio and invest in lower risk assets for those you wish to meet sooner, and could potentially afford to take higher risk for those you wish to meet later in life.

As you can see, one thing is clear; you need a tailored investment strategy that considers these unique factors, and Patterson Mills is here to give you just that.

The Best Way To Formulate Your Investment Strategy

In reality, you cannot paint any age group with the same brush.

If you are older, do not think you have to take less risk and, if you are younger, do not think you have to take high risk.

It all depends on your personal circumstances, risk tolerance, capacity for loss, financial goals, time horizon, and more!

So, look no further as your helping hand is just one e-mail or phone call away.

Get in touch with us today and book your initial, no-cost and no-obligation meeting.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Categories
Investments

How Does Monetary Policy Impact You?

How Does Monetary Policy Impact You?

“Fiscal policy, monetary policy, they need to work together to try and raise the level of growth” – Joe Hockey

3 min read
Monetary Policy

How Does Monetary Policy Impact You?

“Fiscal policy, monetary policy, they need to work together to try and raise the level of growth” – Joe Hockey
 
3 min read

Monetary policy refers to the actions undertaken by a country’s central bank to control the money supply, manage interest rates, and achieve macroeconomic goals such as controlling inflation, consumption, growth, and liquidity.

Central banks, such as the Swiss National Bank (SNB) or Bank of England (BoE), use tools like interest rate adjustments, open market operations, and reserve requirements to influence the economy.

However, once you’ve got through all of the theory, terminology and over-complexities, how does monetary policy really impact your day-to-day life? Read below to find out!

Monetary Policy Explained

In its simplest form, monetary policy is all about using various tools to stabilise prices, improve economic stability and promote sustainable growth.
 
The objectives of monetary policy are to control inflation, ensure stable economic growth, and maintain low unemployment. 
 
Central banks use various tools, including interest rate adjustments, open market operations, and changes in reserve requirements, to influence the availability and cost of money in the economy. 
 
By doing so, they aim to stabilise prices, create economic stability, and promote sustainable growth, which is exactly what monetary policy is all about!
 
Understanding monetary policy helps you, as an individual, and businesses anticipate changes in borrowing costs, savings returns, and overall economic conditions.

The Impact of Monetary Policy

Monetary policy has several impacts.

Lowering interest rates can stimulate economic growth by making borrowing cheaper, encouraging spending and investment.

Conversely, raising interest rates can ‘cool’ an ‘overheating’ economy and control inflation by making borrowing more expensive. 

As well as the above, monetary policy can affect exchange rates; lower interest rates may weaken a currency, making exports cheaper and imports more expensive.

Monetary policy also influences employment levels. Expansionary policies can reduce unemployment by boosting economic activity, while contractionary policies may increase unemployment if they slow down the economy too much.

The central bank’s decisions can significantly shape overall economic confidence and financial market stability.

The Pros & Cons

Now onto the pros and cons, starting with the pros.

One major advantage of monetary policy is its ability to quickly influence the economy.

Central banks can swiftly implement changes to interest rates or engage in open market operations to address economic issues. This flexibility allows for timely responses to economic shocks or downturns.

Monetary policy can also be a powerful tool for controlling inflation. By adjusting interest rates, central banks can manage demand and keep inflation within target ranges.

Effective monetary policy can cause stable economic growth, contributing to long-term prosperity and financial stability.

However, despite its benefits, monetary policy has limitations.

It may not be effective in addressing supply-side economic issues, such as productivity constraints or structural unemployment.

Furthermore, in periods of very low interest rates, the central bank’s ability to stimulate the economy can be limited, a situation known as a liquidity trap.

Monetary policy can also lead to unintended consequences. For example, keeping interest rates too low for too long can create asset bubbles, which can burst and lead to economic instability.

Moreover, rapid changes in monetary policy can cause uncertainty and volatility in financial markets, potentially harming economic growth.

Difference Between Monetary Policy & Fiscal Policy

Fiscal and monetary policies are both tools used by governments and central banks to influence a country’s economy, but they operate in different ways and are managed by different entities.

You can view last week’s article on Fiscal Policy by clicking here.

However, the key differences are:

  • Control: Fiscal policy is under the control of the government, while monetary policy is managed by the central bank.
  • Methods: Fiscal policy uses taxation and spending, whereas monetary policy uses interest rates and money supply management.
  • Direct vs Indirect Impact: Fiscal policy can have a direct impact on public services and individual finances, while monetary policy typically works through the financial system to influence the economy indirectly.

How Does Monetary Policy Impact YOU

The key way monetary policy directly affects you is through changes in interest rates. 

Lower interest rates mean cheaper loans and mortgages, which can boost spending and investment. However, they also result in lower returns on savings, which can impact retirees and savers. In addition, the opposite is true with higher interest rates!

Inflation control is another critical aspect. Effective monetary policy keeps inflation in check which preserves the purchasing power of your money. Conversely, poor monetary policy can lead to high inflation, eroding savings and increasing living costs.

Monetary policy can also influence job opportunities and wages. Expansionary policies can lead to more job creation and potentially higher wages, while contractionary policies might have the opposite effect, impacting overall economic wellbeing.

Managing Your Own Monetary Policy

Whilst you may be unable to influence central bank decisions, you can influence your own financial decisions.

Knowing where to start is key, and having a Patterson Mills Adviser provides you with this key to a brighter financial future.

Get in touch with us today and book your initial, no-cost and no-obligation meeting.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Categories
Investments

How Does Fiscal Policy Impact You?

How Does Fiscal Policy Impact You?

“Fiscal policy, monetary policy, they need to work together to try and raise the level of growth” – Joe Hockey

3 min read
Fiscal Policy: How Does It Impact You

How Does Fiscal Policy Impact You?

“Fiscal policy, monetary policy, they need to work together to try and raise the level of growth” – Joe Hockey
 
3 min read

Fiscal policy, a critical component of economic management, involves the government’s use of spending and taxation to influence economic conditions.

Whilst fiscal policy is a tool utilised by governments, it is important to understand what it is, the pros and cons, and, importantly, how it impacts you.

Those are exactly what you will find out below, so read on!

Fiscal Policy Explained

In its simplest form, fiscal policy refers to the use of government spending and taxation to influence a country’s economy.

It’s a key tool for managing economic performance, aiming to achieve sustainable growth, high employment, and stable prices.

The government adjusts its levels of expenditure and tax rates to monitor and influence a nation’s economy. This approach contrasts with monetary policy, which involves the central bank’s management of interest rates and money supply, and which will have its own article!

The Impact of Fiscal Policy

Fiscal policy’s influence extends beyond immediate economic metrics.

For instance, increased government spending on infrastructure projects not only boosts short-term employment but also enhances long-term productivity by improving transportation and communication networks. This can make a country more attractive to investors, creating sustainable economic growth.

Conversely, tax hikes can dampen consumer spending and business investment, potentially leading to a slowdown in economic activity and affecting the stock market.

Furthermore, fiscal policy decisions can have significant social impacts. Government spending on items such as healthcare, education, and social security can improve quality of life and reduce income inequality. 

However, these benefits must be balanced against the risks of increasing public debt. High levels of debt can limit future fiscal flexibility and may lead to higher taxes or reduced spending on essential services, impacting economic stability and growth prospects. 

The interplay between fiscal policy and social outcomes underscores the complexity of crafting policies that balance short-term economic needs with long-term sustainability.

It can certainly be a complex area through which to navigate, and if you are interested in learning more we encourage you to get in touch with Patterson Mills.

The Pros & Cons

One significant advantage of fiscal policy is its ability to target specific sectors or groups within the economy. For example, during a recession, the government can increase spending on infrastructure projects, directly creating jobs and stimulating demand.

Fiscal policy can also provide immediate relief to the economy through tax cuts or increased public spending and the government to address income inequality by adjusting tax rates and providing social benefits.

Despite its benefits, fiscal policy has several drawbacks. One major issue is the time lag between the implementation of policy changes and their effects on the economy. This delay can make it challenging to time interventions effectively. Additionally, excessive government spending can lead to large budget deficits and increased national debt, which may have long-term negative effects on the economy. Political considerations can also influence fiscal policy, sometimes leading to suboptimal economic decisions driven by electoral cycles rather than economic needs.

How Does Fiscal Policy Impact YOU

Essentially, fiscal policy directly affects you through any changes in taxation and government spending.

Tax cuts increase your disposable income whilst tax increases decrease your disposable income.

Government spending on public services, infrastructure and social programs can improve your quality of life and economic opportunities.

It also extends to your employment prospects and wage growth. When the government implements expansionary fiscal policy (increasing spending or cutting taxes), businesses often experience higher demand for their products or services which can lead to job creation and potentially higher wages.

On the other hand, contractionary fiscal policy can result in the opposite.

Finally, fiscal policy influences the broader economic environment in which you make financial decisions. For example, government investments in education and training programs can enhance your skills and employability, opening up new career opportunities and potentially higher earnings. Infrastructure projects funded by government spending can reduce commuting times and improve access to markets and services, indirectly benefiting your personal and professional life.

However, fiscal mismanagement, leading to high inflation or debt crises, can erode your savings and reduce the purchasing power of your income, highlighting how important fiscal policy is for you and other individuals.

Managing Your Own Fiscal Policy

Whilst you may be unable to influence government decisions outside of the voting booth, you can influence your own spending and, importantly, how you build wealth.

Investing is a great way to start, and for the best possible chance of success, having a Patterson Mills Adviser is paramount.

Get in touch with us today and book your initial, no-cost and no-obligation meeting.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Categories
Financial Planning

What Is An Annuity And Should You Have One?

What Is An Annuity And Should You Have One?

“Here’s the bottom line about annuities; they’re confidence products” – Stan Haithcock
 
4 min read
Annuity - Annuities - Should You Have One?

What Is An Annuity And Should You Have One?

“Here’s the bottom line about annuities; they’re confidence products” – Stan Haithcock
 
4 min read

Annuities are designed to provide a steady income stream, typically for retirees.

They are insurance contracts where you pay a lump sum or series of payments in exchange for periodic disbursements in the future. Annuities can be a valuable component of a retirement plan, but they also come with complexities and considerations.

Below, you will found out what annuities are, how they work, the different types, their pros and cons, and whether you should consider having one. So, read on!

Understanding Annuities

An annuity is a contract between you and an insurance company.

In its simplest form, you make an investment in the annuity, and in return, the insurer promises to make periodic payments to you, either immediately or at some point in the future.

Types of Annuities

There are several types of annuities, each with unique features:

  1. Fixed Annuities: These provide regular, guaranteed payments. They are considered low-risk because the insurer bears the investment risk.
  2. Variable Annuities: Payments vary based on the performance of investments chosen by the annuitant. These offer higher potential returns but also come with more risk.
  3. Indexed Annuities: Payments are linked to a stock market index. They offer a middle ground between fixed and variable annuities, providing some potential for higher returns while limiting risk.
  4. Immediate Annuities: Payments start almost immediately after a lump-sum investment. They are useful for those needing income right away.
  5. Deferred Annuities: Payments begin at a future date, allowing the investment to grow tax-deferred in the interim.

How Do They Work?

When you purchase an annuity, you either make a single lump-sum payment or a series of payments over time. The insurance company then invests your money and guarantees to provide you with periodic payments for a specified period or for the rest of your life.

  • Accumulation Phase: During this phase, you pay into the annuity, and the funds grow tax-deferred.
  • Distribution Phase: In this phase, the insurer starts making payments to you according to the terms of the annuity contract.

The Benefits

Annuities offer several advantages, making them an attractive option for certain people. Here are a few of them:

  1. Guaranteed Income: One of the most significant benefits is the assurance of a steady income stream, which can provide financial security in retirement.
  2. Tax Deferral: Annuities allow your investments to grow tax-deferred, meaning you won’t pay taxes on the earnings until you start receiving payments.
  3. Customisable Payment Options: Annuities offer flexibility in how payments are structured, such as for a fixed period or for life.
  4. Death Benefit: Some annuities include a death benefit, which pays out to your beneficiaries if you pass away before the annuity is fully paid out.

The Drawbacks

Despite their benefits, annuities are not for everyone and do come with several disadvantages. Here are a few of them:

  1. High Fees: Annuities often come with various fees, including administrative fees, investment management fees, and surrender charges if you withdraw funds early.
  2. Complexity: The terms and conditions of annuity contracts can be complex and difficult to understand.
  3. Limited Liquidity: Once you invest in an annuity, your money is typically locked up for a period, limiting access to your funds. In addition, should the company paying you find themselves in severe financial difficulty, your income may cease.
  4. Potential for Lower Returns: Compared to other investment options, some annuities may offer lower returns, especially after accounting for fees and inflation. This means that you would be able to pay yourself more or earn higher returns if you were to retain your fund.

Who Should Consider an Annuity

In short, annuities are suitable for those who are looking for a ‘guaranteed’ income and like the security that comes with it. Provided all goes well with the insurer, it can be comforting to know exactly what you will receive and when you will receive it.

You also have the option to only use a certain portion of funds to buy an annuity, whilst retaining access to the rest aimed at higher returns and performance.

How To Choose The Right Annuity

Selecting the right annuity involves careful consideration of your financial situation, goals, risk tolerance and more.

The top 3 things you can do to ensure you are making the right decision are:

  1. Assess Your Needs: Determine how much income you need in retirement and whether an annuity can meet that need.
  2. Research Different Annuities: Compare the features, benefits, and costs of different types of annuities.
  3. Consult With Your Patterson Mills Financial Adviser: Our professional Advisers can help you navigate the complexities of annuities and choose the best option for your situation.

So, Is An Annuity Right For You?

Annuities can be a valuable tool for securing a reliable income in retirement, but they come with complexities and costs that must be carefully considered.

There are a myriad of options that go beyond the basics provided in this article, and this can be overwhelming for some. By planning early, doing your research, and consulting with Patterson Mills, you can make an informed decision about whether an annuity is right for you.

We are here to help you navigate the complexities of annuities and tailor the right strategy that meets your needs, whether that involves buying an annuity, or not!

Get in touch with us today and book your initial, no-cost and no-obligation meeting to learn more about how we can assist you in securing your financial future.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Categories
Investments

All About Private Equity

All About Private Equity

“The role of private equity as fiduciaries is certainly to make money” ― Thomas G. Stemberg
 
3 min read
Private Equity

All About Private Equity

“The role of private equity as fiduciaries is certainly to make money” ― Thomas G. Stemberg

3 min read

Private equity firms are influential players in the financial world, specialising in investments in established companies with the aim of driving growth, improving operational efficiency, and generating significant returns for investors. Essentially, buying a proportion or entirety of a company with the aim of making it profitable and selling. 

In this article, you will find out all you need to know about private equity firms and how they may impact your returns.

Their Core Functions

Private equity firms primarily focus on acquiring ownership stakes in established companies through various investment strategies, including leveraged buyouts (LBOs), management buyouts (MBOs), and growth equity investments.

These firms typically seek controlling or significant minority stakes in their portfolio companies, allowing them to exert influence over strategic decisions and operational matters.

Private equity firms provide financing to companies at different stages of their lifecycle, from mature enterprises seeking expansion capital to underperforming businesses in need of restructuring. By deploying capital and expertise, private equity firms aim to enhance the value of their portfolio companies, drive operational improvements, and ultimately deliver attractive returns to their investors.

How Do They Invest?

Private equity firms employ various investment strategies tailored to the specific characteristics of their target companies and investment objectives.

Put simply, they invest using many strategies!

Leveraged buyouts (LBOs) involve acquiring companies using a significant amount of debt financing, with the aim of restructuring operations, reducing costs, and improving profitability.

Management buyouts (MBOs) entail the purchase of a company by its existing management team, often in partnership with a private equity firm, to facilitate a change in ownership and drive growth.

In addition, private equity firms may pursue growth equity investments, which involve providing capital to companies with proven business models and scalable operations, aiming to accelerate growth and expansion. These investments typically target companies in high-growth sectors such as technology, healthcare, and consumer goods, offering the potential for substantial returns over the long term.

Risks and Rewards

Whilst their investments offer the potential for attractive returns, they do come with inherent risks, including execution risk, market volatility, and economic uncertainties.

Leveraged buyouts, in particular, involve significant levels of debt, exposing investors to financial leverage and interest rate risk.

Additionally, private equity investments are illiquid in nature, with capital typically locked up for several years, requiring investors to have a long-term investment horizon and tolerance for illiquidity.

However, successful private equity investments can deliver substantial rewards, including capital appreciation, dividend income, and potential tax benefits.

By actively managing their portfolio companies, implementing operational improvements, and driving strategic initiatives, private equity firms aim to maximise value creation and generate superior returns for their investors over the investment lifecycle.

Is Private Equity Right For You?

Determining whether private equity aligns with your investment goals, risk tolerance, and financial circumstances requires careful consideration and due diligence.

While private equity investments offer the potential for attractive returns and diversification benefits, they also entail inherent risks and illiquidity.

Fear not!

Patterson Mills is here to assist you in assessing your investment horizon, liquidity needs, and comfort level with risk before committing capital to private equity funds or direct investments.

Remember, you are not alone.

Get in touch with us today and book your initial, no-cost and no-obligation meeting.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Categories
Financial Planning

Holding Foreign Currencies To Get a Higher Interest Rate: Should You Do It?

Holding Foreign Currencies To Get a Higher Interest Rate: Should You Do It?

“Volatility gets you in the gut. There’s no question that when prices are jumping around, you feel different from when they’re stable” ― Peter Bernstein
 

4 min read

Higher Interest Rates - Foreign Currency Accounts - Exchange Rates - Should You Do It?

Holding Foreign Currencies To Get a Higher Interest Rate: Should You Do It?

“Volatility gets you in the gut. There’s no question that when prices are jumping around, you feel different from when they’re stable” ― Peter Bernstein

4 min read

We all want to get the most out of our money, especially when it comes to earning interest on our cash.

Sometimes, it may seem like the grass is greener on the other side, with foreign currency accounts offering higher interest rates than what is available in your home currency.

But is it really as good as it sounds?

It may seem obvious to gravitate towards the higher interest rates and receive more money each year. However, there may be more risks involved than you think.

Today, we are going to explore the ins and outs of foreign currency interest rates, and weigh the benefits and risks to help you make informed decisions about whether a foreign currency interest rate is right for you, or not.

Is Holding Cash in Foreign Currencies a Good Idea?

Opening an account in a foreign currency to capitalise on higher interest rates may seem appealing at first glance, especially if the rates offered are significantly higher than those available domestically.

However, whilst higher interest rates may enhance the potential returns on your cash, at least in terms of the actual figures you will see on your statement, they also come with increased currency risk.

Exchange rate fluctuations can significantly impact the overall return you receive, and could actually cause you to experience a reduction in purchasing power (i.e. lose money!).

Put simply, when placing funds in a currency other than the one in which you intend to spend the funds, you are making a bet that the foreign currency you choose will not lose value against your domestic currency by the difference of the increased interest rate you will receive.

Currency exchange costs, foreign transaction fees, and regulatory differences can all affect the net return, too. Moreover, navigating the regulatory landscape and tax implications of foreign investments may require specialised knowledge or professional advice, adding to the overall complexity and potential costs associated with utilising foreign currency accounts.

So, is it a good idea to utilise foreign currency accounts to get a better interest rate? Ultimately, it depends.

It depends on whether you are willing to accept increased risk, what your investment objectives are, and the broader economic environment at the time.

Whatever your decision, you should definitely be aware of a theory known as ‘Interest Rate Parity’.

What is Interest Rate Parity?

Interest rate parity is a concept in finance that relates to the relationship between interest rates and exchange rates in different countries.

Essentially, it states that the difference in interest rates between two countries should equal the expected change in exchange rates between their currencies.

In other words, if one country offers higher interest rates than another, its currency should depreciate relative to the currency of the country with lower interest rates to maintain equilibrium.

What this is saying is that your purchasing power won’t benefit from a higher interest rate in a foreign currency.

This principle is based on the idea of arbitrage, where people seek to exploit differences in interest rates and exchange rates to make risk-free profits.

If interest rate parity did not hold, it would be possible to borrow in a currency with low-interest rates, convert it to a currency with higher interest rates, invest at the higher rate, and then convert the returns back to the original currency, profiting from the interest rate differential.

Interest rate parity helps prevent such opportunities for risk-free profit, ensuring that currency markets remain efficient and prices reflect all available information.

Whilst interest rate parity provides a useful framework for understanding the relationship between interest rates and exchange rates, it is not in itself a perfect predictor of currency movements.

Various factors, such as economic conditions, inflation expectations, geopolitical events, and central bank policies, can influence exchange rates independently of interest rate differentials.

However, interest rate parity remains an important concept to know as, frankly, it’s saying there is no such thing as a free lunch!

Are Exchange Rates Really That Important?

In short, yes!

The volatility of currency exchange is not to be ignored. This refers to the degree of fluctuations or variability in the exchange rates between different currencies.

Currency exchange rates are typically highly volatile, fluxuating all the time. 

Why? Well, the fluxuations are influenced by a myriad of factors, such as those mentioned for interest rates above, and present risks that you may not have considered.

Currency volatility adds an additional layer of uncertainty, so you may have thought you can get 2.00% interest for 1-year in your home country, and 5.00% for 1-year using foreign currencies and that’s great, right?

Well, if your domestic currency increases in value by 10% against that foreign currency, you actually have made a loss of 7.00% if you then convert it back into your home currency to spend.

The problem is, no matter what the past performance of a currency has been, the future is not known and the unexpected can happen!

Knowledge is Power, But What's The Answer?

There are two sides to every coin.

In this case, on the one side you make a loss from adverse currency fluctuations, and on the other side you make a profit from advantageous currency fluctuations.

If it goes your way, that would be great. The truth is, there is just no way of knowing.

This is why it is mentioned above that whether or not it is right for you really depends on your risk appetite, capacity for loss and personal circumstances.

Importantly, holding cash is investing, and this is even more true for those holding cash in a currency other than that in which those funds will be spent.

The key to success is that you need not make these important decisions alone.

Patterson Mills is here to guide you every step of the way and assist you in making the decision that is right for you and your financial future.

Get in touch with us today and book your initial, no-cost and no-obligation meeting.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Categories
Pensions

What to Do When You’re Behind on Your Retirement Savings

What to Do When You’re Behind on Your Retirement Savings

“It is never too early to encourage long-term savings” ― Ron Lewis

3 min read

Retirement Savings Shortfall: What to Do If You Are Behind

What to Do When You’re Behind on Your Retirement Savings

“It is never too early to encourage long-term savings” ― Ron Lewis

3 min read

Facing a retirement savings shortfall can be daunting, but it’s essential to tackle the issue head-on and take proactive steps to bolster your retirement savings.

Whether you’re nearing retirement age or still have several years left in the workplace, there are strategies you can implement to bridge the gap and secure a comfortable retirement.

Assess Your Current Financial Situation

Naturally, you need to know how far behind you may be!

This means the first step in addressing a retirement savings shortfall is to assess your current financial situation comprehensively.

Take stock of your retirement accounts, including pension plans such as the three Pillars (in Switzerland), your SIPPs or ISAs (in the UK), or 401(k)s or IRAs (in the US), and any other investment vehicles you may have.

Calculate your total savings balance and compare it to your retirement goals to determine the extent of the shortfall.

Additionally, evaluate your current expenses and budget to identify areas where you can cut costs and redirect funds towards retirement savings.

Great, you’ve completed the first step. Now what?

Read below to find out the steps you can take to increase your chances of enjoying a comfortable and enjoyable retirement!

Delaying Retirement

Delaying retirement can be a strategic move that involves extending your working years.

Essentially, this provides you more years to earn income, contribute to your retirement accounts and grow your investments.

Delaying retirement can also increase your State / Social benefits, too, as they are often calculated based upon your earnings history and the age at which you begin to receive them. For each year your State pension is deferred, you will likely find that the benefits you receive could increase by a certain percentage each year (up-to a maximum age set by the country in which you reside).

In parallel to having more years to earn income, you also reduce the number of years you will need to rely on your retirement savings! Thus, you have extra opportunities to pay off debts, such as mortgages or loans, and reinforce your financial situation.

However, whilst this may not be the ideal scenario for everyone, it can be a practical solution for those looking to boost their retirement savings over the long-term.

Additional Income Sources

Exploring additional income sources can be highly effective in bridging the gap caused by a retirement savings shortfall.

This could involve taking on part-time employment, freelancing, or starting a business you can do in addition to your full-time job to generate supplemental income.

By diversifying your income streams, you can increase your overall cash flow and allocate additional funds towards your retirement savings. This in turn can provide a sense of financial security and peace of mind, knowing that you have alternative avenues to support your retirement lifestyle.

Review Retirement Goals

When faced with a retirement savings shortfall, it’s crucial to reassess your retirement goals and expectations.

This involves carefully evaluating your desired retirement lifestyle, including factors such as travel plans, hobbies, healthcare needs, and living arrangements.

This method would include reducing the income you take and your planned expenditure (as listed above).

By undertaking this review, you can identify areas where adjustments may be necessary to align with your ‘financial reality’.

Downsizing or Relocating

Options like downsizing or relocating can be an integral part of alleviating financial strain.

Downsizing involves reducing the size or cost of your current living arrangements, whether by moving to a smaller home, selling excess possessions, or cutting down on unnecessary expenses in this area.

By downsizing, you can free up funds that can be redirected towards bolstering your retirement savings or covering essential expenses.

Relocating to a more affordable area is another strategy to consider as moving to a region with a lower cost of living can stretch your retirement savings further, allowing you to maintain a comfortable lifestyle without depleting your resources too quickly.

Researching potential relocation destinations and assessing factors such as housing affordability, healthcare access, and overall quality of life can help you make an informed decision about whether relocating is a viable solution for your retirement savings shortfall.

Talk to the Experts at Patterson Mills

Overall, it can be a scary thought when facing a retirement savings shortfall. However, with expert assistance from Patterson Mills, you can take the necessary steps to begin correcting your situation with ease.

Remember, we are here to help you navigate the complexities of retirement planning and develop a tailored strategy to achieve your retirement goals.

Get in touch with us today and book your initial, no-cost and no-obligation meeting.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Categories
Investments

OEICs and SICAVs: Exploring Investment Fund Structures

OEICs and SICAVs: Exploring Investment Fund Structures

“Invest for the long haul. Don’t get too greedy and don’t get too scared” ― Shelby M.C. Davis

4 min read

OIECs / SICAVs Structure of Investment Funds

OEICs and SICAVs: Exploring Investment Fund Structures

“Invest for the long haul. Don’t get too greedy and don’t get too scared” ― Shelby M.C. Davis

4 min read

The vast amount of differing fund structures available when you are looking to invest can be daunting. One such structure that you will likely see is the ‘Open-Ended Investment Company’ (OEIC), also known as the ‘Société d’Investissement à Capital Variable’ (SICAV) in some jurisdictions.

Unlike traditional mutual funds, which are common in the United States, OEICs and SICAVs are prevalent in Europe and other regions. 

OEICs and SICAVs offer several advantages over other investment vehicles. Their open-ended nature allows investors to buy and sell shares at the prevailing Net Asset Value (NAV) per share, ensuring liquidity and transparency. Additionally, these structures provide access to a wide range of asset classes and investment strategies, catering to various risk appetites and investment goals. As global financial markets continue to evolve, OEICs and SICAVs remain popular choices for those seeking exposure to international markets and professional fund management expertise.

Keen to know more? You are in the right place!

What is an OEIC (or SICAV) Investment Fund Structure?

An OEIC (or SICAV) is a collective investment scheme that pools money from multiple investors to invest in a diversified portfolio of assets. Unlike closed-end funds, which have a fixed number of shares traded on exchanges, OEICs and SICAVs are open-ended, meaning they issue and redeem shares based on demand.

This structure allows you to buy and sell shares at the fund’s Net Asset Value (NAV) per share, which is calculated daily based on the value of the fund’s underlying assets.

Key Features of OEICs and SICAVs

  1. Diversification: OEICs and SICAVs offer access to a wide range of assets, including stocks, bonds, and other securities, providing diversification benefits to mitigate risk.
  2. Liquidity: Buying and selling shares in OEICs and SICAVs on a daily basis provides liquidity and flexibility when managing investment portfolios.
  3. Professional Management: These investment funds are typically managed by professional fund managers who make investment decisions based on the fund’s objectives and investment strategy.
  4. Regulation: OEICs and SICAVs are subject to regulatory oversight by financial authorities in their respective jurisdictions, which helps add a level of protection and transparency.
  5. Tax Efficiency: OEICs and SICAVs often benefit from tax-efficient structures, which can result in lower tax liabilities compared to direct investment in securities.
  6. Investor Protection: Both OEICs and SICAVs are regulated investment structures, offering protection through compliance with regulatory requirements and standards.
  7. Global Access: OEICs and SICAVs provide access to a diverse range of international markets and asset classes, allowing for global investment opportunities and portfolio diversification.

Net Asset Value (NAV) Explained

So, you can trade assets at the fund’s “Net Asset Value”, but what does this mean?

Well, Net Asset Value (NAV) per share, is a measure used to determine the value of each share in a mutual fund, exchange-traded fund (ETF), or other investment vehicle. It is calculated by dividing the total net asset value of the fund by the number of shares outstanding.

The net asset value (NAV) of a fund represents the total value of all the fund’s assets, including cash, securities, and other investments, minus any liabilities such as expenses or debts. By dividing this total value by the number of shares outstanding, the NAV per share reflects the value that each individual share represents.

NAV per share is typically calculated at the end of each trading day or at regular intervals determined by the fund’s management. Investors use NAV per share as a reference point to determine the fair market value of their investment and to track the performance of the fund over time. It is important to note that NAV per share can fluctuate based on changes in the value of the fund’s underlying assets and liabilities.

Let’s say the fund has the following assets and liabilities:

Total value of assets (stocks, bonds, cash, etc.): 10’000’000

Total value of liabilities (expenses, debts, etc.): 1’000’000

Number of shares outstanding: 500’000

To calculate the NAV per share, you would follow these steps:

  1. Subtract the total liabilities from the total assets to determine the net asset value (NAV) of the fund: NAV = Total assets – Total liabilities = 10’000’000 – 1’000’000 = 9,000,000

  2. Divide the NAV by the number of shares outstanding to find the NAV per share: NAV per share = NAV / Number of shares outstanding = 9’000’000 / 500’000 = 18

What Now?

Overall, understanding the structure and mechanics of OEICs and SICAVs is an important step for those looking to diversify their portfolios.

So, what now? Patterson Mills specialise in navigating the complexities of investment funds like OEICs and SICAVs. 

With our expertise and experience, we can help you make the investment choices that give you the best possible chance of success. Don’t wait any longer to optimise your investment strategy – get in touch with us and book your initial, no-cost and no-obligation meeting.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Categories
Opinion

The Impact of Artificial Intelligence (AI) on Finance

The Impact of Artificial Intelligence (AI) on Finance

“Technology, through automation and artificial intelligence, is definitely one of the most disruptive sources” ― Alain Dehaze

3 min read

Artificial Intelligence (AI)

The Impact of Artificial Intelligence (AI) on Finance

“Mutual funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks” ― Alain Dehaze

3 min read

Artificial intelligence (AI) is reshaping how people see and interact with the world, and the Finance industry is no exception to this.

Already, we are witnessing new ways of writing about financial markets and ways of streamlining data analysis processes on a massive scale in just the blink of an eye. With its ability to process such vast amounts of data at such high speeds, whilst also then having the ability to make complex decisions, AI is transforming various aspects of finance, from investment management to risk assessment and customer service.

How is AI doing this? Find out below!

The Impacts on Investment Management

When we look at impacts on investment management, we can see that artificial intelligence (AI) is changing how analytics are used to identify patterns, forecast market trends, and refine investment strategies. These AI algorithms are able to formulate data-driven patterns and correlations that human analysts may overlook.

This could lead to fund managers and investment analysts making better informed decisions, leading to enhanced portfolio performance. However, whilst AI processes are very useful in such cases, it is important to retain a human element as relying on AI algorithms (or any algorithms for that matter) can come with issues that are often realised too late.

Such issues can include their predictive capabilities being manipulated or potentially producing the wrong answer that results in a negative return. Whilst not the norm, these potential risks should be recognised and protected against.

Improving Customer Experience

You may notice when visiting various websites that a key way AI is improving the customer experience is through the implementation of chatbots and virtual assistants. The financial sector is no exception to this and you could well be chatting to an AI bot when visiting investment websites!

These AI-driven tools are able to stay awake when a human counterpart cannot, providing 24/7 support and thus improved customer satisfcation and operational efficiency.

Such virtual agents can handle routine enquiries, transactions and even engage in potentially meaningful conversations by addressing customer queries promptly and accurately. In addition, AI systems can allow humans to spend more time on more complex issues, streamlining operations and reducing costs.

Strengthening Risk Management

AI-powered risk management systems analyse real-time market data to identify potential threats and implement proactive risk mitigation measures. Detection of such anomalies and enhancing fraud detection can protect financial institutions against fraudulent activities.

Furthermore, AI enables financial institutions to conduct more accurate and comprehensive risk assessments by, as mentioned already, analysing vast amounts of data from various sources. Such an approach to risk management can allow organisations to anticipate and mitigate potential threats before they escalate, thereby safeguarding assets and maintaining stability in the financial markets.

Facilitating Regulatory Compliance

AI can play an important role in ensuring regulatory compliance within the financial industry. By monitoring vast amounts of data and analysing transactions, AI algorithms can help financial institutions adhere to evolving regulatory requirements, reducing the risk of non-compliance penalties and enhancing transparency.

By streamlining the process, corrective action can be taken promptly, ensuring continued compliance and meeting of regulatory standards. By automating compliance procedures, AI not only reduces the burden on compliance teams but also minimises the likelihood of human error, ensuring accuracy and consistency in regulatory reporting.

It is also possible for AI-powered compliance tools to adapt to changes in regulations more efficiently than traditional manual methods. Machine learning algorithms can quickly incorporate updates to regulatory frameworks, ensuring that financial institutions remain up-to-date and compliant with the latest standards. This agility in regulatory compliance can help navigate complex regulatory landscapes more effectively, mitigating the risk of regulatory fines and reputational damage while maintaining the trust of Clients and customers.

Robot Revolution or Handy Companion?

It would likely be inadvisable to rely 100% on AI processes throughout your business, day-to-day life or any other circumstances. Hence, it is probable that human operators will be necessary going forward.

This means that AI is able to complement the day-to-day tasks of professionals in the finance sector and enhance the services that are able to be provided to Clients.

However, AI is not right for everyone! There are certainly downsides to using AI, including a potential lack of personalisation, potential for manipulation and more. Certain areas may require the diligent attention of a human and are potentially outside of the remit of AI.

As with stock markets, the future cannot be known and AI will likely continue to develop over the coming years.

With Patterson Mills, you can be sure of a 100% human service, tailored to you. So, get in touch with us and book your initial, no-cost and no-obligation meeting and talk to one of our Advisers today!

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.