Investments have become a staple product of banking, yet many customers still hold them at arm’s length. However we are making investment decisions all the time - saving for a rainy day, acquiring our first or upgrading our family home, investing in our children’s education… the list is never ending.
Whatever the circumstances, there are a set of rudimentary questions one would need to consider. What to invest in? How to invest? When to invest? Admittedly, it can be mind-boggling to navigate the spectrum of options one may invest in; from bonds to shares to funds; all the way to real assets.
Where to start from? The very first step is to think about your objective and your risk tolerance. You can do this on your own or with the help of a financial professional. As a rule of thumb, it is good practice to have easily accessible emergency savings that are the equivalent of three months’ salary. This is your fallback fund and will enable you to cover your basic expenses, in case of an unexpected setback. Once that is sorted, you can start focusing on your investment plan.
Weighing your expected return and the risks you are willing to take on board is no easy feat. Interest rates have been at historic lows for a prolonged period of time, making the traditional bank savings less attractive. Add inflation at 5.67% (according to April NSO data) into the mix and you are faced with rapid erosion of the future value of your money. Investing in individual company shares has the potential of high profits but also a greater risk of larger losses. Government bonds generally represent lower risk and are more likely to yield a steady return. Another option is to consider diversification of your investment through an investment fund. This will offer less erratic performance compared to investing in shares of a single company. Funds have a diversification policy and will have numerous underlying investments in equities or bonds or a mix of the two. The result is a better risk adjusted profile than when one is exposed to a single stock.
Investment funds are an easier and more cost-effective way to access stock markets and are run by professional investment managers. Actively managed funds have an objective to beat their respective stock index. The portfolio manager makes changes to the investments as per the fund’s investment policy with an objective to beat its reference index. In contrast, a passive fund has the objective of tracking its benchmark and will thus go up and down (minus costs) in line with the market it follows. Investors can also opt for accumulation (dividends reinvested) or distributing (dividends paid out) share classes, depending on whether they are seeking a regular income from their investment or growth in their investment.
The next consideration is time in the market, as opposed to timing the market. The adage, “It’s not about timing the market, but about time in the market” has been proven true time and time again. Therefore let’s focus on the former. The longer you stay invested over the long run in a well-diversified portfolio, the better the return is likely to be and the less likelihood of a negative impact on your holdings from any short-term volatility, as illustrated by the chart. Saving regularly can unlock the power of compounding. This can be done through monthly investment plans, whereby you invest a fixed amount of say EUR 100 every month. The concept is each month you invest you generate a return, the next month your capital (€100) plus the generated return is invested and you generate further returns on your total investment. Of course, the price of investments can go down as well as up and the volatility of the price movement is influenced by the risk of the investment. The higher the risk the higher the volatility and vice versa. To benefit from the power of compounding you need to be patient and disciplined to ride the highs and lows of the markets. Nevertheless, it should give you financial freedom as your nest egg grows.
Nowadays, there are tools and resources to help you make decisions about your investment path, irrespective of how large your original investment is. Case in point is the Automated Advice Service.
This service is ideal for a client who is interested in setting up an investment portfolio but does not have a significant lump sum to warrant a wealth management service. The first step is to set an appointment with the Financial Adviser (FA) at your Bank, who will discuss with you about your needs, investment experience and risk appetite. The FA will discuss with you to draw up a Fact Find report, intended to give a better understanding of your financial situation, including your assets and commitments. This is corroborated by a suitability report that looks at your risk tolerance and investment objectives. On the basis of this, the Asset Allocation Model (AAM) is recommended.
The AAM options may vary from an ultra-cautious strategy to a diversified growth portfolio with a medium to high-risk investment strategy at the other end of the spectrum.
In today’s world, accessing investment advice in an understandable, convenient and compliant way has never been easier or more accessible. Banks have moved to a model of transparent pricing and efficient service. Customers may benefit from cost-effective financial advice whilst remaining in control of their investment journey. Interested? Take the first step and set an appointment with the BOV branch of your choice.
Any views, assumptions or opinions expressed in this article are those of the author.This article was written by Dipak M Chouhan, Head of Business Generation, Retail Banking at Bank of Valletta.
This article is not, and nothing in it should be construed as a recommendation in respect of investment products or services offered by the BOV Group. Value of investments may go down as well as up and may be affected by changes in currency exchange rates. Past performance is not a guide to future performance. Issued by Bank of Valletta p.l.c., 58, Triq San ¯akkarija, il-Belt Valletta VLT 1130. Bank of Valletta p.l.c. is a public limited company regulated by the MFSA, licensed to carry out the business of banking and investment services in terms of the Banking and Investment Services Acts (Cap.370, 371 of the Laws of Malta).