The importance of planning

When it comes to investing, it’s advisable to take the long view and to follow a cautious approach.

Before investing, you should systematically ask the following questions:

• • How much of your savings do you want to invest?
  • Thinking about your various life goals, over what timescale should investments be made?
  • Do you have enough free cash – in addition to your investments – to cope with any unexpected costs?

Don’t put all your eggs in one basket

It’s important not to put all your eggs in one basket when investing. Diversification is key. It is essential to rely on different products and financial instruments, and a variety of economic sectors. Of course, there is a cost involved in ensuring this split and this also requires consideration. Investments denominated in other currencies also entail some costs.

What medium-term projects I should plan for?

Any form of wealth planning starts with taking stock. Next comes step two, which is extremely important – define your objectives based on your personal wishes and expectations and draw up a wealth plan that is as comprehensive as possible. The third step is called “wealth assessment and analysis” and involves analysing your assets once all the details are gathered together. A wealth assessment is then prepared and its likely development over the long term is considered. The fourth step – simulations – considers the various options for optimising the growth of your assets. The impact and relevance of these options are tested using simulations. The fifth step relates to changes – over time, the financial environment and tax regulations are likely to change, as is the personal and financial situation of clients. Wealth planning must be adapted to each change in circumstances.

Alternatives exist

Investors must prepare for a new environment, characterised by higher interest rates and turbulence on capital markets. In this environment, alternative investments may offer some significant advantages in light of renewed market volatility. However, you must know what you are aiming for and, if possible, seek expert guidance, whilst bearing in mind that complementarity is essential when it comes to investing.

Commodities have frequently served as protection against inflation.

Commodities have frequently served as protection against inflation, given that the demand for and the price of these products rise when the global economy is growing. In recent years, agricultural commodities have also seen broader interest.

Venture capital and private equity are a preferred option for investing in booming technology companies. This type of holding affords company bosses greater leeway than an IPO. However, there are many other options available to investors looking for exposure to venture capital and private equity. Nonetheless, it’s worth bearing in mind that innovative start-ups may not always be able to repay the capital invested in them. Venture capital providers rely on the fact that a few exceptional success stories will offset any failed investments.

The issue of liquidity

“Valuable” items – fine wines, works of art, gold and other jewellery or antiques – may offer alternatives that are open to many investors. Where these assets are bought as an investment, they cannot be assessed homogenously – the markets are different and the assets have distinct characteristics. In addition, it is not easy to sell them quickly, which is a problem if you need cash in a hurry.

Gold is particularly popular when markets or economies seem vulnerable (and it is supposed to offer a hedge against inflation, although its real performance in this respect is patchy). During the global financial crisis of 2007-2009, precious metals traders noted a rise in global demand for gold coins and small ingots. Investors were worried that the institutions that had traditionally held their assets would collapse, taking their money with them. Instead, they turned to an asset that has been popular for thousands of years as a store of value in times of crisis.

Tax advantages based on the type of property

Real estate investments also remain very popular. Which types of property are most attractive from a tax perspective? It is imperative to consider this question before investing in real estate. In Luxembourg, there are four types of properties: off-plan (VEFA) buildings, new builds, properties that are over five years old, and properties that are over 60 years old.

The costs incurred depend on the type of property. For example, for a VEFA building, stamp duty is only calculated on the land and any buildings present, which may considerably reduce the amount payable. Another key advantage is the option of annual tax depreciation of 4% for new builds (plus a special property allowance of 1%, based on the total of the depreciable amounts of the properties) during the first five years. Properties aged from 6 to 60 years can be depreciated at 2% per annum, and those aged over 60 at 3%. It’s therefore preferable to focus on a VEFA, new housing (less than five years old) or a property built over 60 years ago requiring substantial renovation work if you are looking for a buy-to-let.

In any event, it is important to gather all of the relevant information regarding the various tax issues and to take advice on the matter.

Buying a second home provides extra financial security, provided that you understand the risks involved and take the necessary precautions.

A second home as financial security

From a financial perspective, there are many reasons to buy a second home, such as generating rental income or diversifying your property portfolio. It’s an attractive idea – if only with a view to securing your retirement abroad – but it may also bolster your financial security, provided that you understand the risks involved and take the necessary precautions.

As with the purchase of your main residence, buying a second home is not a financial decision that you should take lightly or in a hurry. The price of the property is only ever the starting point. On top of this, there will be administrative expenses, in particular, legal, notary and agency fees, stamp duty and taxes, which may be higher than for your main residence. Note that fees vary from one country to another and may add an additional 10% onto the price of the property.