Learning Material Sample

Investment principles, markets and environment

3. Client objectives and constraints

In this section, we aim to allow you to understand the various savings and lump sum investment objectives that individuals may have and how needs may vary.

Savings objectives

Regular savings

Individuals may wish to make regular savings of surplus funds for a wide variety of reasons. For instance, a person may have the objective to save in order to build sufficient funds to cover emergencies when and where required. In this instance, he is unlikely to wish to risk fluctuations to his capital as he saves. On the other hand, savings can be for a very long period of time and therefore the level of risk that the client is prepared to take, could potentially be higher in order to achieve greater returns. Examples would include saving for retirement or saving towards a young child’s senior school/university education.

Lump sum investments

Where individuals wish to invest ...

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...ical environment may impact on an individual’s savings and investment needs and how they are tackled. For instance, should individuals consider saving more for their retirement if the government of the day has a policy of continually reducing pension benefits provided via the state system? Should an individual invest over the short to medium term in property if it appears that over that period, economic factors will force the property market into a slump?

Other external factors certainly could impact on the choice of product that the individual makes once needs have been established. For example, will the product be most suitable bearing in mind its and the individual’s tax status? What will be the type and level of charges imposed on the prospective product? The higher the tax levied for a particular investor and the greater the charges, the lower the ultimate returns.


In this section, we aim to look in more detail at the factors that influence an individual’s savings and investment needs. Our audiovisual presentation provides an introduction to this section.

Savings and investment objectives

Variance in income needs

Investors will have a variety of income needs from their investment portfolio. Some will require a high level to supplement income received elsewhere. Often realistically high levels of income can be produced but at the price of lower or zero growth in the portfolio. The individual may even accept a gradual erosion of capital over time in order to ensure the level of income that he aspires to.

To others, the need for income may be low as the investor looks towards accumulating capital growth. In this instance, one should not ignore the role that income received by the investment could play in providing growth, as there is nothing to stop it from being continuously re-invested.

Some investors will require income to grow over the course of time. In these circumstances the choices reduce, but there are still products available in the market that achieve reasonable increases (often at the price of increased risk, less flexibility or perhaps a lower initial income).

Variance in growth needs

The need to provide growth in a savings or investment portfolio can be for many reasons. Ultimately, the type and available level of growth will vary depending upon the specific requirements and risk preferences of an individual. Capital growth could be in the form of real value being added to an asset or the reinvestment of income to purchase further “units” in the particular investment. Different asset types will produce different levels of income. We shall discuss this more when we look at the differing asset types.

Variance in combined income and growth needs

Where individuals require a combination of income and capital growth, they may have to accept that a variety of product types need to be used to satisfy the different requirements. Even where a p...

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...rges are likely to be much lower. The disadvantage of these funds is that they can never really outperform the index that they follow.


Gearing or leveraging refers to borrowing money within a portfolio in order to increase exposure to other assets. Borrowing in this way will magnify the possible increases and decreases to portfolio returns and is commonly felt to be a high risk strategy.

Balancing a portfolio

By diversifying across a range of different asset classes and sectors, individuals can provide a balance to their portfolios to reduce risk. The following list of asset classes demonstrates the potential returns and pitfalls that could be experienced when allocating funds towards them:


Variable rate cash deposits

These provide protection against rising interest rates. Poor long term performers in providing real returns especially after accounting for tax.

Fixed interest securities

Perform well in times of falling interest rates providing secure income and known capital returns at redemption. Lose value in times of rising inflation and interest rates. More volatile the longer the term to redemption.

Index linked securities

Provide protection against inflation if held to redemption. Long term performance likely to be less than that derived from equities.


Over the longer term can provide rising income and capital returns. In the shorter term, equity values are volatile. In times of economic slowdown, equities tend to perform badly. Overseas equity markets do not necessarily move in line with each other so diversification by selecting international investments could be viewed as a way of reducing risk.


Normally a good hedge against inflation over the longer term. Not directly correlated with other asset classes such as equities so can be used to reduce volatility in a portfolio.


Can also reduce risk in a portfolio in terms of volatility through diversification. Again little correlation with other asset classes.



In this section, we describe the key issues surrounding ethical investment and some ethical investment strategies. We also look at some risks associated with this method of investment.


Ethical investment is not a new phenomenon. In the last twenty or so years however, we have seen a growth in retail funds specifically geared towards an ethical investment strategy.

Originally these funds aimed to exclude companies from their portfolios on the grounds of the activities they were involved. In more recent times, we have seen a growth in socially responsible investment which rather than just operating on the basis of exclusion, looks to fund companies that actively promote or engage in best practice regarding environmental or social issues.

Obviously companies behave in a wide variety of ways and the concern for the in...

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...isks of strict ethical investing

There are risks to ethical investment:

Companies operating in accordance with strict ethical criteria are very often smaller and therefore at risk of suffering greater volatility in terms of profitability and therefore value

If investment funds narrow down their fund selection through strict ethical criteria, it follows that they may lack diversification thereby increasing risk within the overall portfolio. This problem may be countered by a less strict approach say, selection by best in sector

Ethical tracking funds will tend towards a higher tracking error against a benchmark such as the FSTE All-Share Index compared with a conventional index tracking fund

In recent years, a much wider variety of ethical based funds have entered the market allowing investors to enjoy much more choice.


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