Cash Versus Investing

The rise in interest rates over the last few years has taken many by surprise. Cash rates are looking attractive, especially if locked away for a year, and on top of that without any investment risk. Compare this to 18 months ago when cash was offering next to nothing.

So, for some, the temptation is to retire to the comfort of cash and a ‘reliable’ return, especially as returns over the last few years from most investment portfolios have been underwhelming.

But is this a sensible strategy? The answer, as always, is ‘it depends.’

For existing investors who require access to their money in the short term this could be a sound strategy. ‘Short’, as rule of thumb, typically means up to 2 years, although in some cases it could be a shorter or longer timeframe.

However, for longer-term investors who do not require short-term access to their money it is less likely to be the right decision.

This is because over the long run, cash will almost certainly not deliver inflation-beating returns. It has been proven that over most long-term timeframes an investment portfolio which contains a significant allocation to equities/shares has outperformed cash.

Of course, there is risk to consider but the longer an investment is held the more likely it will ride out the ups and downs of the investment markets. Furthermore, to reduce risk it is best to diversify across different assets (stuff you can invest in), geographical areas and sectors so all the eggs are not in one basket!

The problem with investing is that it can be uncertain and scary, and doesn’t always seem appealing. There is the temptation to sell out and/or wait for a better entry-point. However, although not always easy, investing should be viewed through the lens of a long-term horizon and aligned to a loosely held plan towards where the needle is pointing.

For investors with a longer-term horizon the cost of moving to cash could be costly.

Practicing Healthy & Wealthy Habits

Investing and health are two important things in life, but they can also be confusing. There is so much conflicting data, articles and advice.

I recently read that one of the bestselling books of the year is physician Peter Attia’s Outlive: The Science & Art of Longevity. The book looks at recent scientific research on aging and explores strategies for not only living longer but also living healthier.

There are clear parallels here between our health and how I believe we should think about investing. Some examples of this are as follows:

• There’s no one-size-fits-all solution. From an investing perspective we all have different aspirations and risk tolerances, and I believe the best investment strategy is the one a person can stick with. The same can be said about our ongoing health.
  

• There are no quick fixes. As with our health the same applies to investing. To take advantage of the power of compounding we need time. Smart investing, like good health, requires long term discipline and commitment.
  

• It’s better to prevent problems than being in the position of having to fix them. We can be proactive about how we approach investing by accepting uncertainty, building robust and well diversified portfolios so we stay the course, and importantly, which fits within a plan which is both flexible and accounts for a range of outcomes. It’s the same with our health – making the best-informed decisions whilst recognising the outcomes are uncertain.
  

Attia sees the goal of medicine (which can have various connotations) as prolonging not only our life span but also our “health span” so that we’re in the best shape to enjoy what matters most to us.

When it comes to investing, the aim is to experience a successful journey so our accumulated wealth can be used to lead the lives we want to live while feeling comfortable and safe along the way.  Having a healthy “wealth span” is not just about accumulating money, but aligning it towards what really matters.

Helping people change how they approach their health is important, but to me helping people change the way they invest is also important work. By recognising the importance of prevention and implementing tailored strategies, there is a common theme around making informed choices to lead both healthier and wealthier lives.

What's Your True Net Worth?

Many apps and devices today claim to instantly calculate your net worth by adding up your bank and investment accounts and then deducting anything that you owe. To my mind that number reflects how much money you have, not your net worth.

Money is a means to an end. What we are really after is worth, which is much more complex. There are many people who have a high net worth who don’t have very large figures in their bank account. They have a high net worth because they have most or all of the things they want in terms of their family and lifestyle.

Worth is about having the things that are meaningful and matter to you. It’s about deepening the connection between your life and your money and working towards overlapping them so they are in sync. This is not necessarily easy to do.

Real financial planning is the ongoing process of aligning the use of your capital – money, time, energy and attention – with what’s important to you. The important point is that it is not a plan, but a process around articulating what is important and taking actionable steps towards closing the gap (if there is one) and matching up to what matters.

It is not always easy to articulate the “what’s important” part. I believe this is not a one-time goal clarification event but rather an evolving discovery process over time.

Stephen Covey, the author of the powerful book “Start With Why” quipped that “people may spend their whole lives climbing the ladder of success only to find, once they reach the top, that the ladder is leaning against the wrong wall.”

We perhaps have to be careful about which ladders we are choosing to climb!

We are being influenced all the time by the things we watch, read and listen to, as well as the friends, family, colleagues and advisers we talk to. Most of the time we probably don’t notice how our thoughts and behaviour are being shaped by outside influences and how this in turn influences what we perceive to be important to us.

Rather than influences from other people, I believe it helps to get more intentional to the way we think about what is important. Thinking this through by listing a hierarchy of our values and prioritising them may be a helpful starting point, as well as articulating what is enough. If it’s “things” (objects) that is desired, then it’s probably not important. Putting a value on a thing that is not rooted in a relationship is unlikely to be enough.

So, in summary, it is not easy to articulate what is important and what really matters. It is an ongoing journey of discovery and making course corrections. The initial focus should not be on how much is in your bank account or investment portfolio but on thinking through and over time working towards achieving and maintaining your true net worth. Financial strategies can then be used to help build and support this.

Tax by Stealth!

It goes without saying that it has been a tumultuous year witnessed by one extreme event after another. And that is before any reference is made to British politics with three Prime Ministers and Chancellors holding office in as many months. It can all feel somewhat chaotic.

In respect of the recent Autumn Statement, it didn’t take a rocket scientist (which I’m not) to expect some tax raising measures. It was always going to be a tricky balancing act for the new Chancellor between stabilising public finances, calming the markets, bringing down inflation and trying to fill up the government’s coffers by raising tax revenue.

Basically, what we got was a reverse of the unfunded tax cuts announced by the previous incumbent. So, instead of £45 billion of tax cuts we have approximately £22 billion of tax increases and £19 billion of spending cuts coming through over the next few years.

Within this, a key part of the government’s strategy has been to freeze a number of allowances. So, what is frozen? It’s a bit like looking into the freezer and seeing what is in there and ensuring that they are all being used up!

Perhaps the freezing of the personal and higher rate tax allowances are the most memorable; with these being extended into a “deep freeze” until April 2028. The long and the short of it is that millions more people will fall into the tax net, with many paying higher rate tax for the first time.

Furthermore, the 40% higher rate tax band effectively ends at £100,000 because above this the personal allowance is tapered down by £1 for every £2 over this threshold. The additional 45% rate of tax was not frozen, but instead reduced to £125,140 – a somewhat strange number. This is because this figure is double the personal allowance and has been set at this level to avoid an effective 65% tax rate on £140 of income.

Also, the Inheritance Tax Nil Rate Bands have been frozen until April 2028. This is another “deep freeze”, which is likely to generate quite a bit of money for the government. Plus, not forgetting the quite significant stepped reduction in both the dividend and capital gains allowances over the next couple of years.

It’s tax by stealth which works well for the government. These measures increase the amount of tax taken, but because per se they are not a tax increase, I am of the view that the government does not feel the general public will react too unfavourably towards them.

A key takeaway, where appropriate, is to fill up the tax no brainers such as ISAs and Pensions first and utilise all the available allowances and to repeat this every year. The integration of all these moving parts is becoming even more important and is a key tax saving component when designing a financial planning strategy.

Despite these changes there is still scope to save significant amounts of tax, especially if this is undertaken as part of a regular tax planning strategy. After all, the benefit of saving tax is to have more money in our pockets for spending, to invest or give away.

Uncertainty is Certain!

It is fair to say that the world is very different to where it was at the start of the year. Back then Government was relatively stable, inflation was at a much lower level and there was peace in Europe. Fast forward to today and the picture has changed dramatically.

These unexpected events also reflect our own lives. Life equals unpredictability and uncertainty. Many of us crave for certainty, which is compounded by the media’s obsession with trying to predict the future. Certainty can’t be delivered.

And this also applies when it comes to financial planning. The plan will always be wrong because unexpected events will happen. Plans should be loosely held because they will be blown off course; the landscape ahead of us is constantly moving and changing.

Planning, therefore, is about making course corrections in the face of uncertainty and taking small regular steps to get back on a chosen path. It is a process which never ends.

Although I’m no aviation expert it is my understanding that most pilots prepare a detailed flight plan for every flight (and I would definitely only want to fly with those that do). How often does the flight go according to plan? Apparently, never! And when you think about it that makes sense. They are constantly course correcting. If everything did go according to plan we wouldn’t need pilots in the first place and they would be outsourced to robots.

The same goes for financial planning. It’s about the ability to adapt when the flight doesn’t go according to plan (which is always going to be the case).

I believe the traditional financial services industry tries to “sell” certainty. It’s easy to say, but impossible to deliver. For example, comparing investment returns this year versus last year the range of outcomes have been extreme to say the least. The average targeted rate of return will never be achieved in a given year within an investment lifetime. The performance line will never be straight. It’s not how the investment markets work. The journey will always be squiggly. There will be peaks and troughs, just as in life.

Financial planning is a never ending process. The plan is never done. It’s not about being right today or trying to predict the future. It’s about being less wrong tomorrow and making regular course corrections in the face of uncertainty.

What Matters!

It feels as if we are being buffeted from pillar to post almost on a daily basis by the extraordinary events that are occurring both at home and around the world. At this current time, these are mainly centred around the multitude of economic challenges at play and how best to tackle the rough waters ahead. The media are having a field day.

Chaos reigns and there looks to be no end in sight. We’ve come through several difficult challenges over the last few years and for some it has been draining. I’m sure there will be a lot of talk about current events between friends and family, as well as down the pub and in restaurants. We all have an opinion. These events will blow away, the economy and the investment markets will pull through as this is what typically happens.

Looking at this through a different lens there are so many things that are out of our control. Although it is not always easy to do it is best to focus on the things that we can control, by aligning the use of our capital to what is important to us.

By capital I mean what we do with our time, what we spend our money on, and where we focus our energy and attention. This is a challenge because we are constantly getting blown off course and distracted. It’s human nature.

Furthermore, how do we know and identify what is important to us? I believe most of us struggle with this because being busy (as well as the media scaremongering) detracts us from giving this sufficient thought. Our “why” and purpose is often getting overlooked.

For many of us, and for most of the time there is a gap between how we use our time, money, energy and attention and how we know deep down we want to use it. We all have blind spots and we can help each other by calling out on these.

We regret the things we don’t do more than the things we do. So amongst all the mayhem and chaos it is best to focus on the things that matter and the things we can control.

Why Long-Term Investing Is Crucial

We continue to live in a time of extreme uncertainty. Against the backdrop of the ongoing war in Ukraine and the cost of living crisis it’s human nature to wonder what impact these events will have on the performance of our investments.

I don’t know what is going to happen from here, however, given the evidence of history the odds are in our favour that the investment markets over the long term will deliver the returns that are needed to help us get to where we want to go. By long term, I mean decades rather than years. This gives us the greatest chance to capture the power of compounding and bank those little gains which add up over time.

By zooming out over a longer timescale the current downward movements we are currently seeing will appear to be a small blip within a longer-term upward trend.

In order to stay calm and not panic in these situations it is imperative that a plan is in place. By a plan I don’t mean a two inch thick book, but something which can be loosely set out onto just one page which ideally aligns your capital (time, money, energy and attention) to what is important to you.

Everyone’s situation is different, and when it comes to creating an investment portfolio which is aligned to the plan, the degree of risk to be taken will vary. One of the key components of not selling out when things get scary is having undertaken a “fire drill”, in other words, having an awareness of how much your portfolio could fall by in the event of a market crash scenario. This is hopefully to avoid panic when this does happen, which thankfully is not very often.

When it comes to risk, in return for taking more of this the ups and downs will be bigger and the returns are likely to be higher over the long term. Taking a lower level of risk may result in a more comfortable investment journey but will result in giving up some of the upside when markets are going up. It’s about getting that balance right and aligning all the relevant considerations to the plan.

Sometimes when markets are down we can find ourselves tempted to make a change. However, trying to time short term moves has more in common with gambling than long term investing. A key part of investing is to accept that shocks will happen. At the current time there is inflation, fear of a recession, a war in Ukraine and bigger daily movements in the markets. Nobody knows when this is going to end and what will cause the next shock or when it will occur. It’s going to come as a surprise as it always does because if it didn’t the market would have already priced it in.

As a long-term investor, the good news is that you can capture the returns of the market without trying to speculate because no one is consistently good at doing this. Investing equals uncertainty. Uncertainty never goes away. If it did, there wouldn’t be a positive premium to gain from. There have been a lot of negative surprises over the last 25 years or so, but also a lot of positive ones as well and the markets have continued on an upward trend.

It is not easy to stay disciplined and stick with an investment strategy when we are experiencing this current turbulence. I think it is also important to focus on the things that are in our control (unlike the markets), like cutting out spending on pointless stuff and instead focus spending on the things that matter. 

It is tough being an investor right now but by having your portfolio aligned to a plan should help you maintain a long term perspective and the ability to stick with it and reap the resulting benefits.

Property or Pension?

Property or pension? This is a question I am frequently asked and one which is given a significant amount of coverage in the financial press. I often hear people boasting that their property is their pension, or that their buy-to-let is the best investment they have ever made. The image of a little place by the sea as an investment before retiring to live in it can be a strong pull for many people.

So, can property replace the need for a pension? The short answer – it depends!

I believe the starting point is to view this in the context of the bigger picture, and to avoid the temptation of just looking at the numbers. By this I mean firstly understanding what the priorities are, what is really important, what resources are available both now, and in the future and whether owning a second property is aligned with all of this and the vison for the future. Everything should flow down from this and also because the reality of investing in property is far more complicated than many expect.

At a more tactical level how does property ownership and pensions compare? Firstly, I believe that for a lot of people property is much easier to understand and for a start it is a tangible asset with a structural presence which gives peace of mind. By comparison, the benefits of investing into a pension are harder to grasp and it takes longer for this to have an impact.

As with investing in a pension, there is no certainty that property prices will rise, and tax reliefs are far less generous than with pensions. However, investing in property has been a relatively stable long-term investment, with the exception of 2008 and 2009 when the world was gripped by the financial crisis.

And although the performance of a low cost, globally diversified investment inside a pension is likely to far outstrip a property investment over the long-term, people perhaps do not see that and only benefit from it when they access their pot. Furthermore, with a pension investment there will be downturns which can often mean accepting lower returns over some periods, and a need for patience with the resulting challenge to stick the course. A rental in Chelmsford may seem to many a safer bet as an alternative income source!

Also, there is a tax sting. Most owners will pay the additional rate of stamp duty, which is the normal rate plus 3%. If owned directly rather than via a company structure tax is paid on rental profits (less allowable expenses) – at 20%, 40% or 45%, depending on the personal tax position. Furthermore, mortgage interest relief is now only given as a tax reducer at the basic rate of 20%. Capital gains tax will also be due at 18% or 28% again depending on an individual’s personal tax position.

Buying and maintaining a second property is not always an easy ride. There is the consideration of the potential hassle of being a landlord, which might not be compatible with any desire to wind down. Also, for those who are not lucky enough to purchase in cash there is the potential issue of borrowing which may feel uncomfortable to some, especially if the residential mortgage is about to be or has just been paid off.

In conclusion, a property investment can fit in alongside a pension although I would caution against being overweight in property with a resulting lack of diversification. Property prices do not go up in a straight line and they don’t always rise.

Being mindful of the bigger picture there is a risk that if the sole driver is to just make money this may reduce the ability to do other things, depleting resources that might otherwise be available. This may increase stress levels and diminish the ability to focus on what is important. In my view it is better to use resources which contribute to the quality of life and owning an investment property may or may not fit in with that.

What we should focus on

As investors, we are currently facing numerous challenges as the horror and human tragedy of the war in Ukraine continues, inflation soars and interest rates rise – not to mention the last throes of the pandemic which is taking hold once again in China.

Our first thoughts must be with everyone affected by the terrible events in Ukraine. It can feel somewhat inappropriate to consider investment themes when confronted by the scale of human suffering we are seeing and reading on our screens – an alien world to the freedoms and peace we are accustomed to here.

But part of my role is to steer clients through immense uncertainty and an ever changing landscape.

Somewhat surprisingly global equity markets are still around the level they were prior to the Russian invasion. Big events, such as wars, have historically had little impact on markets in the long run.

During these periods, if you were to look at the trajectory of your portfolio on a regular basis (daily, weekly or monthly) you would probably see some significant fluctuations. However, looking quarterly or preferably over annual periods there would be significantly more positive periods than negative ones.

Looking back over decades global equity markets have typically generated a positive return in three years out of every four. A way of looking at this is that the negative year earns you the other three! The investment markets don’t move in a straight line but fluctuate generally on an upward trend over the longer term.

The less you look at your investment portfolio the better.

However, the danger is that our emotions can take over and we can react to emotional prompts by what we see and hear in the media. This can be our enemy to generating long term returns.

The media is not a friend of the patient and disciplined investor. With the constant barrage of financial news telling us what we should buy and what we should sell there is a temptation, especially with current events as they are, to get blown off course and to chase short term returns.

No one can predict when the positive and negative periods will occur and which investments will perform the best and the worst. It’s akin to buying a lottery ticket.

Investing is a long term game, and contrary to the day trader, what happens in the next 30 days is likely to be unimportant to your plans. If you are in it for the long term the odds of a successful investment journey are stacked in your favour.

While I don’t know where markets will be in 6 months, I’m pretty confident where they will be in 10 years – higher than where they are now. Time is the enemy of market declines and generally we have plenty of it.

With all of this, it is important to remember that the big picture is crucial and to focus on the things that we can control. Life is centred around adapting to what lies ahead in the face of all the challenges and uncertainty that is thrown at us.

In respect of current events, the worse might not be over. However, 2020 and 2021 was a great case study in adapting to a challenging environment. The path ahead will not be a straight one (because it never is) and will require continued navigation to steer a course in the direction we want to go.

Holding firm in the face of uncertainty

With the heart-breaking images we are seeing from Ukraine, it is perhaps hard to focus on the ‘bigger picture’ in respect of our own planning. The depressing and upsetting scenes make this even harder when taking into account what might still be to come as Russia encircles Ukraine’s major cities. We can only hope it doesn’t escalate.

On the investment front, financial markets are likely to remain volatile and with these fluctuations come the inevitable increase in media coverage and the usual financial scaremongering.

As with during the early days of the Covid pandemic it is best to focus on the long term, rather than be pulled by short term emotions.

It’s human nature to attempt to take some form of action, for example, by attempting to ‘time the market’. However, trying to pick winners and avoiding losers is a dangerous game. Although this is a scary and uncertain situation removing emotion from the investment decision making process reduces the likelihood of making a mistake.

At a higher level, it is worth remembering that within a globally diversified investment portfolio, diversification will naturally minimise the risk of loss. If one country performs poorly over a certain period, other countries may perform better over that same period, reducing the potential losses of the portfolio compared to if it had been concentrated in one market. The aim is to position the portfolio in a way where the gains offset the losses, delivering a smoother ride.

Taking a step back, these current events are a sharp reminder how uncertain and unpredictable the world, and life in general, is. A country has done what was considered unthinkable in the modern era, with no one knowing what is going to happen. Not wanting to sound dispassionate, when it comes to investing, I believe it is best to encourage a long-term mindset and try and ignore the push and pull of the ‘financial’ media and suppress our short-term emotions.

Inflation; it's personal

Over the past few weeks the headlines have been dominated by inflation, and especially with regard to the rising cost of our energy bills. There is the usual media scaremongering that inflation is spiralling out of control with even some jumping to the conclusion that it could be a return to the 1970s.

I acknowledge that we’re all being squeezed in some form or another, and this is a phenomenon we have not experienced for over a generation. Those of us born later than the early 70’s won’t have an emotional connection to this – I’m just about one of those without that experience!

Anyone though who was an adult through the 70s and 80s is likely to have a clear memory of high inflation and the stresses it can cause. Since the early 90s inflation hasn’t been a problem in developed countries.

Whether the rise in inflation is temporary or long lived, nobody can say, and nobody has a crystal ball. The current situation has been caused by a combination of factors – supply chain disruption from Covid 19, record amounts of government spending and huge pent-up demand for people to spend which has caused a bottleneck in the system.

There are of course geopolitical events linked to energy prices at play here and it’s hard to ignore their part in driving inflation concerns. However, it is worth noting that the rise in energy prices isn’t just down to geopolitics. There are a whole host of global issues constraining supply; low wind over the course of the summer, demand from Asia and a cold winter in Europe last winter draining storage to mention but a few. It is very unlikely these will play out again simultaneously.

Furthermore, the average person doesn’t spend that much on energy and the reality is that for most people energy prices don’t matter as much as perceived wisdom suggests.

Also, the inflation rate you see or hear on the news will almost certainly not relate to your personal experience of prices. This is because the rate is based on a basket of goods based on the average person’s spending. In reality, it doesn’t mean a great deal because none of us are the average person.

To make this point ‘recreation and culture’ makes up 11% of the spending basket. That might reflect your spending at a headline level - or it might be a lot more or a lot less. But dig a little deeper and the constituents within this include things such as camper vans, acoustic guitars, barbecues, football season tickets, hamsters the list goes on and on. How relevant are these items?

Moreover, health spending represents 2% of the basket. As people age that number could be significantly higher. Our spending habits change over time and looking through the basket there are lots of things that to me seem very odd, but might be perfectly acceptable to someone else. That’s the problem when pundits get carried away with meaningless predictions that “inflation will be higher.” We all have our own personal inflation rate.

However, I believe many people are currently wondering how they can mitigate the effects of inflation. There is of course the option to reign in a bit and spend less, although through financial planning this may not need to be the case if it can be shown there is going to be enough money in the pot.

From an investor’s perspective the aim is to ensure an investment keeps pace with inflation and to have a good chance of achieving this it is best to invest into a diversified portfolio to be held ideally for 5 years plus. As a result, investing may be less effective for countering short term inflation and is more suitable for investors who have a longer time horizon.

In summary, it is extremely difficult to predict the trajectory inflation will take and our personal inflation rate will be different to the headline rate, which won’t reflect the things we spend our money on. If inflation is to remain high in the near term it is not necessarily doom and gloom, and having a diversified investment portfolio should help to counter this over the longer term.

Time is Precious

I heard a really powerful statement recently which I believe came from Confucius, the Chinese philosopher.

It goes something like this – “we each have two lives and the second one starts when we realise we only have one.” It kind of took me aback a bit and made me think why am I holding back and procrastinating from doing certain things when the opportunity to do them, for whatever reason, might be taken away.

As another year goes by we are all getting short of time – the clock is ticking and time is running out. It’s so easy to get wrapped up in the busy, busy, day to day stuff of life.

Simplistically, it could be stated that there are two key financial planning life stages – the saving stage when we are working and the spending stage when we have stopped. However, it should not be viewed as a cliff edge.

Of course, it is prudent to save as much as we reasonably can while we are working. However, I disagree that we should work as much as we can during this stage so that we can live comfortably when we “retire”. Life isn’t just about retirement and a financial plan should not have such a rigid framework that denies us from being happy and living today.

There is more to financial planning than just seeing our money go up forever. What matters most is what we do with our lives, not how much money we have got. Money does not make us happy, it’s how we use it that matters. Also, it’s not about status and possessions. Creating wealth does not necessarily lead to living a life well lived.

I believe three key components towards living a fulfilled life are firstly, having time to do the things that are important. Secondly, being in the right location and thirdly achieving financial freedom (where enough money has been accumulated).

They may not all be ticked and greater weighting may be placed on one compared to the other two. For example, I am yet to achieve financial freedom but spending time outdoors when I choose (within reason) is really important to me.

Getting the balance right between enjoying the here and now (which does not necessarily mean spending money) and holding back towards something in the future is no easy task. Furthermore, we don’t always know what we want and often we think what we desire is by observing what other people have got.

However, having “more” of something is unlikely to make us happier. Our lives should be designed towards what makes us happy and trying to understand what happiness looks like is the key. The trouble is most if us think we have time but the ticking of the clock is getting louder.

Living in an Uncertain Landscape

As we head into the last two weeks of the year, we are once again living in uncertain times and Covid is dominating the headlines once again.

We are seeing an increase in case numbers and a tightening of restrictions with more confusion around what we can and can’t do.

In addition to this, we are constantly being buffeted by negative news which is overloaded with doom and gloom. Sadly, this attracts the headlines, much of which is noise and scaremongering.

Although it is not always easy to do, it is best to cut out the noise that comes our way and focus on the things that we can control and care about. The landscape we live in will always be constantly changing. Life is full of uncertainties and it is easy to get blown off course. Making small course corrections on a regular basis helps to move the needle back towards the direction we want to head in.

On a similar theme, I have recently seen some media scaremongering coming from the financial press (does it ever stop!) around whether the stock market (in particular the US market which has recently hit an all time high) is going to “fall off a cliff!”

Many investors appear to think a market high is a signal that risk assets (equities) are overvalued or have reached a ceiling. However, it is worth noting that average returns of the Standard & Poor 500 index (this is one of the most followed indices which tracks 500 large companies in the US) over 1, 3 and 5 years after a new market high, are similar to the average returns over any 1, 3 and 5 year period.

As I have written before, I’m no investment guru and I haven’t a clue what the markets are going to do but reaching a new high doesn’t necessarily mean that the market will retreat. Equities are priced to deliver a positive expected return over time so reaching record highs regularly is the outcome one should expect.

So again, as with other headlines it is best to cut out this noise and focus on the things that are important to us. It’s best to ignore all the scaremongering and not let the doom and gloom news drag us down, and perhaps consider those who have been less fortunate than us over the last couple of years.

Turning to 2022, seeing the back of the pandemic is probably on top of everyone’s wish list for next year. Hopefully, we can focus on life after Covid and look forward to the coming year and everything we can hope it will bring with a continued spirit of optimism.

The Importance of Setting Up LPAs

Setting up Lasting Power of Attorneys (LPAs) is incredibly important. It is a common misconception that an LPA is only needed for those that are of an older age. Although we might think the unexpected won’t happen to us, it can and does. The reality is that capacity can be lost at any time as a result of a serious accident, mental illness (degenerative or otherwise) or stroke.

What is an LPA?

An LPA is a legal document which allows a person (known as the donor) to appoint someone they know and trust to make decisions on their behalf should they become unable to do so in the future. This person is called an attorney, and more than one can be appointed. Attorneys must always act in the best interests of the donor.

There are two types of LPA:

·       Health and Welfare

·       Property and Financial Affairs

A Health and Welfare LPA grants the attorney the power to decide on your medical care, including treatments and surgeries. It would also give them authority on living arrangements, for example, such as where you were to live. However, you can also set out instructions in the LPA which are legally binding. An example might be that you only wish to move into residential care unless, in your doctor’s opinion, you can no longer live independently.

A Property and Financial LPA grants the attorney the power to manage your finances and property. Again, there is the option to specify certain preferences and/or instructions. Examples could be that you wish to maintain a minimum balance in your bank account or that your attorney must not sell your home unless in your doctor’s opinion you can no longer live independently.

However, you may just prefer to talk to your attorneys as specifying any instructions can cause potential complications. My view would be to only include any preferences and/or instructions in relation to any matters which you feel strongly about.

When does it come into effect?

A Health and Welfare LPA will only come into effect once the donor loses mental capacity and providing it has been registered with the Office of Public Guardian (OPG).

You can decide when a Property and Financial LPA comes into effect. It is advisable that this happens when the LPA is registered. This affords the most flexibility because your attorneys won’t have to ever prove you have lost mental capacity which can sometimes be difficult to do. It is important to note that while you have mental capacity you will be in control of all your decisions and your attorneys can only make decisions if you allow them to.

Registering your LPAs with the OPG can take up to 12 weeks or possibly longer so it is important you register them as soon as they are set up.

What happens if you do not have an LPA?

If you don’t have an LPA and you become unable to make your own decisions life can become stressful, challenging and expensive for you and your family. The people who you would want to act on your behalf would not automatically be able to take control of your affairs or make decisions around your welfare. Instead, others would have to make decisions for you and they may not be what you would have wanted i.e. social services deciding where you live and what care your receive.

If capacity is lost and there are no LPAs in place, a friend or family member can apply to the Court of Protection to be a Deputy for you and make decisions on your behalf. However, this is a time consuming, long and expensive process which can take 6 months or more. In the interim, a stranger is likely to be appointed as a Deputy with the result that the wrong person may be given control of your affairs and ultimately you have had no say as to who looks after your situation.

To conclude, it is much cheaper and far more effective to have LPAs in place. They are relatively easy to set up and the potential benefits are significant when compared to not having them in place. Setting up LPAs should be an integral part of any financial plan.

A Framework for Investing

I’m no investment guru, I do not have a crystal ball and I can’t predict the future.

So, when it comes to investing a key part of the planning process is to align your money towards where you want to be heading; and not to bet on the next hot fund to buy, nor try and speculate in which direction the markets are going to go.

Importantly though, any plan needs to account for the reality that markets go down as well as up. Instead of getting hung up on predicting when the next downturn will occur (which the media do all the time and especially at the moment) it is best to simply accept that it is inevitable at some point and focus on sticking to your plan when it does.

It is important you have an understanding of risk and how you may react in the event of a market crash. Understanding and being comfortable with this is a really important step in the planning process.

By way of an example, let’s say you invest £500,000 into a super diversified investment portfolio with a target allocation of 60% risk assets (global equities) and 40% defensive assets (global fixed interest securities, which confusingly are also known as bonds).

The worst 1 year fall for this type of portfolio over the last 65 years or so would have been around 20%. So, if you were unlucky and had invested just before such a crash your portfolio after 12 months would be worth around £400,000. If this scenario were to play out, it would be best to hold firm and take into account the historical long term upward trend of the markets and to take a long-term perspective, with the expectation that your portfolio will recover. However, investing evokes emotion and this is not always easy to do.

Another 12 months goes by and your portfolio has fallen to £395,000. A fall of 21% since the start date 2 years before. You have experienced two years in a row where returns have been negative. Do you stick with it or run? Your faith that equities will perform better than cash over the longer term, just as they always have, would probably be tested. However, if you can accept that basic framework then no matter how scary it can feel when markets are falling it is just part of the deal of investing.

For the record, the falls noted above occurred in the two-year period up to January 1975. The ten-year return from 1975 onward was 500%. So, for those investors who had held firm their portfolio would have ballooned to around £2.3 million (not adjusted for inflation).

This is an extreme example which won’t happen very often but can be used to illustrate the range of best and worst returns and the importance of taking a long-term view. This in turn can help you to select the right blend of risk and defensive assets which you are comfortable with and which will hopefully meet the needs of your plan.

Part of the dilemma of investing is that no matter how much data we have about the past, we have no data about the future. No matter what history says about the long-term upward trend of the stock market, we still don’t know for sure what the future will bring.

I have no idea how we are going to deal with the massive public debt and all the other doom and gloom the media is throwing at us, but I do believe that we will get through it. To me, investing is based on the weighty evidence of history and seems the most prudent thing to do. So far it has always proven to be correct and so is in our favour. Given this record it is reasonable to assume that your investment portfolio will continue to significantly perform better than cash over the longer term.

On the basis you agree, keep it simple and stick to five principles:

1.       Diversify your portfolio.

2.       Keep costs low.

3.       Establish the right mix of risk and defensive assets and remember there is a correlation between risk and reward.

4.       Focus on returns in terms of 5 years plus, and not in days, weeks, months or a couple of years.

5.       Be disciplined and stay the course.

So, you don’t need to be an investment guru to have a good chance of experiencing a successful investment journey. Although there will be good and bad times, and abandoning a planned investment strategy can be costly, it is best to hold firm and prior to investing have an understanding as to what could happen to your portfolio in the event of a major crash. Thankfully, they don’t happen too often.

The Benefits of Charitable Giving

Basically, we have four choices as to what to do with our money – we can spend it, save it, invest it or give it away and quite often it can be a combination of all these.

As a result of the pandemic many charitable organisations are struggling with funding their work, so this blog focuses on giving money away and the options that are available to support charities and the tax benefits of doing this, both during lifetime (active giving) and via a Will (passive giving).

Charitable giving during lifetime

A recent survey conducted by the Personal Finance Society showed that less than a quarter of clients of financial advisers made donations to charity. I believe this may have something to do with the fact that clients of advisers want to put their family first. Furthermore, they may also be uncertain as to whether they can afford to make charitable gifts and are also likely to be unaware of the benefits of charitable giving, perhaps seeing it as something for the “rich few.”

As well as the pleasure and happiness that can often be derived from charitable giving, the tax benefits are generous. If someone donates £100 to a charity and they are a taxpayer, Gift Aid increases that to £125. The charity can reclaim £25 because the donor (person making the gift) is regarded as having basic rate tax deducted on the gross amount.

If the donor is a 40% taxpayer, they can reclaim 20% tax relief through their tax return. On a donation of £125 this would be £25. Furthermore, charitable donations can be used to reclaim the personal allowance for individuals whose taxable income exceeds £100,000. The income tax personal allowance reduces by £1 for every £2 over £100,000. However, Gift Aid donations can restore the personal allowance with an effective tax relief of 60%.

To make a Gift Aid donation you must pay at least as much Income Tax and/or Capital Gains Tax as the amount reclaimed by the charity. The source of the gift can be capital and therefore doesn’t have to be natural income. Also, assets such as qualifying shares can be gifted to a charity and any capital gains will not be taxed.

Where there is a desire to make “significant” gifts, there may be a disconnect between being able to afford to make the gift (and benefiting from the tax relief) and choosing a charity or chosen project. To address this potential barrier there is a structure where a gift can be made into a donor advised fund. This type of structure separates out the securing of the tax relief from the identification of an appropriate project. At the point the gift (or series of gifts) is made into the fund the tax benefits are received but the donor can then decide at what point grants are paid out of the fund to their chosen charities or project.

This structure is likely to appeal to individuals or couples who have assets in excess of £5m and who perhaps don’t want to have the hassle and cost of setting up their own charitable foundation.

Although this type of structure will only be relevant to a small minority the tax benefits of making gifts is available to the majority. Furthermore, there is an unlimited exemption from Inheritance Tax on any gifts to a charity made during lifetime.

Charitable giving via a Will

In order to encourage charitable giving and philanthropy gifts to charity via a Will are exempt from Inheritance Tax (IHT) regardless of the size of the gift. Furthermore, a reduced rate of IHT applies where a deceased leaves 10% or more of their net chargeable estate to charity. The net chargeable estate is what remains after the deduction of available IHT free allowances (the nil rate and residence nil rate bands). In such cases the usual 40% rate will be reduced by 10% to 36%.

As to how this works in practice, I will use a simple example of a surviving spouse’s estate which is worth £1 million, with a gift of £50,000 being left to a charity and the rest to the children. After the combined nil rate bands of £650,000 are deducted this leaves a baseline amount of £350,000. The £50,000 gift exceeds 10% of the baseline amount so the reduced tax rate of 36% will apply to the part of the estate passing to the children.

As a result, the IHT liability is reduced by £12,000 to £108,000 (36% of £300,000). The calculation can be more complexed where there are also assets held in trust, but it is a tax planning opportunity which can often get overlooked.

In conclusion, financial planning can help an individual or couple to firstly establish whether they are likely to be able to afford to give some of their money away during their lifetime either to support their family and/or their favourite charities without it derailing their own lifestyle.

Secondly financial planning can also help to decide whether there is a desire to leave a charitable legacy because in both scenarios there are multiple benefits in doing this.

Are You and Your Family Safe from Financial Fraud?

It is likely that we have all been a target of some form of scam so far this year. These are designed to get us to part with our savings, reveal our personal information or click on bogus or harmful links or attachments. In many cases we may not have realised we have been targeted.

Linked to this, I recently read with alarm an article that almost 8 million people in Britain have been targeted by fraudsters attempting to trick innocent pension savers out of their life savings. The number of pension and non pension scams has rocketed during the pandemic and the article went onto say that pension scams have become one of the most common types of fraud (up 45% so far this year compared to 2020).

The Pensions Regulator is currently investigating more than £54 million of lost pension savings, affecting 18,000 people, although the figure is likely to be much higher. A survey conducted by LV, the insurance and pensions provider found that 14% of adults (7.6 million people) had received unsolicited emails, texts or calls from people encouraging them to transfer or release money from their pension.

Cold calling has been the most common way for scammers to target their victims, although alarmingly, scammers are also using fake websites. Aviva, the pension group, identified 27 fake websites (between March and September 2020) that purported to be the company and were trying to defraud pension savers. Scammers are using sophisticated language and marketing techniques to appear genuine and authoritative.

This has become a huge issue which needs to be given more attention. At the moment there is little regulation to tackle financial harm or fraud. Sadly, people are losing their life savings to fraudsters by being tricked into moving their investments and pensions into risky schemes, many of which are overseas, and which often collapse. In these cases, they are unlikely to get anything back because these schemes are not regulated by the Financial Conduct Authority (FCA) and without regulation there is no protection if anything were to go wrong.

But this problem is not just confined to pension or investment fraud.

There are many different types of financial fraud which use techniques to share data and target specific groups. They are becoming ever more sophisticated. For example, elderly people living on their own with a cognitive impairment such as dementia who are less likely to be able to safeguard themselves are at a high risk of being targeted. Furthermore, under 25’s are most likely to be the victim of a banking scam. So both old and young are at risk, as well as those in between.

The impact financial scamming can have is not just a financial one but can be a severely detrimental life changing event for the individual undermining health and quality of life. It can also (and often does) impact the family too.

Here are some tips to avoid scammers:

• Reject cold calls and approaches from out of the blue.

• Take your time and don’t be rushed into making a quick financial decision.

• Beware of websites offering to unlock your pension before age 55 or offering high returns. If it looks too good to be true it usually is. Also, early access to pensions can cause a ‘double loss’ as this would constitute an unauthorised payment with a tax charge of 55% even if the individual never received the liberated funds.

• Always find out who you are dealing with by checking out the FCAs online register of authorised firms and individuals.

• Check the FCAs warning list for known investment scams. These are firms that the FCA know are operating without permission or running scams.

• You can get free and impartial advice from the Pension Advisory Service or advice from an FCA regulated adviser before making any decisions.

Tackling the problem

Initiatives are being taken by various bodies to tackle these issues and it is only by taking a collective effort that awareness can be raised. One of these is called “Friends Against Scams” which is an initiative which aims to protect and prevent people from becoming victims of scams.

They have produced a really helpful website where you can learn about the different types of scams and increase your knowledge and awareness. They have also produced a short educational online learning session which can be found at www.friendsagainstscams.org.uk/training/friends-elearning.

This issue is not going to go away and is likely to get worse so firstly it is important to protect yourselves from scams but also raise awareness within your families, young and old (as they may be more vulnerable to scams), as well as amongst your friends.

5 Timeless Lessons Every Investor Should Follow

I recently read an article written by David Booth who is the Executive Chairman and founder of Dimensional Fund Advisors. Dimensional is a US fund manager with $637 billion assets under management. In his article he shared five priceless tips on how to be a successful investor. As too many people keep falling into the same traps, I think they are a great reminder as to what every investor should know so I wanted to share them with you as well.

Gambling Is Not Investing, and Investing Is Not gambling

Gambling is a short term bet. If you treat the market like a casino, and you’re picking stocks or timing the market, you need to be right twice by buying low and selling high. Investing, on the other hand, is long term. While all investments have risk, there are things that can be done as a long term investor to manage those risks and be prepared. For example, buying a little bit of thousands of companies and holding them for a long time. The only bet is on human ingenuity to find productive solutions to the world’s problems.

Embrace Uncertainty

Over the past 100 years, the US stock market has returned a little over 10% on average per year but hardly ever close to 10% on any given year. Stock market behaviour is uncertain. The way to deal with uncertainty is to prepare for it. Make the best informed choices, monitor performance and make adjustments as necessary. Course corrections may need to be taken to get back on track in case things don’t go as expected. Remember, you can’t control the markets.

Effective Implementation

Choose fund managers who can consistently execute their strategies better than others, as well as doing it at a lower cost. Gaining a few extra basis points each year through effective implementation can make a big difference to your investment value over a long period of time.

Tune Out the Noise

If you don’t understand something, don’t invest in it. A lot of investment fads will come and go. Media pundits handing out stock tips? Friends or family letting you in on their next big investment. Focus on your goals and keep things simple (steady and boring wins the race). There is no compelling evidence that professional stock pickers can consistently beat the markets. Even if a manager outperforms, it’s difficult to know whether this was skill or luck. You can still do well without trying to find out what markets have missed. Everybody can have access to the expected returns that a diversified, low-cost portfolio can generate.

Stay the Course

It can be difficult to stay the course during periods of extreme market movements. At the end of March 2020, the S&P 500 (the largest 500 companies traded on the US stock market) was down nearly 20% for the calendar year to date. Record amounts of money exited equity funds and went into cash. Those investors who stayed out of the equity market missed out on the subsequent 56% gain in the S&P 500 over the next 12 months.

Selecting the right blend of risk (equities) and defensive assets, by taking into account the level of risk you feel comfortable in taking, the level of risk you may need to take and the level of risk your plan is able to withstand without it being derailed in the event of a severe market fall will help you to stay the course. Defensive assets are your insurance policy against equity market falls. It’s a bit like car insurance. When all is well it is a bit of drain on your finances but in the event of a crash you are likely to be glad you had some!

Learning to embrace uncertainty allows you to focus on controlling what you can control. Discipline applied over a lifetime can have a powerful impact and is likely to close the gap between where you are now and where you want to get to.

Should investors be taking Bitcoin seriously?

Bitcoin and other cryptocurrencies are receiving significant media coverage, with articles being written about ‘crypto-millionaires’ and a whole heap of noise around its growth potential. It is somewhat difficult to comprehend what this all means, however, it is prompting many investors to wonder whether this new type of electronic money deserves a place in their portfolios.

Although there are other crypto-currencies, bitcoin is by far the most widely traded. My blog  therefore focuses on bitcoin and gives an opinion as to whether it should be considered within a diversified portfolio. However, a good place to begin is to explain what it is.

Some background

Bitcoin has emerged only in the last decade. Unlike traditional money, no paper notes or metal coins are involved. No central bank issues the currency, and no regulator or nation state stands behind it.

Bitcoins are transferable digital tokens made by computers and stored in a digital wallet. There is a finite supply of 21 million bitcoins, of which more than 18.5 million are in circulation. Transactions are recorded on a public ledger called blockchain and can be purchased through dedicated exchanges. Bitcoin could be described as ‘internet money!’

For much of the past decade bitcoin has been the preserve of digital enthusiasts and for people who believe the age of traditional currencies is coming to an end. However, the price of bitcoin has surged over the last few months prompting intense media attention, in part fuelled by large companies such as Tesla, Mastercard and JPMorgan purchasing the digital currency. Furthermore, Tesla has recently announced that it will accept bitcoin as a form of payment for its products in the future.

So what are investors to make of all this media attention? What place, if any, should bitcoin play in a diversified portfolio? Why does bitcoin have any value at all if it is not backed by any physical commodity (such as gold), nor guaranteed by any government or company?

The arguments for bitcoin

Proponents of bitcoin state that it is free from centralised interference (unlike the money supply) and is a store of value, like gold. It has also been argued that it acts as a hedge against the price movement of other investments i.e. that the price of bitcoin can move in the opposite direction. Also, because it has a finite supply many have reason to believe that the longer term price trajectory of bitcoin will continue to surge upwards.

The arguments against bitcoin

The key arguments against owning Bitcoin is that it can only be used to pay for a small number of goods and services and so it has limited intrinsic value. Furthermore, it is criticised as being ‘unsuitable money’ because its price has been too volatile in its short existence to be a suitable substitute for cash. There is also the risk of the threat of a legal clampdown if governments were to intervene and were to make it, for example, illegal to own. Owning bitcoin is not like having money in the bank and there is no financial protection if something were to go wrong.

My opinion

Firstly, I think it is important not to be drawn in by the media noise and instead to look at the big picture and focus on your personal goals, situation and risk tolerance.

Although the value of bitcoin may continue to appreciate there is no reliable way to predict by how much and when that will occur. When designing a portfolio the default position is to have exposure to the whole market through a low cost highly diversified portfolio and let time and compounding do the heavy lifting work for you. Investing is a life long journey, not a fad, and although the path won’t always be a smooth one it is essential that a plan is in place that you can stick with during both good times and bad.

It is essential to understand and weigh up the risks before considering investing in bitcoin. However, for some the potential thrill of owning bitcoin and being part of the evolving blockchain technology may be too hard to resist.

So if it is decided that bitcoin does fit in within a plan, as part of a well diversified portfolio, I believe its weighting should generally be very small perhaps no more than the total value of bitcoin currently in circulation as a percentage of the aggregate value of global equities and fixed interest securities. This is currently less than 1%.

Finally, always keep in mind that a goals based approach using equities and fixed interest securities has helped investors achieve their lifestyle goals for decades and it is best to sleep easy at night!

Time To Go Clean

A few years ago Taittinger purchased a plot of land and planted its first vines in Kent. This popular champagne brand believes it can produce a high quality sparkling wine in the South of England. There are a number of reasons why they have done this, but one of them is because England is warming up, which is good for the grape ripening process but not so good for the world.

The earth is warming fast predominantly through the vast emissions of carbon dioxide being released into the atmosphere. Greenhouse gases like carbon dioxide absorb infrared radiation from the sun and trap heat like the glass of a greenhouse. More and more carbon is spewing into the air and the atmosphere as a result is getting hotter.

This is likely to get worse before it gets better, but there is change afoot.

Firstly, politicians are waking up. Eight of the World Economic Forum’s top 10 global risks for 2020 were environmental. There were none ten years ago. Although action being taken by individual countries is inconsistent, some are moving a lot faster than others.

Significantly, China has announced its intention to become carbon neutral by 2060. This is big news as China is by far the world’s biggest emitter. Change is happening on a global scale.

Politicians are also in agreement that carbon emissions need to be made far more costly, via taxes and other means. Not good news for the likes of BP and Shell.

A further development is that the cost of renewable energy is plunging, putting much of the fossil fuel industry under threat. The cost of solar and wind electricity is at a fraction of what it was a decade ago. Furthermore, developments in the electrification of the worlds cars is proceeding at a pace which will drastically lower future emissions. With increasing competition and enhancements in these areas most fossil fuel and related areas will be severely undermined and probably wiped out.

A third factor that will help to reduce carbon emissions will be around our behaviour. Over time I believe we are going to want increasingly more sustainable products – cardboard bags, plastic free packaging and electric cars to name a few. Linked to this, there is also going to be greater demand for investment solutions which cut out the ‘dirtiest’ companies and focus on ‘cleaner’ companies with higher sustainable credentials.

Sustainable consumer products is where the growth is and this growth is set to continue to rise. Companies that don’t consider their environmental impact will be in the minority and will lose market share and fall by the wayside if they don’t change their ways. Their share price is likely to fall as well.

This de-carb drive is going to speed up over the coming years and we will likely see a gradual levelling out and fall in the world’s emissions.

What this means for Taittinger’s project on the South coast who knows – but I don’t think we’ll see them growing grapes in Scotland anytime soon.