Welcome to our Summer email. The economic weather is about as sunny as the summer at the moment. Commercial property values falling, residential values falling, equities falling. When the Sunday Times features an article on where to make money at the moment and ends up with timber, stamps and collectable coins, we all know it’s a difficult climate. Will my Euro 2008 Sticker Album have a resale value, I wonder?!
There is no easy short term solution. If in order to be financially independent, you need to invest £x per month or per annum, this is a truism whether markets are rising or falling. At Wealth Matters our key goals for you remain the same:
- Keep your interest repayments on your mortgage as affordable as possible and ensure that there is a sensible repayment regime in place to pay off the mortgage
- Protect you and your loved ones against disaster through life and health insurance policies and savings plans
- Build your investments to make you financially independent.
History teaches us some important lessons. Here is one from the mid 1970’s. At that time, equities plunged because of political instability in the Middle East, rising inflation and rising oil prices (sounds familiar?). Equity prices plummeted in the years from 1970-74 by 57%, the worst record in the UK in the 20th century. However 1975, the following year, wasn’t just a great one for the Wombles and West Ham fans, it was also the best year for equities in the whole of the 20th Century with a rise of 97%. The key lesson from this is to remain invested. No-one knows when the bottom of the market will arrive. However confidence and emotion tends to take markets below their true value. If you miss the bounce back, you miss a lot of the key growth in the market. Indeed, clients of ours that are making regular monthly contributions are seeing smaller percentage declines, than those who have stayed out of the markets.
We are introducing a new feature to our newsletter this issue. There will be a top tip, or piece of advice from one of our members of staff. We kick off with Kevin Smith, one of our two para-planners, who provides advice on how to view your WRAPS™ statement from Transact.
The four articles contained in this newsletter are topical subjects. We hope that you enjoy them. Please contact us should you have any questions about these articles or your personal finances.
How to print off your WRAPS™ portfolio
by Kevin Smith
Please follow the instructions below, to print off your WRAPS™ portfolio.
- Open Wealth Matters Website
- Click on “Transact Members Login” button on right hand side of the homepage
- Enter your Transact portfolio number and pin where indicated. (If you do not know your number or pin, let us know and will arrange for it to be sent to you.)
- Your Portfolio summary will be displayed on the screen.
- Click “Printing and saving options” at the top right corner of your screen.
- Select “Download as PDF”, Select “open” when prompted.
- This will generate a printable version of your portfolio.
The most obvious ‘bolt-holes’ from shares are probably deposits and government bonds and over the short term, this can prove effective. However, analysis of the longer term shows that even over as little as two years, equities have outperformed both classes in more than two thirds of periods. Looking at ten years, the figures are even starker with shares winning nine times out of ten.
This does not mean you should never move from shares into cash of bonds, simply that if you do, you need to get your timing right and be aware of the costs involved in selling, and then later re-buying, shares.
Selling shares, or unit trusts / investment trusts and insurance bonds that are based on shares will usually involve some form of costs, as will re-buying them later. But other forms of asset can have costs that may not at first be obvious. For example, if you buy gold VAT might apply, adding 17.5% to the cost; so you need to have considerable growth just to cover this, before you can make a profit. What is more, assets such as gold have to be stored – and insured against theft and other risks, further adding to the costs associated with them.
You can, of course, purchase shares in companies or funds holding gold, but you are then not holding the asset directly and transactions may actually take place at a discount, or premium to the actual value of the underlying asset. This could well mean that your investment does not perform in the same way as gold.
Further to reinforce the message, figures showing comparative annualised investment returns (that is the total growth for the period expressed as an annual growth figure) for different assets, it is easy to see that, over 15 years, shares and commercial property have outperformed index-linked government bonds, gold and certainly cash deposits.
Any investment decision should be based on a number of factors, including:
- How much risk of short-term volatility you are prepared to accept;
- How much risk of relative underperformance you are prepared to accept over the longer term;
- Whether you can afford to loose part or all of your money, or require some level of guarantees; and
- How long you wish to invest for and how important it is to you to have access to your cash in the short term.
Some newer forms of investment offer some degree of guarantees, even though they are equity based. These all carry an element of risk that the guarantee will fail and the lower the degree of risk, the smaller the potential return. Nevertheless, these can still offer a good potential return.
One guide to watch out for is that following trends is seldom a good idea; it can result in the worst of all worlds – buying at the top and selling at the bottom!
It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact your usual independent financial adviser.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE, YOU MAY GET BACK LESS THAN YOU INVEST.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
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In essence, the problem is that lenders like to have as many customers as they can, so many of them package up ‘bundles’ of mortgages and sell them to investment houses and other banks, so that they then have money to lend again.
This has the effect of spreading mortgage debt around the market – and the world – so that when a large number of borrowers start experiencing trouble with their repayments, there was a massive knock-on effect. The problem is that too many banks, largely in the US but to a lesser extent in the UK, lent money to people who could ill afford the repayments, especially if the cost of money was to rise, as it did, last year.
This led to some mortgage defaults, but the real problem was that those companies who were buying bundles of mortgages from mortgage lenders, especially in what is known as the sub prime market (that is lending to those with less than ideal credit histories) became concerned that the mortgages may suffer a higher rate of defaults than they had allowed for. To a large extent this is probably attributable to excessive optimism (some may call it greed) amongst lenders and their financial backers. By allowing customers to become over-extended, they met targets, but stored up problems for the future, which are now coming home to roost.
The problem now is not necessarily the level of defaults but the lack of confidence in the market, which led to a crisis of confidence resulting in banks not wanting to lend to each other. This makes it more difficult for mortgage lenders and they have been closing down deals in large numbers, several have even ceased (temporarily it is believed) accepting new cases other than from existing customers. Those who can get a loan are facing far tougher lending criteria; gone are the days of an easy 95% mortgage.
But why, if headline interest rates are falling, do we still see mortgage rates going up – even for existing borrowers? The answer is that the rate at which banks lend to each other (known as the London Inter Bank Offer Rate or Libor) is going up as a direct result of the lack of market confidence. Since January, it has risen steadily despite a cut in the Bank of England’s base rate and is currently about 0.75% above ‘base’ rate. This means that mortgage lenders are having to charge more.
Defensive measures
There are a number of things that can be done to help yourself, should you wish to re-mortgage for any reason, including:
- Check your credit report to see if there are any adverse comments Experian are currently offering a free 30 day trial;
- Make sure you never miss a credit card payment – this can affect your credit history;
- Don’t ‘test the market’ by applying for a number of ‘offers in principle’ this will affect your credit rating even if you go no further;
- Make sure your bank account is in credit.
It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact your usual independent financial adviser.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN. YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP THE REPAYMENTS ON YOUR MORTGAGE.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
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This is simply not true, although new markets tend to do comparatively better than established ones simply because of the positive inflow of cash. In practice, emerging markets such as China, Brazil and India may look attractive, but carry with them substantial risks.
Looking at our own past, it is all too easy to draw comparisons with the “South Sea Bubble” of the early eighteenth century. In that case speculators “talked up” stock in a highly risky venture which had dubious (to say the least) prospects based on the anticipation of access to South American Gold, which never materialised, partly because Spain was blocking access to the ports concerned. The result was that investors lost substantial amounts of money and never really had the prospect of getting their investment back, let alone turning a profit.
The point is that investment performance is largely driven by sentiment and the availability of capital seeking a home; the underlying fundamentals are often so very different. Long term investment outcomes depend on economic stability, sound markets and good management.
This means that investing needs to take account not of how markets have been moving in the past, but how they are likely to move in the future, comparative to the current position, based on the likelihood of sustainable growth.
It may thus be seen that China and India, given political and social stability, could be expected to provide long term growth based on a low cost base and massive internal demand, which means that they are only partly dependent on exports. By comparison, Japan, which has a well established free market economy and a secure political base has high internal costs and is dependent on exports to keep it afloat.
Does this mean you should invest heavily in the former while ignoring the latter? In all probability the answer is “no”. This is because nobody can predict what will happen in future; political and economic circumstances can change quickly; a world recession could hit China and India just as much as the UK.
What this should tell us is that putting all your eggs in one basket is unsafe and that it is important to have a diverse asset distribution strategy. It also tells us that few individual investors will have sufficient knowledge to make decisions on their own and that collective investments are likely to be most suitable for most people. The costs are higher than direct investments, but the risk far less onerous.
Investment diversity means that you do not have to rely on picking the winner (like China last year) and risk it falling at the last fence (like Ireland last year). You may miss out on the biggest potential wins, but you will also avoid the largest potential losses. On average, you can expect to do better by selecting a varied investment strategy.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact your financial adviser.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
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‘With profit’ investments make sense; they offer a diverse investment strategy that includes equities, property, gilts and deposits and by acting on behalf of thousands of policyholders, they spread risk very well.
But they do more than this; they offer a ‘smoothed return’ that irons out the short term fluctuations of individual markets, ensuring that policyholders have a more predictable return. They also offer cast iron guarantees; there is a basic value to the plan (at a set date in the future) and bonuses once added cannot be taken away.
Unfortunately, it is this strength that is also their greatest weakness. Because of the guarantees, the insurance companies offering ‘with profit’ investments are legally obliged to have adequate reserves to cover a large range of contingencies including a stock market collapse. Unfortunately when the collapse happened at the start of this decade, some insurance companies were late in realising the depths to which markets would fall. From September 2000 to March 2003, the FTSE100 fell by more than 50% and it took until mid June 2007 for the index to recover (since when it has fallen back again).
As a result, many ‘with profit’ funds quickly reached the stage where they had to sell shares on a falling market and move into gilts and deposits in order to protect their financial solvency.
Having done so, they were unable to benefit to the fullest extent in the subsequent recovery. This is why bonus rates and payouts generally have been so poor, for so long; with only limited prospect of recovery over the next few years.
However, some insurance companies have managed to weather the storm better than others and it should be noted that ‘with profits’ as a concept is generally sound; collective investments with a diverse investment strategy should offer a good comparative return. Unfortunately, the way they operate – and particularly the lack of clarity over charging structures – has made them less popular with investment professionals and many clients are being encouraged to review their current use of this type of plan.
Simply ‘bailing out’ and switching to other forms of investment is not something that should be done lightly; not only might you be with one of the stronger funds, but you are also likely to be giving up guarantees. You could well face penalties for surrendering (as it is called) a ‘with profit’ policy before the maturity date, or encashing a ‘with profit’ bond on other than one of the dates when values are fixed.
If you have a plan that is linked to a mortgage – and some of the older ones are on-track to clear the mortgage, even if they do not offer a substantial balance on top – you will also need to consider an alternative way of repaying the capital on your mortgage.
More than ever, it is important to seek professional advice before making any decision relating to a ‘with profit’ plan. If you are in doubt about the best course of action, you should contact your independent financial adviser. Indeed, it is important always to seek independent financial advice before making any decision regarding your finances.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
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