Welcome to our winter 2009 newsletter. 2008 provided a number of lessons that we should all remember for the long term. Firstly, all market assets are simply worth what people will pay for them. This is a truism whether it is equities, property or commodities (e.g. gold, oil). People who bet their whole future on the property market are now realising that in a market, prices move both ways. This is not to say that property is no longer a good long term investment, just that we should be realistic in our expectations on all investment returns and that for the last four years we have been living in a property bubble.
A fascinating article from the Economist has been circulating the Wealth Matters office recently, concerning investment bubbles. It talks through the history of investment bubbles, from the South Sea Bubble, the UK Rail Building Bubble of the 1840’s (yes your Great, Great, Great Grandparents could have felt the same way about investing in trains as your neighbour, who bought that new-build investment property in 2007 with a 20% “gifted” deposit) to the Florida property bubble of the 1920’s and today’s property bubble. So what can history teach us? To contradict Michael Douglas from “Wall Street”, greed is not good.
At Wealth Matters, we believe that if we can achieve long term growth that outperforms inflation by a few percent per annum, invest tax efficiently and get tax breaks worth 20-40% or even more, this will lead to clients achieving their goals. The tax breaks often add significantly more value than the growth rates. This is a get rich slowly investment programme. The starting point for this is a detailed Financial Plan that is regularly reviewed. A spread of investments should be used, to allow growth but with diversified assets to avoid bubbles. Not the most exciting strategy to get the pulses racing perhaps, but far more likely to get you from A to B than a random strategy or trying to time the markets. On that point, it is more important than ever that regular investments are made into your portfolio. If you feel that a Financial Plan would help you make sense of the current economic turbulence, please contact your adviser at Wealth Matters.
Finally, congratulations go to Viv Powell for passing her CF2 Investment and Risk exam, Paul Cleworth for passing his J01 Taxation exam and Julian Gilbert for passing J01 Taxation and J02 Trust exams.
Our Top Tip this quarter comes from one of our Paraplanners, Dawn Ashworth regarding tax returns:
For higher rate tax payers, the self-employed, company directors and anyone else who is required to complete a Self Assessment Tax Return; the deadline for online returns is the 31st January. For the relevant tax year you'll need records of:
- UK savings and investments
- UK pensions, annuities and benefits
- life insurance gains and AVC refunds
- any other taxable income
Remember, if you are a higher rate tax payer, you will not receive the 20% higher rate tax rebate unless you complete a tax return every year. If you are unsure about your pension contributions for the relevant year or need help completing the return, give us a call and we will try and help where possible. If you want someone to complete your tax return, you can contact one of our suppliers, Ian Parker, who has the relevant experience and qualifications to complete a tax return. He can be contacted on 01767 652924 or ian@parlow-associates.co.uk
The Credit Crunch started in the US, as the result of over-exuberant lending (a polite way of saying that the greed of American bankers is the root cause) but there is no doubt that the UK banking and corporate investment community also shares part of the blame for buying up packages of ‘securitised’ mortgages without having any understanding of the level of debt involved.
If the US bankers thought they were being clever by off-loading the high-risk mortgages round the world, they have certainly now discovered the old adage (common within the insurance company market) that you do not load up rubbish on your counter-parties or they will stop dealing with you.
Well as soon as people who should never have been lent money in the first place started to have problems repaying their debts – and house prices started to fall as re-possessions flooded the market – the chickens came home to roost; with a vengeance.
All of a sudden, banks and other investors were unwilling to ‘buy’ mortgages from each other because they were uncertain about the value of the security offered by properties involved. As an immediate corollary of this, banks started also to consider whether their competitors were actually financially sound any more; if not, there is no point in lending to them except on more expensive terms.
And this is where the problems began for borrowers, whether home-buyers or those wishing to finance businesses.
Although the Bank of England is the lender of last resort – as some banks have recently rediscovered – most of the transactions that keep money markets afloat are actually between the high street banks themselves. They work through a system called the London Inter Bank Offer Rate, which determines the rate that each will charge the other for lending between them. Historically, this has been close to bank rate, but over the past year, the rate at which banks will lend to each other over a year has risen dramatically compared with base rate.
Unfortunately, this means that mortgages are unlikely to come down very much, even if the Bank of England’s Monetary Policy Committee cuts base rate dramatically. There may be some impact on mortgages, but this is likely to come more from the sentiment behind any such cut. In other words, if bankers believe that the government is determined to help them, they may relax the rate at which they lend to each other.
But beware, they have lost a lot of money over the past year and will want to recoup it by maximising the rates at which they lend, compared with those at which they borrow.
How to defend yourself
Whatever happens to mortgage rates, borrowers should consider reducing their outstanding balance by overpaying their monthly amount (unless they have the older type of mortgage under which repayments are only credited once a year, in which case they should identify and work towards that date). This will help reduce your loan-to-value ratio, should you wish (or need) to move your mortgage.
Everyone should ensure that they do not miss any repayments, or if this is inevitable, that they tell the lender in advance and say how long this might last and how they will get ‘back on track’. Otherwise their credit history will be affected.
If you have to move your mortgage, make sure that your credit history is clean first (you can check with www.experon.co.uk), that you are on the electoral roll and that you do not approach more than one or two lenders (both can affect your credit score).
It is best to seek professional advice first as you will then be able to limit the time you spend on the exercise and can expect to get the best deal appropriate to your needs.
As ever, it is important to take individual advice before making any decision regarding your finances. For further information, please contact your usual independent financial adviser.
Your home may be repossessed if you do not keep up your mortgage repayments.
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.
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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You will probably have noticed that the value of your pension fund (unless you are very lucky and in a ‘final salary’ scheme) has fallen over the past year. This should not be taken as an indication that pensions are a bad thing, but rather a timely reminder that all investments should be seen over the long term and only those within five years or so of retirement are likely to be disadvantaged.
While there is no guarantee that investment values will bounce back – indeed, we are always reminded that past performance is no guarantee to the future; nevertheless, markets have always recovered in the past. Events in the investment markets during 2008 were not just driven by the credit crisis. In the opinion of some observers, markets had become overheated in many parts of the world, with sentiment driving share prices well above the natural level sustainable by economic conditions.
On the other hand, many businesses within the FTSE100 and beyond were fundamentally sound, and could continue to be so despite the recession, which means that the markets may have over-reacted (as they so often do) and that a recovery is more likely than not.
In any event, those making pension contributions need to find a home for their money; not making contributions at all is not necessarily an option, particularly for those paying in monthly, as there is a loss of tax relief and a habit once lost is difficult to recover. On the other hand, there is no value in investing for the sake of it.
Asset allocations
What we should, perhaps, draw from the experience of 2008 is that asset diversification is very important. By spreading your risk as much as possible, you will miss out on the best performance of the top asset ‘class’. But just as it is impossible to predict precisely which type of asset will do best – whether it is UK, US, Far East, or technology shares, government bonds, or even commercial property, fine art or wine – spreading your investments around will also protect you from the full impact of the worst performing asset class.
A buying opportunity
If you believe that current equity markets are undervalued, now could be a good time to be planning to invest more throughout 2009 and beyond, in order to benefit from an expected upswing in the market. Should it return to its long term trend, there are certainly gains to be made; however, care needs to be exercised and professional advice is essential.
Filling the gap
The nearer you are to retirement, the more important it is to consider using all available resources to full up any shortfall in your retirement planning that may have developed due to poor market performance.
It may be worthwhile considering alternatives to conventional pension plans, although there can be considerable benefits in investing a lump sum and then ‘vesting’ it immediately, in order to generate a tax free cash sum and an income for life (although you do not have to take the income). You can currently do this provided you are over age 50, although the minimum age will rise to 55 in April 2010.
As ever, you should take individual professional advice before making any decision relating to your personal finances. The value of investments is not guaranteed; you may get back less than you put in.
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.
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.
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When things get tough, there can be a temptation to cut out what are seen as unnecessary costs. This makes sense, of course, provided you do not throw out the baby with the bathwater – in this case, almost literally.
Ensuring that your family is fully protected should anything happen to you is arguably more important during a recession than at any other time, because it is less easy for one parent to go out and find a job to replace the income previously provided by a partner who has died or become long-term incapacitated. (Or, indeed, if they have been made redundant – the new scheme announced by the Prime Minister on the day of the Opening of Parliament in December only relates to mortgages and is limited to a partial guarantee, so the need for insurance could well remain.)
During the first few weeks of the year, while bills are starting to come in and things are otherwise rather quiet, it can be a good idea to take stock of your financial position and consider just what sorts of cover – and how much – you actually need.
For most families, all earners should be insured so that should they die or become ill, there is sufficient income to replace the money they were earning in order to provide enough for the family to live on as well as to cover any mortgage and other repayments.
While no two families will be the same, it is a good idea at least to ensure that all outstanding loans can be cleared by a lump sum insurance and then enough on top to provide for immediate needs, while the family gets back on its feet.
Bearing in mind that the loss of a family member is a stressful time, it should not be assumed that a surviving parent will be able to go back to full time work quickly; not least because of the need to provide support to other family members. For the longer term, earning capacity may remain constrained, so a regular income to supplement wages could be a good idea.
In the case of severe illness, an ongoing income is essential if the family is to continue enjoying an acceptable standard of living.
It should not be forgotten, however, that non-earning partners contribute to the family by undertaking functions that might otherwise have to be paid for, such as cooking, cleaning, care of children and the elderly and so on. As a result, even those who are not ‘economically active’ should be covered by life and health insurance, to ensure continued functioning of the family, should the worst happen.
Cost savings
Most insurances become more expensive as you get older, so suggesting that premium savings might be available could sound counter-intuitive. However, it is also true that life expectancy is improving – and with it the nation’s health. So it is quite possible that premiums now could be lower than a few years ago, even though you are older.
Finding out whether you could save money while possibly getting more cover is a simple matter of seeking professional financial advice, which is always essential before making any decision relating to your personal finances. It also gives your independent financial adviser the opportunity to establish whether there are any gaps in your protection that can easily be plugged.
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.
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.
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The FTSE100, which covers the largest companies in the UK, has been running in its current form for just under 25 years now. Starting in April 1984 at a base of 1,000, it ended October at 4,377, well down from its high points of 6,930 at the very end of 1999.
At the time many commentators were concerned that most world stockmarkets were overvalued and that a correction was inevitable. Which, of course, is what happened during the early years of the century; with the FTSE100 falling to 3,287 in mid-March 2003. It then rose back again reaching 6,732 in mid-June 2007 before falling back to its current level.
Thanks for the history lesson, but why bother?
The reason for this background is twofold. First we wanted to demonstrate that markets are volatile and should be viewed only over the longer term; they are influenced by external events such as the credit crunch just as much as by such factors as the inherent stability of companies that we all invest in and their ability to continue paying dividends.
The second reason, however, is that we wanted to draw attention to the long-term trends inherent in the figures. By creating an ‘average’ of the FTSE100’s daily closing prices over the entire period, it is possible to add a ‘trend’ line showing the long-term ‘value’ of the index.
What is really interesting is that the index is currently some 30% below its long term trend line. This could, of course, simply reflect that the market was, indeed, overvalued and therefore represents a correction that will remain in place for some time. But this would assume that markets act in isolation. In fact, they are influenced not just by economic factors but also by the pressure of money available for investment.
For the past year, money has become relatively scarce as people sell assets on a falling market and feel less well off, because of falling house prices. This has exacerbated the problem of falling share values as there have been fewer investors chasing an increasing number of available shares. However, this is creating pent-up demand amongst individual investors, who need to make provision for their retirement, and institutional investors, who need to find a home for their funds.
The future is bright
The result of this is that we can expect share values to bounce back at least in the direction of their long-term trend, as soon as confidence starts to return to the market. It is possible that the election of Barack Obama as the next US President will be one of the engines of growth.
It is important to remember that the actual components of any index such as the FTSE100 – the companies which are used to calculate its value – are not constant. Mergers, acquisitions, new entrants and the decline of some old companies combine to ensure that the index constantly reflects the fortunes of the largest companies in the UK by market value. This, to some extent, reflects the health of the economy but not entirely because market sentiment is also important.
Only one thing is sure; uncertainty will continue for some time.
As ever, you should take individual professional advice before making any decision relating to your personal finances. The value of investments is not guaranteed; you may get back less than you put in.
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
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.
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