IF YOU INHERITED
£500,000 TOMORROW where should you put your money, for income or growth?
by Philip Chambers Chartered FCSI, Chartered Wealth Manager, Investment Manager, Brewin Dolphin Channel Islands Ltd
Before embarking on any investment decision is it essential that an investor’s main objective is quantified. Whilst most people have a vague idea of what their requirements will be in the future, it is a small number who put any serious thought into their overall financial plan.
“An investor without investment objectives is like
a traveller without a destination.” Ralph Seger
H
ow much money is required is unique to each individual. To some £500,000 is a life changing sum, to others it would only make a dent in their mortgage, although a very welcome dent I’m sure.
We must first start with the individual circumstances of the person inheriting the sum. At Brewin Dolphin we always begin the conversation with the individual and their own unique requirements and the many factors to be considered before any overall investment recommendation can be arrived at: including, at what stage of their life cycle are they presently, how much risk does the person want to assume, do they need to generate a yield to supplement overall income and what other assets or liabilities do they have?
Let’s start by asking what it means to invest for growth or for income. The definition of a growth investor is one whose style and strategy is focused on increasing their investment capital. Typically, they invest in growth stocks, that is, the equity of companies whose earnings are expected to increase at an above average rate compared to their industry sector, recent examples include Amazon, Facebook and Tesla.
An income investor’s strategy is based on building a portfolio to maximise the annual earnings (or yield) from
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those investments. The focus will be on assets that generate regular payments from either dividends, interest, or rental yields. This strategy favours stocks in companies that are well established with good credit ratings, good margins and free cash flow in order to cover distributions to shareholders and ascertain if these can be maintained over the longer term.
I have detailed two scenarios for our imaginary investor, one where they are approaching retirement and another where they are just starting their career. Starting with our individual client approaching retirement or the “decumulation” phase, typically at this stage, the client will be focused on how they spend their assets so that they can maintain their lifestyle once they have finished working. They could already have some savings or a pension plan along with equity in their main residence. Expenditure will be stable and they are perhaps unlikely to have school fees or mortgage payments to cover. For this client, their time horizon will not necessarily be long term (depending on their other assets). Therefore, we would expect the level of risk they can tolerate to be low. With the client’s main objective to target a level of income to maintain their lifestyle into retirement, they would typically fall
into the income investor bracket. The types of assets used to populate their portfolio would be selected for their ability to generate a regular income stream, for example, bond funds, equity income funds and property funds.
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