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Alternative Investments

A picture of wealth in retirement

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The post-war baby boomer generation is often seen as a ‘fortunate’ generation, holding the majority of the wealth in this country.

Many in this generation have benefited from rising property values, gold-plated final salary pensions and booming stock markets during their working lives.  As a result, those older members of society tend to hold a lot of wealth.  Those on the cusp of retirement, aged 55-64, had average housing wealth of £185,000 and other wealth excluding pensions of around £33,000.

A set of new reports – funded by the Institute of Fiscal Studies (IFS) Retirement Savings Consortium and the Economic and Social Research Council – shows that this wealth, whether held in housing or in financial assets, is not in general drawn down in retirement.  We might imply from this finding that the wealth held by older people today is likely to become the inheritance received by the younger generations tomorrow.

There were some interesting findings when looking at the use of wealth by current retirees.  Perhaps unsurprisingly, the majority of wealth is tied up in the value of the main residential property.  80% of over 50s are homeowners and the majority would not be expected to move home before they die.  The study found that of the slightly over two-fifths who would be expected to move, few are moving for financial reasons, but something like two-thirds of house moves do release some wealth.  Sticking with property wealth, the research shows that around one-in-six of those aged 55-64 own a second home.  This frequency of second home ownership changes very little at ages 70 and over, increasing only slightly in the late 50s and 60s.  Those in their late 50s and 60s tend to shift second home ownership towards income-generating properties.

The studies also found that financial wealth is on average drawn down, but only slowly. On average, individuals are drawing just 31% of net financial wealth between the ages of 70 and 90. Even for individuals in the top half of the financial wealth distribution, who we might expect to draw down and spend more, are only withdrawing their wealth at a rate of 39% during this twenty-year period.

Commenting on the research, Steve Webb from Royal London said:

“This report confirms that the vast majority of pensioners who have saved through their working life are cautious with their money and leave unspent wealth at the end of their lives.  This is great news for those who believe in ‘pension freedoms’.

“The IFS research suggests that the biggest concern about pension freedoms is likely to be about excessively cautious retirees spending too slowly than it is about reckless retirees blowing their pension savings on lavish living.”

Another finding pointing towards the availability of an inheritance for the younger generations is most people not experiencing large end-of-life expenses that would use up remaining wealth before they died.

Looking at a sample of those who died between 2002/03 and 2012, only 7% received help with daily activities from a privately paid employee in the two years prior to death.  The research also found that one in five stayed in a nursing or residential home for some length of time before death, with only 7% resident for longer than six months.  Not all will have paid for their own care.

The patterns of bequest evidenced by this research made for interesting reading too.  Married couples nearly always bequeath only to their spouse.  This is in line with our experiences, with the study finding the surviving spouse then most often bequeaths all of their assets to their children. This happens in 60% of cases for those with financial assets to pass to the next generation.  Only 16% of those with financial assets and no surviving spouse directly left any assets to grandchildren, despite 74% having grandchildren who could have received an inheritance.

This research offers a useful insight into how wealth is being used in retirement today.  However, what about in the future?  As many working age people expect to draw on non-pension wealth to provide money in retirement, housing wealth could become a bigger factor in determining future spending in retirement.

With future retirees expected to have lower pension incomes than those of current retirees, it could become more normal to draw higher levels from housing wealth in the future.  It is currently those with high housing wealth, and those with the greatest housing wealth relative to their incomes, who draw most on their housing wealth when they move.

Rowena Crawford, an Associate Director at IFS and author of the set of reports said:

“Older people do not draw on their wealth much during retirement. The majority of homeowners do not move or access their housing wealth, and even financial wealth is drawn down only slowly.  This means that most wealth held by retired people is likely to be bequeathed to future generations, rather than spent.

“This will have implications for the level and distribution of resources among current working age individuals, particularly those with wealthy parents and few siblings.

“Given the increased freedom people now have over how they spend their pension wealth in retirement, carefully monitoring how the use of wealth evolves in future will be important, both for the living standards of the retirees themselves, and also for younger generations.”

Retirement is one of life’s important transitions and at Wells Gibson we make it easier for you to visualise and achieve the life you want.  If you would like to discuss your own retirement please get in touch.

 

Is property still a good investment?

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It’s interesting to see which investments are in favour as time changes.

For a long time, property was the darling of the investment world.  Buy-to-let investors amassed substantial property portfolios, using ‘other people’s money’ to generate additional monthly income, as well as the prospect for capital appreciation.

Because there’s something tangible about owning property and it tends to be a familiar asset class, for many investors it feels simpler to invest in a buy-to-let than to construct a portfolio which includes fixed-interest securities (otherwise known as bonds), and company shares or equities.

However high property prices and the threat of rising interest rates, combined with recent tax changes for landlords, could mean property is no longer considered by many as a good investment.

Some new research shows more than half of UK investors no longer consider property to be a good investment.  The survey of more than 1,000 UK investors and 500 high Net Worth individuals was commissioned by a well-known UK investment management company. One of their investment directors said:

“It seems recent changes to the tax and regulatory treatment of buy to let has caused investors to take a step back and assess the viability of these investments.

“Whilst it’s understandable that property, and in particular residential property, has been a popular investment in the past, it’s now making less sense.  Not only are the returns now being impacted by an increased rate of tax, but they can also prove high risk investments due to a lack of diversification.  Property investments require a large amount of capital to be held in one single asset and landlords will often hold a number of properties within one region.

“Investors who are looking to invest in property, should make sure to assess their risk appetite, look at all alternative options and make sure this property is held within a well-diversified portfolio of investments.”

The negative sentiment towards buy-to-let property as an investment was driven by some recent changes to the tax treatment of rental homes. This combined with the introduction of new regulations by the Prudential Regulation Authority (which affect portfolio landlords), have prompted many property investors to re-evaluate the overall cost-effectiveness of property as an investment.

The tax changes for property investors have been particularly unpleasant.  In April 2016, the government introduced a stamp duty surcharge of 3% on additional property purchases.  They have also reduced the tax relief available to buy-to-let investors, with this tax-relief set to be removed entirely by April 2020.

The survey also found that investors with more than £100,000 of investable assets – defined by the survey as High Net Worth individuals – were slightly less bearish about property as an investment.  In fact, only 38% of these wealthier investors no longer view property as a good investment.

A quarter of High Net Worth investors already own buy-to-let properties, however only 7% had plans to increase the size of their property portfolio.

Separate research carried out by the National Landlords Association at the start of this year revealed that 20% of its members planned to dispose of part of their property portfolio in 2018.

Despite high market valuations and less attractive tax treatment, investing in property can still play a role in your financial planning. It’s important though to first understand the advantages, disadvantages, risks and potential rewards of property investment.

Before deciding which investment asset to choose, it makes sense to build a lifetime financial plan.  Always start with your desired lifestyle and with the help of a qualified financial planner, consider the options which are available to help you achieve your goals and maintain your lifestyle.

Are you materialistic when it comes to treasured possessions?

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Groucho Marxfamously said that while money can’t buy happiness, it certainly lets you choose your own form of misery.

Having wealth is often associated with acquiring material possessions.  These trappings of wealth may give the appearance of success, despite studies about happiness suggesting that spending our money on experiences tends to make us happier than buying things.

When considering your own personal finances, what would you describe as your most treasured possessions? According to some new research, it’s not the gadgets and technological devices we treasure most, but what we might consider to be sentimental items.

New trends data from Admiral Home Insurance found that the family photo album tops the list of most treasured possessions in 2018.

They found a bit of a gender divide on this subject, with women picking framed photographs as their second most treasured possession and men choosing tablets such as iPads and laptops, followed by their televisions.  It suggested that women placed sentimental items above the technology chosen by men.

Admiral also found that men were more likely to consider their watch or music collection as treasured possessions. Women placed greater value on gifts made by their children, and also certificates.

Admiral asked survey participants which single items they would choose to save in the event of a disaster, such as a house fire.  This is a worthwhile hypothetical exercise, as it can say a lot about what is most important to us in life, allowing us to manage our personal finances with these personal values in mind.

Most common items to save in a disaster for all age groups were photographs, jewellery, watches and technology, including tablets/laptops, TVs and mobile phones.

Despite having seemingly strong feelings about the sentimental value of the items within our homes, more than a third of those surveyed admitted to never having accurately valuing their home contents.

The worst culprits when it came to this valuation question were those in the 45-54 year age bracket, with nearly half of this age group saying they had never properly worked out the value of their possessions.

Noel Summerfield, head of home insurance at Admiral, said:

Whilst the things we treasure most in our homes may be sentimental items or our favourite gadgets, and not necessarily the most expensive things we own, it’s still vital that consumers protect themselves by having the right level of contents cover, regardless of whether they own or rent their home.

In the event of theft, or a disaster where a claim needs to be made, being underinsured could make a tough situation even worse, and  could make it harder to replace the things you need for your home.

Admiral shared some top tips for calculating the value of contents, for the purpose of putting in place the right amount of contents insurance.  They suggested using an online contents calculator to help. You should go from room to room in your home, looking at each item as you go.  They also suggested taking a look at the value of things in your garden, shed, garage and loft, which are areas often overlooked when thinking about insurance. According to Admiral, the average garden contains £5,000 worth of contents, with the average theft from a garden stealing £1,593 worth of property.  In addition to totting up the total value of your contents, you should note any high value items, worth £1,000 or more, in order to insure these separately on your home contents policy.

Admiral suggest adding any new high value items to your insurance policy when you buy then, rather than waiting until the annual renewal of your policy.

What do you treasure most within your home and what does this say about your attitude towards money; do you favour materialism or sentimentality?  What’s important about money to you?

Our thoughts on bonds

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“You don’t need bonds, until you need them!”Anonymous

Challenging times

Today, investors face some challenging choices when it comes to investing in bonds, not least because yields on bonds are at historical lows and currently below that of UK inflation.  In response to the very low yield on bonds, some investors have been tempted to chase higher yielding bonds, in an attempt to squeeze some return out of what feels like an unproductive portfolio allocation.  This is, unfortunately, an accident waiting to happen.  The phrase ‘picking up pennies in front of a steamroller’ comes to mind.

Other investors, including clients of Wells Gibson are asking whether they should instead be holding cash.  This has been a theme, on-and-off, for almost a decade since the era of low yields began, driven by quantitative easing by the Bank of England in response to the Credit Crisis.  Those taking the cash deposit route over this period have paid a heavy price, losing 15% of purchasing power compared to just 3% from being invested in short-term government bonds.

The challenge is to make decisions today that will help to protect, preserve and create wealth over time and, most importantly, allow investors to remain invested in the markets at the worst of times.

Why own bonds at all?

As investors, it’s our emotional and financial ability to suffer falls in the value of our shares, which tends to determine how much risk we can take on. Very few investors have the stomach for a 100% global equity portfolio.

Investors who cannot emotionally, or financially, afford to suffer falls in the value of their portfolio have to reduce their allocation to equities / shares and own more stable and therefore lower returning bonds to offset these falls.

We should be looking forward to yield rises

At some point in the future, yields are likely to rise to higher levels.  The problem is that no-one knows when, how quickly and with what magnitude it will happen.  Investors should be looking forward to yield rises, because in the future their bonds will be delivering them with a higher yield, hopefully above the rate of inflation.

When yields do rise, bond prices will fall, creating temporarylosses.  At that point bonds earn an investor more than they did before the rate rise and they reach a breakeven point when the new higher yield has fully compensated them for the temporary capital losses suffered.  The time to break even is equivalent to the duration (similar to maturity) of an investor’s bond holdings.  Short-dated bonds with a three-year duration will breakeven after three years.

Conclusion

Bonds are a very important part of most portfolios, providing lower absolute levels of volatility than equities and protecting portfolios from periods of severe equity market trauma that occur from time to time.  Be prepared for unexciting returns as yields – potentially – move back to a more normal level.  No one knows when or how quickly this will happen, so don’t try to second guess the guessers.  Sit back and remember: ‘You don’t need bonds until you need them!

Tuning out the Noise

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As an investor, it can be easy to feel overwhelmed by the relentless stream of news about markets. Being bombarded with data and headlines presented as impactful to your financial well-being can evoke strong emotional responses from even the most experienced investors.  Headlines from the ”lost decade”1 can help illustrate several periods that may have led market participants to question their approach.

  • May 1999: Dow Jones Industrial Average Closes Above 11,000 for the First Time.
  • March 2000: Nasdaq Stock Exchange Index Reaches an All-Time High of 5,048.
  • April 2000: In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates.
  • October 2002: Nasdaq Hits a Bear-Market Low of 1,114.
  • September 2005: Home Prices Post Record Gains.
  • September 2008: Lehman Files for Bankruptcy, Merrill Is Sold.

While these events are now a decade or more behind us, they can still serve as an important reminder for investors today.  For many, feelings of elation or despair can accompany headlines like these. We should remember that markets can be volatile and recognise that, in the moment, doing nothing may feel paralysing. Throughout these ups and downs, however, if one had hypothetically invested £10,000 in US equities / shares in May 1999 and stayed invested, that investment would be worth approximately £28,000 today.2

When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility and help them look beyond the headlines.

Picture11. For the US stock market, this is generally understood as the period inclusive of 1999–2009.

2. In GBP. As measured by the MSCI World Index (net div), May 1999-April 2018. A hypothetical £10,000 invested on April 30, 1999, and tracking the MSCI World Index (net div), would have grown to £28,033.46 on April 30, 2018. It is not possible to invest directly in an index.

The Value of a Trusted Adviser

Part of being able to avoid giving in to emotion during periods of uncertainty is having an appropriate asset allocation that is aligned with an investor’s willingness and ability to bear risk.  It also helps to remember that if returns were guaranteed, you would not expect to earn a premium. Creating a portfolio that investors are comfortable with, understanding that uncertainty is a part of investing and sticking to a plan may ultimately lead to a better investment experience.

However, as with many aspects of life, we can all benefit from a bit of help in reaching our goals. The best athletes in the world work closely with a coach to increase their odds of winning, and many successful professionals rely on the assistance of a mentor or career coach to help them manage the obstacles that arise during a career.  Why?  They understand that the wisdom of an experienced professional, combined with the discipline to forge ahead during challenging times, can keep them on the right track.  The right financial planner can play this vital role for an investor.

A highly qualified financial planner can provide the expertise, perspective, and encouragement to keep you focused on your destination and in your seat when it matters most.  A recent survey conducted by Dimensional Fund Advisors found that, along with progress towards their goals, investors place a high value on the sense of security they receive from their relationship with a financial planner.

Having a strong relationship with a financial planner can help you be better prepared to live your life through the ups and downs of the market.  That’s the value of discipline, perspective, and calm. That’s the difference the right financial planner makes.