Investing in the future

Lifestyle investing is increasingly important for solicitors and barristers alike. By Guy Davies

The arguments for investing in the financial markets, rather than keeping your assets in the bank, are well rehearsed. Over the long term, equities and bonds will generate higher returns than cash.
Whether it is to achieve a specific objective, or simply to provide a nest egg in these uncertain times, constructing an investment portfolio is time well spent.

However, selecting the right mix of assets for an investment portfolio can be challenging. With financial assets showing no signs of becoming more stable, and the array of choices becoming ever wider, constructing a prudently diversified investment portfolio can be a daunting task.

This is particularly important for partners in law firms. The value of the equity in the partnership will be exposed to changes in the capital of the firm, outstanding casework and fees, goodwill and the fixed assets of the practice. In addition, the profitability of the partnership will tend to be closely linked with the economy or the financial markets. Ideally, your investment portfolio should help protect you against the effects of any downturns in your professional life.

For barristers the same principle holds true. With little job security as a self-employed professional, the likelihood of peaks and troughs in casework, the need to make independent provision for a comfortable retirement, the desire for a nest egg that will grow over time but is accessible in times of need, is self-evident.

Exactly what constitutes prudent diversification will depend on individual circumstances. A portfolio suitable for a young lawyer with ambitions to become a partner may not be suitable in later life, when there is a need for income to help pay school fees or to help offset a lower income in the early years of partnership.

The solution for busy legal professionals with an investment portfolio to manage, but with limited time to devote, is to consider specialist wealth management. With a direct relationship with your portfolio manager, an investment strategy can be created around your circumstances and adapted as your needs change. This approach is often called ‘lifestyle investing’. The traditional spheres of investment are equities and bonds. Managed skillfully, they remain the core of a successful portfolio. However, the past few years have also taught many people about the importance of risk-adjusted investing. Traditional private client benchmarks tend to have very high equity weightings, and this makes portfolios constructed along those lines quite volatile.

Having spent many years working hard and building up a capital base, the last thing you want to see is the value of your investments bobbing around like a cork on the ocean. Many wealth management firms will recommend exposure to other, more innovative ways for investors to enhance returns and manage risk, including hedge funds, property and private equity. Such diversification should reduce the volatility of investment returns in the future.

Whether you choose to employ the services of a wealth management firm or decide to manage your own investment portfolio, the starting point for investors should be the same. Think about your investment objective and timescale. What do you require from your portfolio: Income? Capital growth? Or a bit of both? Consider your appetite for risk. Would it be acceptable to miss this objective some years if you exceed it in other years? Try to anticipate future capital requirements, so that you can plan for them. Will you have school fees to pay? If you become a partner, how will that be financed?
Ensure you are adequately diversified across all of your assets. Are you too exposed to property prices? What if the UK stock market weakens? Make sure that your portfolio is tax-efficient. If necessary, take advice from your accountant. And finally, when your portfolio is up and running, make sure that you review it and rebalance it regularly to maintain that diversification.

Guy Davies is director of business development at Baring Asset Management