In private banking we are accustomed to meeting successful people who lack time to pay sufficient attention to their personal wealth. Buoyant economic and stockmarket conditions in recent years have enabled many individuals to create significant wealth. The big question now is how to keep it.

No one will need reminding that some markets have fallen sharply in the last 12 months. At the time of writing (late April 2001), the technology-rich NASDAQ index has fallen by a massive 55%, while the more broadly spread Dow Jones and FTSE 100 indices are down by around 7% apiece. (Source Reuters).  Anyone who committed everything to equities will be feeling the pain now.

Let us first revise three basic investment home truths:

►      Growth and risk are inextricably linked. If you have enjoyed very high growth, then you have almost certainly accepted a high level of risk in order to achieve it. Rising markets mask that risk: it is all too easy to get swept along by a trend, and it is not until something goes wrong that you realise the degree of risk to which you have actually been exposed.

►      The return from the UK equity market over the 4 years to the end of March 2001 was equivalent to an annual average growth rate of around 14%. (Source Reuters).  However, inflation and interest rates have both fallen steadily in most major economies, and this means that future returns from various types of investment may not be as high as they have been in the past. This, in itself, not something to be worried about, since it is the real return that actually matters. However, given the prospect of continued low inflation, it is important not to get sucked into investments offering the prospect of higher absolute returns without fully understanding the additional risks involved.

►      Equities are a very volatile asset class, as has been amply demonstrated recently by the wild daily swings in all major stockmarkets. Again, this is not necessarily a problem provided that the long-term movement is in an upward direction and you do not have a short-term need for the funds.

So what should you be doing about your investments at the moment?

Here are some general pointers:

►      Make sure that any funds that are going to be required for expenditure or for tax in the next 12 months are held in cash or in very short-dated fixed income investments.

►      Work through some of those depressing ‘what if’ questions in the context of your finances. What will happen if you fall ill? If your partner becomes incapacitated? If you lose you job? If any of these crises could possibly have financial implications, then you will need to consider taking steps to protect yourself.

►      While dealing with some of these unpalatable thoughts, review your will. If you do not have one, then bear in mind that lawyers can and will charge huge fees for handling intestacies. Worse still, if you die intestate then your hard-earned capital may benefit individuals who you feel are undeserving or unsuitable.

Dealing with these issues will help you build a much better picture of the overall financial structure you are looking for. You now need to develop a broad investment strategy around your lifestyle goals to ensure your savings work in the best way for you. Are you looking at upgrading your property? Putting your children through school? Building up a nest egg for a rainy day or to supplement your pension? Protecting wealth for future generations? Whatever your goals, remember that unless you state them you are very unlikely realise them. As you build your investment strategy, you should also do the following:

►      Think about tax. There are many legitimate ways of investing and structuring your affairs to minimise the amount of tax that you pay. For example, are you sure that you are making full use of ISAs and pensions?

►      Think about risk. Can you, for instance, tolerate ongoing volatility in the stockmarket? If you have longer term objectives and do not need cash flow from your capital investments in the short term (perhaps because you are earning a good salary), then you may be able to. On the other hand, if recent stockmarket behaviour causes you sleepless nights, or if you are likely to need funds for other purposes in the short term, then you may find this less acceptable. If your aspirations for returns are modest, then why take more risk than you need to?

►      Think about your overall asset allocation – the way in which your assets are distributed between cash, property, fixed income investments, and equities. Does it suit your overall investment strategy? Have you diversified adequately between the various asset classes?

►      If you have cash available to invest for the longer term, then consider applying it slowly over a period of time.

►      Take advice. Even the most experienced of investors benefit from discussing their strategy with a professional. The marketplace today offers a huge and constantly changing array of financial products and services, and investment professionals will often be able to suggest better ways of achieving your objectives. If you have £500,000 or more of liquid funds, a private bank may well be your best overall source of advice. Other potential advisors include high street banks, independent financial advisors (IFAs), stockbrokers, solicitors, and accountants.

►      Having formulated and implemented your strategy, you should ensure that you review it regularly, either alone or with your advisors. Your circumstances and goals will change over time, as will the legal, economic, and market environment in which you plan.

The question I have not yet addressed is what the outlook for the equity markets really is. In the short term, lower economic growth and the increasing possibility of a recession warrant a cautious approach to equity investment. At Kleinwort Benson Private Bank we believe that such an outcome is unlikely, but it could be a close run thing. Ongoing reductions in interest rates and the package of tax cuts proposed in the US will help stimulate a market and economic pick-up in time, so there will be some attractive opportunities for the patient longer term investor in coming months. However, uncertainty seems likely to continue for a while.

Gail Cargill is a Client Relationship Management Director of Kleinwort Benson Private Bank. Before joining Kleinwort Benson at the end of last year she fulfilled a similar role at Coutts and prior to that held a number of management positions at Lloyds Private Banking. She is a Fellow of the Securities Institute and holds the Financial Planning Certificate.

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