This book is not intended
in any way to provide
advice on individual
savings strategies or
products; it is simply the
True Potential philosophy.
Showing our
true colours
Our Philosophy
• Investingcanbemadesimple,easytounderstand,andfun
• Settingagoalforanysavingisakeyactivity
• Understandingtheeffectsofinflationandtakingitinto account is crucial
• Understandingyourownattitudeandcapacityforrisk is important
• Makethemostofanytaxbenefits
• Monitoringyourinvestmentsshouldbeeasy,interesting and educational
• Saveonimpulse,butavoidgettingintodebtonimpulse
• Theresponsibilityforsavingiswiththeindividual
Responsibility for saving
Settingagoal,oradestination,isthemost important and least emphasised
partofinvesting.
A goal gives you a purpose and will
remind you and prompt you to carry on.
Unlessyouknowwhereyouaregoingandwhy,youdon’tknowhowbesttogetthereorhowmuchmoney,orfuel,youwillneed.
Soajourneywithoutadestination,at worstissimplywandering,untilyourunoutoffuel,atwhichpointyouarestranded.
Stretchthemetaphorabit,andthisiswheremanypeoplenowfindthemselves,strandedwithoutthefinancialabilitytolive truly independently.
Retirementage,redundancy,ortheneedtoslowdowncanbeforcedonyou.Bettertosetyourowngoal,yourowndestination and enough money to reach
itinstyle,whileyouhavethephysicalandmental means to do so.
Althoughyoumayhavenumerousgoals,the ability to retire when you want with
yourmortgagerepaidandwithsufficientincometoliveinthestyleyouwant,isformany their primary need.
Goalsettingshouldbefun.Bearinmindwhatevergoalyouset,youareunlikelytohitthatgoalexactly.Nothinginlifeiscertain,everythingchanges,but at least a broad aim is better than
avoiding the process.
Prioritising goals
Finally,althoughyoumayhavemanygoals,itisimportantthatyouworkonafirstthingsfirst,secondthingsneverprinciple.Onlyoneofyourgoalswillbethemostimportant,sotakethetimetoreally prioritise that one. Putting enough
resource to work to achieve that one goal
will almost certainly ensure other goals
become attainable.
The importance of setting a goal
Start with a blank canvas
‘Order from Chaos’
Workingonthecompanyphilosophyofthedesignstartswithbusyandchaoticformsatthetopofthepiece,withnostraightlines,whichleaddownthepiecegraduallydiminishing into complete calm at the
bottom.Thegreyoblongpiecesformchaoscatchersintowhichallthechaosfallsto emerge as calm. The lavender pieces
were chosen to compliment the purple
lights within the boardroom and vice versa.
Quantifythegoalinmoneyterms,andintoday’smoney.
Itisimpossibletopredicthowmuchyouwillneedin5,10,15yearstime.Butweallknow what we need to live on right now.
Ifhavingadecentincomeinretirementisyourgoal,thenyoudeterminehowmuchyouwillneedintoday’sterms.“Iwanttoretireontheequivalentof£20,000pawhenIam60”,isasensiblewayofstatingthat goal.
So,ifyouwereretiringtoday,howmuchcapital would you need to generate an
incomeof£20,000pa?Therearelotsoflifestyleplanningtoolsavailabletoquantifyallofthismoreexactly,butanapproximateguidewouldbetomultiplytherequiredincomeby20(whichequatestoa5%pareturnfromyourcapital).Soyouwouldneedasumof£400,000fromwhichtodrawanincomeof£20,000ata5%rateofreturn.Arealitycheck:ifyouwereretiringnowhowmuchofthat£400,000doyouhave,rightnow?
Butyouaren’tretiringtoday.Youareretiring(let’ssay)in15yearstimesoyouhavetofactorininflationoverthatperiod.Atthecurrent(CPI)rateof2.7%thatmeansyouwillneed£597,000in15yearstobuythesameas£400,000buysnow.
Please note the government has had
atargetof2%inflationforthelast10years,soyoumaywishtousethatfigure.Howeveryoumustnotignoreinflation–theeffectsonyoursavingsandonyourlifeifyoudosowillbedevastating.
Becauseno-oneknowstherateofinflationoverthattime,ortheratethatyourinvestmentwillgrowat,nevermindyourownpersonalcircumstanceschanging,allthesecalculationsarealwaysapproximate.Youcanonlyaim,notguarantee,butthatshouldnevereverputyouoff.Inflationmaybegreater,butitmaybeless.Yourinvestmentmaygrowfaster,orslower.Bettertoknownow,andact,whileyouhave time.
Converting tomorrow’s goals and income to today’s values
Focusing on the big picture
Yourattitudetoriskisveryimportant.Althoughlivingisarisk,mostofussensiblyavoid doing things where the downside
isoblivion.Alwaysensureyouhave,especiallymentally,moretogainthanlose.
Ourviewisthatanyinvestment,whethercashorasset-backedinvestments(shares,propertyorsimilar),shouldhaveasitsminimumgoaltheabilitytooutperforminflation.
There should also be the intention
toavoidmoneylosingvalue,inotherwordstryandretaingains,ratherthanrisking the lot on a bigger return.
Aquickwordabouttherisksofrelyingtoomuchoncash.Cashisportrayederroneouslyasbeingsafe.Acashdepositthat is consistently at a rate lower than
inflationisguaranteeingthatyouarelosingthevalueofyourmoney.Inflationisahugelyimportantfactor,adestroyerofvalueandlivingstandards,whichbanksand government seem to overlook.
Forbanksthisistheirlifeblood,payingsaverslessthaninflation,whilstcharging borrowers much higher than
inflation.Thedifferencebetweenthetwocreatingmassiveprofitsforthem,forlittleornoworkorrisk.
Thusanyreturnaheadofinflation,nomatterwhattheinvestment,isaminimumoutcome. Asset backed investments have
tended,overthelongterm,tobethebestwaytoachievethis.Thereforethisneedstobeencouraged,andunderstoodintermsoftherealriskstoanyonesaving.Asset-backinvestmentscan,andoftenwillgodown,aswellasup,andsometimestheyaredowninvalueforquitealongtime.
Alotofriskisabouttimescale,thetimeremainingbeforeyouneedtoen-cashyour investment. Although cash at
ratesbelowinflationisriskyoverthemediumtolongterm,itisthebestplaceifyoursavingsgoalsareshortterm.
Usingriskcategories,suchasdefensivethrough to aggressive is our attempt to
help investors relate that description
backtothem.Butifindoubt,bemorecautious. What this should mean is
thattoachievethesameamount,overthelongerterm,youwillneedtosavemore.Andthatisn’tabadthing-havingtoo much rather than too little.
We recommend that no-one talks you
intobeingtooaggressive,orhopingthatafundmanagerwillperformmiracleseachyear,toensureyouhityourgoal.Itisyourgoal,notanyoneelse’s.Itistooimportantforyoutodelegateittoanyone,trustedornot.Ifyouarenotontarget,savemore,donottakeabiggerchance.
Understanding the risk you are willing to take in order to reach your goals
Painting your own picture
Goodfundmanagersaddvalueto your investment. There is a positive
gapbetweenwhatyousave,andwhat theygrowyourmoneyto,minustheir costsandinflation.
Differentfundmanagersmayusedifferent“styles”orprocessestoachievetheseobjectives.Forexample,someruntheirownfundsandpicktheirownassetclassessuchasshares,property,bondsandcommodities.
Othersmayusea“managerofmanager”approach,choosingmanagersthathaveaproventrackrecordofexcellingintheirownassetclassinvestment.Sometaketheviewthatactivefundmanagementisnotasgoodaspassive(wherethemanagers use passive investments such
astrackerfundstokeeppacewiththemarket,ratherthantrytooutperformit).
Weseektohavesomedifferenceinstylebetween each manager so that people
haveachoice,withoutgivingsomuchchoicethatitbecomesconfusing.
All styles have their merits and
supporters as well as detractors.
Our approach is to pick top quality
investment managers who have a
reputation to uphold and a clear process
that can be inspected to ensure they are
stickingtoit.Iftheycan’tachievewhat
they said they would do over a shorter
period,say5years,thenyoushouldnothope they will get it right over a longer
period either. Asset backed investment is
meantforthemediumtolong-term,say,5to10yearsplus,butthosetimeperiodsstartwiththefirst5years,notthefinal5.
Transparency,simplicityandclarityofintentionareparamounttous.Notallfundswillhavea5-yearrecord,andtoanextent,pastperformanceissecondary.It’swhattheydowithyourmoneyinthefuture,nototherpeople’smoneyinthepast,thatisofgreatestimportancetoyou.
Our view is that you should simply
ensureyoucanbeatinflationbyamargin,overthelongterm,butthatyoushouldnotlockyourmoneyintojustoneinvestment,uncheckedforthelongterm and become complacent. Long-
terminvestmentisafterall,aseriesofshorter time periods over a longer time.
Ifyousetadestinationandplaceitonamap,thejobissimplytomonitoritandensureyoustayontrack.Ifthegoalisset correctly and your attitude to risk is
sensible,therealthingtoworryaboutisensuringyouputsufficientmoneyintoyourinvestment,whateveritis,tohityourgoal.Andlikeanyoneonajourney,youwillcheckfromtimetotimeastoyourprogressandadjustaccordingly.
Fund managers and investment style
An eye for detail
As a nation we have been told that we
should have a pension. We should buy
property. And we should avoid risky
stock markets.
Currentexperienceshowsmuchofthathasproven to be erroneous.
Regulatorscan’tstopriskandaddinglayeruponlayerofregulationaddstocosts,opacity,andactuallydissuadespeoplefromsavingfortheirfuturebenefit.Soweshouldtakewhatevertaxallowancesthegovernmentgives,butwithaneyeonhowsimple and sustainable they could be.
Outlinedhereare3ofthemainsavings vehicles used. This is not an
attempt to detail each one or recommend
themindividually,justsimplifythem.
Individual Savings Account (ISA)
Therearetwomaintypes,CashandStocksandShares,plusaJuniorISA.
Theyarerelativelysimple–youinvestinthemfromafter-taxincome.
YourinvestmentgrowsfreeofallUKtaxes.Youcanhaveaccesstoallofyourinvestment at any time.
AnymoneycomingoutoftheISAistaxfree,soincomeinretirement,forexample,isn’ttaxedandyoudon’thavetopurchaseanannuitywithyourmoney.Youtakeasmuchasyourequire,whenyourrequireit.
ISA’sarethereforeaflexibleretirementoption.Theydonotattracttaxreliefonpaymentsgoingintothem,butafterthatenjoygreattaxbenefits.
Understanding your options
Our palette of choice
Pension
Themainbenefitofapension(thenameismisleading–itissimplyasavingsoraccumulation vehicle until you actually
“retire’andbegintakingmoneyoutofitasa“pension”),isthatyoureceive,withincertainlimits,taxreliefatyourhighestrateon payments going into it.
Yourmoneythengrows,moreorless,tax-free.
Howeveryoucan’tgainaccesstoyourfundsuntilyoureachtheageof55,whichmayhavetheeffectofputtingpeopleofffundingthemintheearlyyears.Clearlythelogichereistoensurepeopledon’traidtheirpensionpotsforminoritems,afterreceivingtaxrelief,andstillendupwithinsufficientfundsatthepointofretirement.
Theeffectofallthismaybetomassivelyunder-fundpensionsintheearlyyears,which are the crucial years.
Whenyoudecidetotakeyourpension,there are several things to consider.
Currentlyannuity(thethingyoupurchasewithyourpotofmoney)ratesareextremelylow,andarelikelytostaylowbasedonincreasedlifeexpectancy.Otheroptionsareavailablebutanyincomecomingfromapensionisalsotaxed.Ourviewisthatmost pensions are more complicated than
they need be. Governments change the
rulestoofrequentlyandinturnincreasethe uncertainty about their long-term
use,soacombinationofISAandPensionsavingsmaybemoresuitableforthelong-term saver.
General Investment Account
Althoughthesearetaxed,theyareusefulforanymoneyinexcessofyourISAallowance,orforinvestmentsthatyoudonot wish to tie up inside a pension.
Mostpeoplehavesavingsandinvestmentsscatteredacrossdifferentproducts and providers. This makes
thejobofunderstandinghowwellyouaredoingnearlyimpossible,evenifyoudounderstandeachproductaftercuttingthroughtheinevitablejargon.
Thislackofunderstandingisoftenbasedonanasymmetryofinformation(thedifferencebetweenwhatthesellerandbuyerknow),andcanbewronglyexploited.
We believe it is crucial that people
understand their savings and thus we
have a total bias towards simplicity and
providingasmuchinformation,inanunderstandablefashion,inoneplace.
Checkingonhowyourmoneyisgrowing,versusyourgoals,shouldbeaseasyandinteresting as possible. And it needs to be
doneonareasonablyfrequentbasis,sayonceaweek.Why,afterallthesearelong-terminvestments?Theanswerissoyouget to know your investments well and can
see how well they react in volatile times.
This does not mean when stock markets
godownyourushfortheexits,orevenbuy more guessing that the market has
reacheditsbottom.Youdon’tknowthat.Infact,fewcanevercallthatmomenton a regular basis. There is an old saying
“Itistimeinthemarket,notmarkettiming,thatmakesthedifference.”
Butitisyourmoney,andyoushouldhavethe right and responsibility to keep an eye
onit.Themainthingtowatchforisthatyourinvestmentisdoingwhatthefundmanagers said it would do; it is behaving
appropriately.Forexample,amoreadventurousfundshouldgoupfasterwhenstockmarketsaregoingup,thanadefensivefundthatwillhavelesssharesand more cash inside it. And vice versa.
Trackyourinvestmentagainstyourgoal–ifitisunder-shootingthensimplytopitupwithasmuchasyoucanreasonablyafford.Thereisnothingwrongwiththis–thisisexactlywhatyouwoulddoinreallife,onarealjourney,youwouldputmorefuelinthetank.bettertoarriveearly,thanlate.
Monitoring your investments
Keeping you in the picture
Impulse saving
Wewantthathouse,soweborrow.ThatmaybeOK,aslongashousepricesgoup,interestratesstaylowenough,andour personal circumstances mean we can
affordthecostofborrowing.Attheendofthe mortgage term we have an asset backed
investment,andnoborrowing.
But many are tempted to continue to
borrowagainstthesamepropertyforthingswhicharenotassetbacked,oraremuchmorerisky,suchaspropertythatotherslivein,orpropertyabroad.
Inaddition,wealluseourcreditcardsforpurchases,withoutathought.
Goodhabitsandbadonesarejusthabits.Gettingintothehabitofsavingsmallamountsratherthanbuyingthatextracoffee,orifyoudecidetostayin,putthemoney saved straight into your investment
account becomes a very good habit. And
it helps ensure you have money to go out
moreoften,whenyoureallywantto.
Whenever you get the impulse to borrow
(likeacreditcardpurchase),orover-indulge,justpause.Thatcoffeeandcake-youdon’treallyneedit,popthemoneyinstead into your savings and not into
thepocketsofotherspreyingonyourtemporary weaknesses.
Iris HoughtonFused Glass Panel
Working on the True
Potentialphilosophy,thedesign starts with busy
andchaoticformsatthetopofthepiece,withnostraightlines,whichleaddown the piece gradually
diminishing into complete
calm at the bottom.
The grey oblong pieces
formchaoscatchersintowhichallthechaosfallsto emerge as calm.
Order from
Chaos
Resolution
Glynnis CarterOil on canvas
True Potential LLP wants to
createorganisationoutofchaos and wishes to
presentitselfasaclearthinking leader in a
marketplace that presents
itselfasachaoticone.
From a seemingly chaotic
beginning the artist
exploredtheformalaspectsofcolour,texture,line and tone to make a
painting that draws an
immediate response but
which also has the depth
and interest to reward
sustained viewing and
evokesasenseoflandscape.
Vision
Frank BriffaOil on canvas
InkeepingwithFrank’snormalpractice“Vision”isbasedonapieceofmusic,inthiscase,AnAlpineSymphonybyRichardStrauss.Thisisalarge orchestral work that
describes11hours–justbeforedawntonightfall–duringwhichthereisan ascent up a mountain
followedbydescent.
Theworkcomprises22continuous sections and
isbasedspecificallyonthesectioncalled“vision”during which the summit
ofthemountainisreachedand the music here seems
to describe a sudden clear
visionofachievementfollowingthearduousandsometimes chaotic climb.
Commissioned artwork
The True Potential Gallery
Commissioned artwork
True Potential LLPRegistered Head Office: Newburn House, Gateway West, Newburn Riverside, Newcastle upon Tyne, NE15 8NXLondon Office: 42-44 Grosvenor Gardens, Belgravia, London, SW1W 0EB
T: 0871 700 0007 E: [email protected] www.tpllp.com
True Potential LLP is registered in England and Wales as a Limited Liability Partnership No. OC380771
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