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The Pros and Cons of Real Estate Investing

The Pros and Cons of Real Estate Investing

“Now, one thing I tell everyone is learn about real estate” ― Armstrong Williams
 
3 min read
Pros and Cons of Real Estate Investing

The Pros and Cons of Real Estate Investing

“Now, one thing I tell everyone is learn about real estate” ― Armstrong Williams

3 min read

Real estate investing is a popular strategy for building wealth that involves purchasing, owning, and managing properties with the expectation of generating income or value appreciation over time.

Like any investment, it is not guaranteed to increase in value, and also has it’s own set of advantages and disadvantages.

Read below to find out what they are so you can make more informed decisions as to whether real estate investing is right for you.

Pros of Real Estate Investing:

Let’s get straight into it.

Here are some of the advantages to real estate investing:

  1. Potential for High Returns: One of the primary attractions is its potential for high returns. Historically, real estate has shown steady appreciation in value over the long term, which in turn has provided significant capital gains. There is also the possibility to receive rental income from investment properties which can generate ongoing cash flow, thus further enhancing returns.

  2. Compounding Returns with Leverage: The ability to borrow a significant percentage of an investment property’s purchase price can greatly increase total returns. For example, borrowing 75% with a real estate mortgage, secured on both the property and the rental income, would result in a 100% return on your invested capital after just a 25% increase in the property’s value (before applicable taxes).

  3. Portfolio Diversification: Being separate from stocks and bonds, your investment portfolio can enhance its diversification with real estate. This is because real estate values often move independently of other assets, thereby helping to reduce overall portfolio risk and volatility.

  4. Tax Advantages: Real estate investors often benefit from various tax incentives and deductions that can lower their overall tax liability. Expenses such as mortgage interest (excluding the UK), property taxes and insurance can often be deducted from rental income, reducing taxable income. Additionally, profits from the sale of investment properties may qualify for preferential capital gains tax treatment (excluding the UK), depending on the holding period or rules in your relevant jurisdiction.

  5. Tangible Asset: Unlike stocks or bonds, which represent ownership or debt in a company, real estate is a tangible asset that you can see, touch, and control. Owning physical properties can provide a sense of security and control that can be appealing to those seeking more direct involvement in their investments. Along the same vein, real estate investments can offer the opportunity for hands-on management and improvement, allowing you to add value and increase returns.

Cons of Real Estate Investing:

We’re not here to waste time, here are the disadvantages!

  1. Lack of Liquidity: One of the major drawbacks of real estate investing is its lack of liquidity compared to other asset classes. Unlike stocks or bonds, which can be bought and sold quickly, selling a property can be a time-consuming process that may take weeks, months, or even longer. Illiquidity can make it challenging for those wishing to access their capital quickly in times of need or take advantage of new investment opportunities.

  2. High Upfront Costs: Real estate investments typically require a significant amount of capital upfront, including down payments, closing costs, and ongoing maintenance expenses. For many, this high barrier to entry can make real estate investing inaccessible or impractical. Financing real estate investments with mortgages can also introduce additional risks, such as interest rate fluctuations and leverage.

  3. Risks From Leverage: Whilst borrowing to invest in property is often seen as a positive way of increasing returns, interest rate risks need to be managed carefully. The risk of interest costs exceeding rental income over time can be very real, especially during periods of rapidly rising interest rates. In such circumstances, exiting the investment may not be possible (see point 1 above) and so maintaining good cash reserves is vitally important.

  4. Management and Maintenance: Owning and managing investment properties can be time-consuming and labour-intensive, requiring landlords to deal with tenant issues, property maintenance, and regulatory compliance. While hiring property management companies can alleviate some of these responsibilities, it comes with additional costs that can eat into overall returns. As well as this, vacancies, property damage, and unexpected repairs can negatively impact cash flow and profitability. Maybe not very ‘passive’ income after all..!

  5. Market Risk: Real estate markets are subject to fluctuations and cycles, which can impact property values and rental demand. Economic downturns, changes in interest rates, and shifts in local market conditions can all affect the performance of real estate investments. You must carefully assess market risk and conduct thorough due diligence before committing capital to real estate to ensure you are making informed investment decisions.

Buy In or Steer Clear?

There are ways to invest in real estate without having to buy a property, such as through REITs, which can help with upfront and management costs, though the majority of the pros and cons remain the same.

It’s important to carefully weigh up these pros and cons when deciding whether real estate investing is right for you. How does it align with your overall financial goals, time horizon, risk tolerance and more?

Patterson Mills are here to help you answer these very questions (and more!) when it comes to considering real estate within your investment portfolio.

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.

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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.

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Investments

Currency Hedging: The Cost of Managing Risk

Currency Hedging: The Cost of Managing Risk

“Between calculated risk and reckless decision-making lies the dividing line between profit and loss” ― Charles Duhigg
 
4 min read
Currency Hedging

Currency Hedging: The Cost of Managing Risk

“Between calculated risk and reckless decision-making lies the dividing line between profit and loss” ― Charles Duhigg

 

4 min read

Businesses and investors are increasingly exposed to risks stemming from fluctuations in foreign exchange rates. Currency movements can impact the value of investments, affect profitability, and introduce uncertainty into international transactions.

However, there is a way to mitigate your exposure to currency risk, and this is through a strategy known as ‘hedging’.

For you, the investor, hedging is simple as it involves simply buying a fund that has ‘hedged’ in the name or fund literature.

Under the bonnet, currency hedging involves a range of financial instruments designed to mitigate the potential adverse effects of currency fluctuations on your investment portfolios, business revenues, and cashflows.

This article aims to help you make informed decisions about whether currency hedging is the right strategy for your investments, or not. So, read below to find out more!

What is Currency Hedging?

Currency hedging is a risk management strategy used to mitigate the impact of currency fluctuations on international investments or transactions. 

It involves taking positions in the foreign exchange (FOREX) market to offset potential losses that can come from changes in exchange rates.

Currency hedging aims to protect against adverse movements in currency values that could erode the value of investments denominated in foreign currencies.

One common method of currency hedging is through the use of financial derivatives such as forward contracts, futures contracts, options, and swaps.

Essentially, by hedging a certain currency, you are taking a position on the future direction of that currency’s movements. This is akin to placing a bet on whether a particular currency will appreciate or depreciate. So, you are locking in a specific exchange rate to protect yourself from adverse currency movements.

These instruments allow you to lock in exchange rates at predetermined levels, providing certainty about future cash flows and reducing the uncertainty associated with currency risk. However, whilst currency hedging can help smooth out your returns and protect against losses in currency fluctuations, it also comes with costs and complexities that you need to consider carefully.

Is Currency Hedging Good or Bad?

The effectiveness of currency hedging depends on various factors, including your specific circumstances, market conditions, and investment objectives.

As mentioned, you are placing a bet on whether a particular currency will appreciate or depreciate, locking in a specific exchange rate, and you do not get to do this for free!

Just like any insurance policy, currency hedging requires paying a premium, typically in the form of management fees or transaction costs. These costs can then eat into your potential profits and diminish your returns (which is especially true if the currency movements do not move in your favour).

In some cases, currency hedging can provide valuable protection against currency risk, particularly for those with significant exposure to foreign markets or those holding international assets. You can even potentially enhance risk-adjusted returns over the long term whilst enjoying reduced volatility in your portfolio.

However, do not be fooled, hedging does not eliminate currency risk entirely and may not always be effective in volatile or unpredictable market conditions.

What’s more is that hedging decisions should not just be a quick thought of “I am investing in a foreign currency so I should buy a fund that implements hedging”. In reality, this decision requires careful consideration and expertise, and improper hedging strategies can result in unintended consequences or losses. 

Therefore, you should weigh the pros and cons of currency hedging carefully before implementing any strategies. Fortunately, Patterson Mills is here to help, so contact us today!

Considerations You Need To Make

When evaluating whether currency hedging is suitable, there are several consideratinos for you to make.

  1. Determine your risk tolerance and investment objectives
  2. Find out the level of exposure to foreign currencies in your  existing or planned portfolio
  3. Consider the outlook for currency markets, economic fundamentals, and geopolitical developments that could impact exchange rates.
  4. Evaluate the costs associated with currency hedging and compare them to the potential benefits.
    1. This includes considering the impact of hedging costs on investment returns and whether the expected reduction in currency risk justifies the expenses incurred.
  5. Assess the performance of different hedging strategies under various market scenarios and their historical effectiveness in managing currency risk.
    1. Remember, past performance is not indicative of future performance
  6. Consider the prevailing interest rate differentials between currencies
  7. Consult with Patterson Mills

Could Topiary Help Your Investments?

Our Advisers at Patterson Mills understand the importance of currency risk management and offer tailored solutions to help you navigate the challenges of international markets and decide if hedging would be suitable for you.

Whether you’re looking to hedge currency exposure in your investment portfolio or protect your business from currency fluctuations, our team can provide the guidance and support you need.

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.

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Investments

How Much Money Do You Need to Live Off Dividends?

How Much Money Do You Need to Live Off Dividends?

“And I had an old-fashioned idea that dividends were a good thing” ― James MacArthur

4 min read

Dividends - Income - How Much Money Do You Need To Live Off Dividend Income

How Much Money Do You Need to Live Off Dividends?

“And I had an old-fashioned idea that dividends were a good thing” ― James MacArthur

4 min read

Dividends are an important part of the total return you achieve within your investments. They are also particularly notable for those looking for income stability.

They offer a reward (payment) for investment in a company’s success and can act as a buffer during market downturns, providing a source of income even when capital appreciation is stagnant or negative.

However, despite the benefits, it’s important to recognise that dividends are not a one-size-fits-all solution and may or may not align with your own financial planning. 

Whilst you could prioritise income generation and value the reliability of dividend payments, you may prefer growth and the reinvestment of earnings for long-term capital appreciation.

Whatever you may decide, it’s important to have knowledge! Luckily, that’s what you will find below, so read on!

Dividends: The Basics

Dividends represent a portion of a company’s earnings distributed to its shareholders as a reward for their investment.

These payments are typically made on a regular basis, such as quarterly or annually, and can vary in amount depending on the company’s profitability and dividend policy.

Dividends are often seen as a sign of financial strength and stability, with companies that consistently pay dividends considered reliable investment options in this area.

The “dividend yield” is how much dividend you could expect to receive per share. This is expressed as dividend divided by a share price. For example, this may be 2.50%.

It is important to note that dividends are not guaranteed and can fluctuate based on various factors, including economic conditions, company performance, and management decisions. During periods of financial distress or economic uncertainty, companies may reduce or suspend dividend payments to conserve cash or address operational challenges.

This can lead to disappointment and financial strain should you be relying heavily on dividend income for your living expenses. As such, it is important to carefully assess a company’s dividend sustainability, financial health as well as many other factors.

The Key Advantages

Naturally, one of the main advantages of dividends is their potential to provide a steady stream of income, regardless of market conditions.

Dividend-paying stocks are often viewed as less volatile than non-dividend-paying stocks, offering a degree of stability and predictability to your portfolio. 

Additionally, dividends can provide tax benefits depending where you are tax-resident, as they are often taxed at a lower rate than other forms of investment income, such as interest or capital gains.

You can also get signals of a company’s financial health and management’s confidence in its future prospects. Companies that consistently pay dividends demonstrate a commitment to returning value to shareholders and may be perceived as more reliable and trustworthy investment opportunities.

Dividend payments can also act as a form of discipline for company management, encouraging diligent capital allocation and discouraging wasteful spending or risky investments.

Uncovering The Disadvantages

Despite their appeal, dividends do come with their share of drawbacks.

  1. Unlike interest payments on bonds, dividends are not guaranteed and can be reduced or suspended altogether if a company’s financial performance deteriorates. 
  2. Furthermore, dividend payments can fluctuate with changes in the company’s earnings or stock price, making them less reliable than you might first think. 
  3. Companies that prioritise paying dividends may have fewer resources available for reinvestment in growth initiatives, potentially limiting their long-term growth prospects.
  4. Dividend income may not keep pace with inflation over time, reducing its purchasing power and eroding the real value of your returns, particularly in environments with high inflation rates.
  5. Investing in dividend-paying stocks may also limit your ability to diversify your portfolio across different asset classes or pursue alternative investment strategies which could lead you to missing out on higher returns elsewhere.

How Much Do You Need To Live Off Dividends?

So, what is the answer to the question of how much you need to live off dividends?

Well, it will (hopefully) come as no surprise that of course it depends on how much income you require!

If you are considering a dividend-focused strategy, you should carefully assess your income needs and risk tolerance.

For example, if you require an income of 100’000 per year and were looking at a dividend yield of 10%, you would need to invest 1’000’000.

To work out much you need, calculate your required income and then the percentage dividend yield you may be able to achieve.

From here, you can find out what initial investment you would need to achieve that percentage return and therefore the income level you desire.

The example above is a useful way of looking at this.

What Are The Next Steps?

Whilst dividends can be an attractive option when seeking income, it’s crucial to weigh the pros and cons carefully and consider how dividends fit into your overall investment strategy.

Yes, it can be complex, and that is exactly why the next steps are to get in touch with Patterson Mills! We understand the complexities of dividend investing and offer expert guidance to help you navigate the world of dividends and achieve your financial goals.

With our expertise and experience, we can help you make the investment choices that give you the best possible chance of success. 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.

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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
Investments

Re-Invest Or Withdraw? Accumulation Versus Income Funds

Re-Invest Or Withdraw? Accumulation Versus Income Funds

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

3 min read

Dividend Investing vs. Income Withdrawals - Accumulation - Compounding - Investments

Re-Invest Or Withdraw? Accumulation Versus Income Funds

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

3 min read

Within the world of mutual funds and exchange-traded funds (ETFs), you will often have the choice to opt for accumulation or income.

What’s the difference you may ask?

Put simply, accumulation funds re-invest any income or dividends generated by the underlying assets back into the fund.

On the other hand, income funds distribute any income generated by the underlying assets to you, the investor. This is often in the form of cash dividends or interest payments.

However, just knowing what these are is not necessarily enough to make informed decisions on your investments. Which type is suitable for you? What are the benefits? Read on to find out!

Accumulation Funds

Accumulation funds, often shortened to ‘Acc’ or known as ‘capital growth’ funds, are designed for those who wish to re-invest any income back into the fund in which they are invested.

With this type of investment, the process is automatic and any dividends, interest payments or other distribution types will be re-invested without you having to do anything (at least, nothing beyond buying into the fund in the first place!).

Why might you wish to do this? Because you will benefit from compound growth over time that could have a huge impact on the gains you see when you come to withdraw in the future!

As an example, should you have CHF 1’000 invested and receive a CHF 100 distribution (e.g. as a dividend payment), you would then have CHF 1’100 invested (if you did not take it as income). This is CHF 100 more that can potentially increase both your returns and even future distribution payments.

The longer you leave your funds, the more time this type of approach has to grow your wealth. Hence, this strategy is typically better-suited if you have a longer-term investment horizon and prioritise capital appreciation.

Income Funds

Income funds, you will not be surprised to read, are also sometimes known under another name!

Not only are the often shortened to ‘Inc’, they are alternatively known as ‘distribution’ funds (sometimes shortened to ‘Dist’). As mentioned, these types of investment provide regular income paid out as dividends, interest or through other means.

Income funds are generally more suitable for when you are retired or if you are relying on investment income to cover defined living expenses.

Naturally, this makes the key advantage of income funds exactly that: their ability to provide a steady stream of income. 

What’s more, this income is provided to you without the need to sell off your shares!

Which One Is Right For You?

Now you know what both types of funds are, who they may be more suitable for and how they could benefit you.

This then leaves the question: which one should you choose?

Naturally, each of you reading this will be unique and there is no one-size-fits-all answer.

So, when deciding between accumulation or income funds, consider your investment objectives, risk tolerance and income needs. If you have quite some time before you wish to access your investments, you may be more suited to accumulation funds. On the other hand, income funds provide a regular income that you may prefer.

However, in both cases, assess any tax implications, fees and the benefits you may receive from compounding, or the potential drawbacks if you take the income out of the investment.

Here For You

There are more considerations than those which are in this article, and so you are must do your own research before making any decisions.

Yes, it can be complex, but Patterson Mills are here to help and explain your options in a jargon-free manner that ensures your complete understanding of your most effective route forward.

So, get in touch with Patterson Mills and book your initial, no-cost and no-obligation meeting. Your future financial success is our priority!

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.

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Investments

Keeping More Money in Your Pocket: Tax-Loss Harvesting

Keeping More Money in Your Pocket: Tax-Loss Harvesting

“Whatever you tax, you get less of” ― Alan Greenspan

4 min read

Tax-Loss Harvesting: Reducing Your Tax Liability

Keeping More Money in Your Pocket: Tax-Loss Harvesting

“Whatever you tax, you get less of” ― Alan Greenspan

4 min read

Tax-loss harvesting is a sophisticated strategy that you can use to optimise your investment portfolio(s) and reduce your tax liabilities. Today, we are looking into the intricacies of this strategy that you may not have heard before!

Read on to discover the upsides, downsides and how you can implement this technique to enhance your overall financial wellbeing.

Tax-Loss Harvesting: The Basics

Tax-loss harvesting is a proactive investment strategy designed to mitigate tax liabilities and enhance overall portfolio performance. The process hinges on the strategic selling of investments that have incurred losses, creating an opportunity to offset capital gains and, consequently, lower your taxable income. Seems simple enough, right?

To execute tax-loss harvesting effectively, it is important to closely examine your investment portfolio. This involves identifying specific assets that have experienced a decline in value. These underperforming investments become valuable tools in the tax-loss harvesting toolkit, as their losses can be strategically realised to counterbalance any capital gains within the same tax year.

The key principle is to turn temporary setbacks into long-term advantages. By intentionally selling assets that are currently at a loss, you create a deliberate taxable event. This loss can then be used to offset capital gains, either reducing or entirely eliminating the associated tax obligation. This approach not only minimises the immediate tax impact but can also allow for for improved tax efficiency and potential long-term capital growth.

With regards to which assets to sell, it’s surely just any that have made a loss? Well, whilst that could be the case, it’s actually prudent to identify assets with unrealised losses that align with the your overall financial goals and risk tolerance. Selecting the investments to sell that ensures your investment strategy can remain on track, or making adjustments as required. 

Additionally, the process must adhere to any regulatory guidelines where you are based. Some jurisdictions have laws in place to prevent manipulation of tax benefits such as selling an asset at a loss and buying it back immediately or shortly afterwards.

What is Good About it?

The benefits of tax-loss harvesting extend beyond just a reduction in taxable income; it is a strategic financial tool with many advantages that can significantly impact your overall wealth management plan(s).

  1. Minimising Taxes: Naturally, an immediate reduction in your taxable income is one of the main benefits to tax-loss harvesting. Minimising taxes through this strategy translates to more disposable income that can be redirected towards further investments, other financial goals or a nice holiday.

  2. Balancing Portfolios: An often overlooked benefit of tax-loss harvesting is its role in portfolio rebalancing. In your usual portfolio, you should aim to maintain a specific asset allocation aligned with your financial objectives and risk tolerance. However, market fluctuations can skew this balance. Therefore, tax-loss harvesting allows for strategic selling of underperforming assets without incurring substantial tax consequences. If done correctly, you are able to keep your portfolio in line with your risk tolerance and goals whilst reducing your tax liability!

  3. Creating Tax Efficiency: The cumulative effect of consistent tax-loss harvesting is increased tax efficiency over the long term. As losses are strategically realised, they can be used to offset future capital gains, providing a shield against unnecessary tax liabilities. This enhanced tax efficiency ensures that a larger portion of your returns contributes to growth or income rather than being diverted towards taxes. Over time, this can result in a more streamlined and effective approach to wealth accumulation.

Are There Any Downsides?

Of course, nothing is without it’s disadvantages! Here are some of the key ones that apply to tax-loss harvesting:

Complexity and Monitoring Requirements

Tax-loss harvesting involves a thorough analysis of an investment portfolio to identify opportunities for realising losses. This process can be complex, requiring continuous monitoring of market conditions and individual securities. You need to stay informed about changes in the value of your holdings and make strategic decisions to optimise tax outcomes. The complexity of tracking and managing multiple investments can be overwhelming for some!

Transaction Costs and Fees

Engaging in tax-loss harvesting often involves selling and buying securities, which can trigger transaction costs and fees. These expenses have the potential to erode the tax benefits gained from harvesting losses. Additionally, if you’re not careful, frequent trading may lead to increased transaction fees, impacting the overall returns of the portfolio. It’s crucial to weigh the potential tax advantages against the costs associated with executing the necessary trades. Ensure you speak with your Patterson Mills Financial Adviser before making any decisions.

Potential Market Timing Risks

Tax-loss harvesting requires selling investments at a loss, and the decision of when to execute these sales introduces potential market timing risks. If you sell during a market downturn to realise losses, they risk missing out on a subsequent market upturn. The challenge is to balance the tax benefits of harvesting losses with the uncertainty of market movements. Attempting to time the market can be unpredictable, and decisions made solely for tax purposes may not align with your broader investment strategy.

Can You Benefit?

If you are able to identify losses to offset your gains whilst adhering to applicable regulations and ensuring your investment strategy remains on plan, you can!

If it sounds like the monitoring required, careful selection of which assets to sell and adherance to applicable regulations could be too time consuming for you, it is time to get in touch with Patterson Mills and book your initial, no-cost and no-obligation meeting. Your investments will thank you and you too will be pleased that you have the peace of mind you deserve.

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 information within this article has been prepared for informational 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.

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Investments

Investments Go Down (As Well As Up)

Investments Go Down (As Well As Up)

“It has been quite a rollercoaster ride, but one that I’ve enjoyed” ― Bez

3 min read

Investments Go Down As Well As Up

Investments Go Down (As Well As Up)

“It has been quite a rollercoaster ride, but one that I’ve enjoyed” ― Bez

3 min read

Investing is marked by highs and lows, peaks of prosperity and valleys of decline. At the heart of this rollercoaster ride lies a simple truth: investments can go down just as swiftly as they can rise. It’s a fundamental reality that every investor, from the novice to the seasoned, must come to terms with when navigating their investments.

The Market's Downturns: A Normal Occurrence

Market downturns are inherent to the investment landscape. They are regular events that halt the upward trajectory of the financial markets. These downturns shouldn’t surprise you; rather, they are to be expected in the cyclical nature of markets.

These periods of decline can stem from various factors, including economic shifts, geopolitical events, or sector-specific challenges. However, it’s crucial to grasp that market fluctuations, both upward and downward, are a fundamental aspect of the investment ecosystem.

Typically Your Investments Do Recover

Investing isn’t just about numbers on a screen; it’s deeply intertwined with human psychology. During periods of market turbulence, fear can grip you, clouding rational decision-making. The instinct to sell and salvage what’s left can be compelling, driven by the fear of further losses. However, reacting impulsively to market volatility often leads to selling at a low point, crystallising losses, and missing potential recoveries.

History has repeatedly shown that panic-driven selling in the face of market downturns tends to be counterproductive. Emotional reactions to short-term fluctuations can derail long-term financial strategies. It’s crucial to recognise that markets, although prone to short-term volatility, have historically recovered from downturns. Selling in a panic only crystallises losses, locking in the decline without affording the opportunity to recover when markets bounce back – a pattern that can substantially impact long-term wealth-building goals.

Staying the Course in Volatile Markets

Navigating market fluctuations requires a steady hand and a long-term perspective. History has consistently shown that despite periodic downturns, the market tends to rebound, demonstrating resilience over time. Investors who remain patient and stay invested through the storms tend to reap the benefits of eventual market recoveries.

Studies have shown that attempting to time the market by selling during downturns and re-entering when conditions seem favourable often results in missed opportunities for recovery. It’s essential to recognise that attempting to predict short-term market movements is a challenging and unreliable strategy.

Instead of succumbing to fear-induced reactions, maintaining a steadfast commitment to your investment strategy is crucial. Stay focused on your long-term financial goals and the strategic plan established with your Patterson Mills Financial Adviser. Review your portfolio periodically to ensure alignment with your objectives, risk tolerance, and time horizon.

En Route to Success

At Patterson Mills, we prioritise ensuring our clients are aware of market cycles, the risk they are taking and the importance of staying the course during turbulent times. We provide personalised guidance to help you understand the implications of market volatility on your investments and devise strategies to navigate through these periods. Our goal is to give you the knowledge and confidence needed to make informed decisions, ensuring that you remain steadfast in your investment portfolio, even amidst market uncertainties.

So, get in touch with us today and book your initial, no-cost and no-obligation meeting, you will be pleased that you did. Send us an e-mail to info@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all information within this article has been prepared for informational 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

Holding Cash is Not Investing… Or is it?

Holding Cash is Not Investing… Or is it?

“Either you sit on the pile of cash, or you continue to grow” ― Gautam Adani

5 min read

Cash Is Not Investing

Holding Cash is Not Investing… Or is it?

“Either you sit on the pile of cash, or you continue to grow” ― Gautam Adani

5 min read

For many, the notion of investing evokes images of stocks, bonds, or real estate. However, does this mean if you have 500’000 cash sat in your bank account you are not investing and therefore immune to the volatility of the stock market?

The dictionary definition of “investing” (n.) is: “The use of money or capital to purchase an asset or assets (such as property, stocks, bonds, etc.) in the expectation of earning income or profit1″ 

Well, whilst you do not generally use money to purchase money, cash is an asset and by holding substantial amounts you are making a conscious investment decision that can have both positive and negative impacts to your overall financial wellbeing.

So, it may not perfectly fit the dictionary definition, holding cash is, in fact, a form of investment, albeit one with its own set of dynamics. Read on to find out more about whether you should be holding substantial amounts of cash.

The Real Cost of Cash

Cash serves as a store of value, but its value is not immune to erosion over time, though this is a common misconception about cash: that its value remains static.

When you login to your online banking on a Monday morning you might see 500’000 on your screen. Provided you don’t spend anything that week, you can check your phone on the following Friday morning and still see 500’000 on your screen. However, does this mean you still have 500’000 in your bank account? Well, factually, yes.

However, the truth lies beyond the surface. In the backdrop of inflation, that 500,000, though numerically the same, is likely to have reduced purchasing power tomorrow. So maybe you can buy 2 Porsche 911 GT3 RS model cars today, but next week, month or year, this may reduce to only 1!

This erosion in the number of sports cars you can buy is the silent but persistent effect of inflation on idle cash. It underscores the hidden cost of keeping money in your bank account and highlights the importance of seeking investments that can potentially outpace inflation to preserve and grow wealth over time. For more information about the impact of inflation, view our article here.

Returns on Cash

Earning from cash holdings typically involves interest income offered from various financial instruments like savings accounts, certificates of deposit, or money market accounts. When you park your money in a bank account or one of the above, financial institutions (typically a bank) compensates you with interest payments for allowing the institution to use your funds.

Savings accounts offer relatively low but steady interest rates, providing account holders with a modest return on their deposits. Money market accounts, akin to savings accounts but often offering higher interest rates, invest in short-term, liquid, and low-risk securities like government bonds or commercial paper. These accounts provide competitive interest rates whilst preserving liquidity, making them attractive options for those seeking relatively higher returns than traditional savings accounts.

Nevertheless, the returns generated from cash holdings are often conservative, and whilst they can provide stability and security, they might not suffice to counter the effects of inflation, which as mentioned can erode the purchasing power of your earned interest over time. In fact, in times of low-interest rates or when the inflation rate exceeds the interest earned, the real return on cash becomes negative and so you are guaranteeing a loss each year.

It is definitely vital to keep some of your funds in cash for accessibility when you need it, though typically enough to cover 6-months of your expenditure is likely to be sufficient.

Cash in Your Investment Portfolio

When creating an investment portfolio, cash actually plays a pivotal role. It acts as a buffer, a tactical tool, and a source of opportunity. A strategic allocation to cash within a portfolio provides liquidity, ensuring readily available funds for immediate needs, such as covering expenses or seizing investment opportunities arising during market downturns. This liquidity allows investors to maintain financial flexibility, capitalising on moments of market volatility or taking advantage of undervalued assets without the need for selling other holdings at disadvantageous times.

However, whilst cash can allow for stability and accessibility, it comes with a trade-off in terms of potential returns. As mentioned above, cash returns primarily stem from prevailing interest rates, which often lag behind the pace of inflation, resulting in a loss of purchasing power over time. Despite its importance as a tactical and liquidity tool, holding excessive cash for prolonged periods could impede the portfolio’s overall potential for growth and limit the ability to counter the eroding effects of inflation. Balancing the advantages of liquidity and stability against the necessity for potential returns becomes imperative in constructing a well-diversified and resilient investment portfolio.

Cash vs Equities

Cash and equities represent contrasting facets of investment, each with its own merits and drawbacks. Holding cash serves as a protective measure during market volatility, providing a cushion against downturns and allowing investors to swiftly navigate unexpected financial needs. However, while cash ensures safety, its returns are typically modest and might not sufficiently outpace inflation, leading to a decline in real purchasing power over time.

Equities, on the other hand, embody ownership in companies and the potential for significant capital appreciation. Investing in stocks grants shareholders a stake in a company’s profits and growth potential. Equities historically outperform cash over extended periods, offering the possibility of higher returns. Yet, stocks carry higher risk due to market fluctuations and economic uncertainties. They can be volatile and subject to market sentiment, making them prone to short-term fluctuations and potential losses. Despite this, the potential for long-term wealth accumulation often draws investors towards equities as, historically, cash has been greatly outperformed by equities (and other asset classes, too).

When considering cash versus equities, weigh your risk tolerance, investment horizon, and financial goals. Whilst cash allows for stability and immediate access to funds, equities offer growth potential but come with higher risk. Holding cash may often lose to inflation, but it is possible that in a bad period your other investments may decline in value even further. Finding the right balance of cash and equities (or bonds, real estate etc.) is crucial in constructing a diversified portfolio that aligns with your risk profile and long-term investment objectives.

Cash is Investing

In reality, holding substantial cash is often a deliberate decision (or perhaps you haven’t got around to investing yet?) and is an investment in cash rather than a diversified portfolio of equities, bonds, commodities, real estate and, yes, cash etc. 

It is up to you to decide what style of returns you wish to achieve, and whether they can be achieved by holding cash or may require a well-structured investment strategy for your portfolio.

Patterson Mills are here to help you make that decision and ensure your portfolio is putting you on the right path to future financial success. So, get in touch with us today and book your initial, no-cost and no-obligation meeting, you will be pleased that you did. Send us an e-mail to info@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all information within this article has been prepared for informational 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. Past performance is not indicative of future returns.

1Oxford English Dictionary, 2023

Categories
Investments

Investment Myths Debunked

Investment Myths Debunked

“Words are very important, and I’m really into destroying myths” ― Yoko Ono

2 min read

Investment Myths

Investment Myths Debunked

“Words are very important, and I’m really into destroying myths” ― Yoko Ono

2 min read

To many, the world of investing is shrouded in mystery; the realm of financial whizz-kids and the super-rich. In reality, however, this is not the case and, once myth is separated from reality, it should be clear that investing is actually accessible to all. 

Can’t invest, won’t invest!

Research1 has highlighted several reasons why people are sometimes reluctant to invest. The main one, cited by 45% of respondents, is because they don’t have sufficient money, while 23% feel they are not knowledgeable enough about investing and 21% are worried about losing money.

Only for the rich?

These findings mirror a number of common misconceptions surrounding investing, one of which is that only wealthy people invest. However, whilst this may have been the case in the past, it is certainly not true nowadays, with investment options available for people with relatively small sums to invest.

Personal expertise and devotion required?

Other common investment myths include the idea that you have to be a stock market genius and monitor your investments on a daily basis. Both of these are untrue: advice is readily available to guide novice investors throughout their investment journey, while taking a long-term approach is always advisable. 

Too risky by far?

Whilst it is true that all investing involves risk, not all investments are similarly risky. So, anyone who is worried about losing money can take a more cautious approach by holding a greater proportion of less-risky assets in their portfolio.

Real Estate is Always a Safe Investment!

Real estate can be lucrative, but it’s not devoid of risks. It requires research, maintenance, and might often lack liquidity compared to other investments.

Gold is the Ultimate Safe Haven?

Whilst gold is often considered a safe haven, its value fluctuates and doesn’t always offer the returns or stability expected during economic turmoil.

You Can't Recover from Investment Losses

Losses are part of investing, but smart strategies, patience, and learning from mistakes can help recover and grow wealth over time.

Timing the Market Guarantees Success

Timing the market consistently is incredibly challenging. It’s time IN the market, not timing the market, that matters. Consistency and long-term strategies tend to yield better results.

Help at hand

If you’re new to investing then get in touch and Patterson Mills can help get you started. We’ll show you that investing is not just for the ultra wealthy but in fact everyone has a chance to potentially secure a higher return on their hard-earned cash.

Patterson Mills understand that navigating the investment landscape can feel daunting amidst these myths and others. But here’s the truth—we’re here to support you every step of the way. We won’t throw you into the deep end; instead, we provide a steady hand to guide you through the complexities, offering tools, resources, and expert advice.

Whether you’re a novice investor or seeking to refine your strategies, our commitment remains steadfast — together, we’ll navigate the investment world and build a secure financial future. Get in touch today and book your initial, no-cost and no-obligation meeting, you will be pleased that you did. Send us an e-mail to info@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all information within this article has been prepared for informational 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.

1HSBC, 2022