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Evidence Based Investing

Top 10 tips for surviving inevitable market falls

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Although we previously considered these top 10 tips for surviving market falls, we feel it is worth revisiting them as they can’t be overstated.

When it comes to investing, it’s worth stressing that just as turbulence is a characteristic of flying, volatility is a characteristic of capital markets. Market falls and therefore a fall in the value of your portfolio are inevitable – your portfolio might include a personal pension, stocks & shares ISA and a general investment account.

Market falls can often be alarming and at an unexpected degree.  The last bear market (when share prices are falling), saw the S&P 500 Index (American stock market index based on the market capitalisations of 500 large companies),peak on 28thSeptember 2018 but fall 20% by Christmas Eve – other global indices fell by similar amounts.  As investors, we should expect further falls however, when and at what magnitude, no-one knows so as a client of Wells Gibson, remembering the following should help:

  1. Embrace the uncertainty of markets – that’s what delivers you with strong, long-term returns.
  2. Don’t look at your portfolio too often. Once a year is more than enough.
  3. Accept that you cannot time when to be in and out of markets – it is simply not possible. Resign yourself to the fact.  Hindsight prophecies – ‘I knew the market was going to crash’– are not allowed.  Time in the market is what counts, not timing the market!
  4. If markets have fallen, remember that you still own everything you did before (the same, lower-risk, bond holdings and the same higher-risk shares in the same companies).
  5. A fall does not turn into a loss unless you sell your investments at the wrong time. If you don’t need the money, why would you sell?
  6. Falls in the markets and recoveries to previous highs are likely to sit well inside your long-term investment horizon, in other words, when you need your money.
  7. The balance between your lower-risk, defensive assets (high quality bonds) and higher-risk, growth assets (equities / shares) was established by Wells Gibson to make sure that you can withstand temporary falls in the value of your portfolio, both emotionally and financially, and that your portfolio has sufficient growth assets to deliver the returns needed to fund your longer-term financial goals.
  8. Be confident that your (boring) defensive assets will come into their own, protecting your portfolio from some of equity market falls. Be confident that you have many investment eggs held in several different baskets.
  9. If you are taking an income from your portfolio, remember that if equities have fallen in value, you will be taking your income from your bonds, not selling equities when they are lower value.
  10. Last and by no means least, we are available to talk to you at any time and as your wealth partner, we will urge you to stay the course and be a source of fortitude, patience and discipline. In all likelihood we will advise you to sell bonds and buy equities, just when you feel like doing the opposite.

Comparing your spending with others

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Our clients are often interested in how their household spending compares to others.  Do they spend more than their neighbours, about the same, or less?  This financial curiosity has been satisfied with the publication of new official figures reporting on household spending across the UK.

The latest Family Spending Survey from the Office for National Statistics (ONS) offers an insight into the spending habits of UK households, broken down by household characteristics and types of spending.  At a headline level, it shows that average weekly spending is up to £572.60 for the year ending March 2018.  This is the highest level of weekly spending since 2005, when adjusted for inflation.

According to the ONS, this rise in UK household spending is correlated with an improvement in the employment rate, which reached a record high of 75.6% in the first quarter of last year.

The ONS reports that the biggest outlay for households was transport.  The average household is now shelling out £80.80 a week on its transport costs.  A further £76.10 per week was spent on average on housing costs, fuel and power.  This was followed by an average of £74.60 a week on recreation and culture.

In addition to spending habits, the report also looks at how much we are saving.  It found that our savings ratio has fallen to its lowest level since records began, to just 3.9%.  Such a low savings ratio suggests that households are dipping into their savings, and even taking on new debt, in order to spend more and keep up with their lifestyle costs.

Looking at spending habits across different parts of the UK, the ONS report found some interesting differences.  Perhaps unsurprisingly, London households are spending the most each week with an average weekly spend of £658.30 in the City.  Other parts of the country to report above average levels of weekly spending were the South East, South West and East of England.

In contrast, the lowest average spending was reported in the North East of England, where households were spending an average of £457.50 each week.  There was also below average spending in Scotland, Northern Ireland and Wales, at £492.20, £488.50 and £470.40 a week on average respectively.

Another trend identified in the report was less of an outlay on alcoholic drinks.  It’s not the first time the ONS has spotted this downward trend.  Households are now spending an average of just £8 a week on alcohol.  A decade earlier, this figure was £10.90 a week, when adjusted for price inflation. More is being spent on food and non-alcoholic drinks compared to a year earlier; £60.60 a week now compared with £58 a week (inflation adjusted) back in 2008.

Commenting on the figures, Helen Morrissey, pension specialist at Royal London, pointed out they represent a home maintenance time bomb for the over 50s.  She said:

“Today’s figures show that just because people may have paid off their mortgage it doesn’t mean they stop spending on their house and many are facing a home maintenance time bomb.

“The stats show almost a quarter of all housing expenditure in households headed by people aged between 50-74 was on alterations and improvements such as central heating installations and double glazing. This figure is much higher than the average for all households which is more like 14%.

“It demonstrates the importance of having the necessary savings to meet these sizeable and often unexpected expenses for those approaching and in retirement. Being unable to meet these expenses as we get older can lead to people being forced to move from much loved homes because they no longer meet their needs.”

Of course, how you allocate your own household spending each week is likely to vary from these national averages.  What matters is that expenditure is intentional and forms part of your overall financial planning, helping you to achieve and maintain your desired lifestyle.

At Wells Gibson we put your life at the centre of our conversations and design a Wealth Plan which makes it easier for you to visualise and achieve the life you want; answers your big questions and helps you prepare for your life’s transitions; and gives you the greatest chance of a successful investment outcome and fulfilled life from the money you have and will have.

How to keep your investment head during Brexit

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As the old Chinese curse has it, “May you live in interesting times”.  With Brexit negotiations ongoing, it’s certainly interesting times in British politics, with likely consequences for investment markets.

There’s still a great deal of uncertainty over the outcome of Brexit. The anticipated ‘decisive vote’ has been postponed, for now, so Theresa May can seek more reassurances around the Irish border backstop.  We’ve also had confirmation from the European Court of Justice that the UK can unilaterally withdraw its Article 50 notice and effectively cancel Brexit, without seeking approval from other EU countries.

We can’t know for sure what is going to happen next.

One possible scenario is a lost vote in the House of Commons followed by the resignation of Theresa May, and then a new leadership election within the Conservative Party; possibly even a General Election in the New Year.

We do know that investment markets dislike uncertainty.  As we move ever closer to the 29th March departure date, that uncertainty only grows.  With global markets already displaying some volatility in recent months, that growing uncertainty could result in greater volatility, market corrections and (understandably) nervous investors.

Despite this uncertainty and its potential impact on investment portfolios, at Wells Gibson, we are clear about how we will navigate any choppy investment market conditions ahead.  In simple terms, our approach towards investment planning and management remains unchanged.  Here’s why.

The portfolios we recommend for clients are globally diversified. This means that we don’t recommend putting all of your eggs in one basket, instead spreading portfolios across several investment asset classes, sectors and themes.  This diversification is a really important aspect of risk management when investing money.  Furthermore, it’s probably the only free lunch available when investing.

From the perspective of any Brexit induced volatility, diversification means our clients are not overly exposed to investment assets which are most likely to respond to domestic turmoil.  It means that, when the newspapers and newsreaders are being sensationalist and screaming about billions of pounds being wiped off the value of the FTSE 100, this is only one part of your investment portfolio.

In recent years, this diversification within the portfolios we recommend and manage has moved further from the UK to include a higher proportion of global assets.  Thinking about the UK equity holdings within client portfolios, there’s an interesting consequence of the high proportion of overseas earnings from FTSE 100 companies, for example.  In the aftermath of the Brexit referendum, many investors were surprised to witness the FTSE 100 rise by more than 10% in three months.  During this time, the weakness of Pound Sterling was boosting the profits of FTSE 100 companies with overseas earnings.  Around 70% of FTSE 100 earnings come from outside of the UK, making a weak Pound Sterling beneficial for these companies.

We’re not suggesting that a Brexit meltdown, leading to a collapse in the Pound, will have the same positive impact on UK equities next time, but it’s worth keeping in mind that things aren’t always as simple as they first seem when it comes to investing money.

Our approach towards investment advice and management also remains unchanged because our clients are long-term investors.  Any increased volatility we experience over the coming days, weeks and months will likely be short-term, having little meaningful impact on the long-term performance of portfolios.  One exception could be where clients are making withdrawals from their portfolios in retirement and in this case, we can allocate a sufficient amount to cash in order to avoid needing to drawdown from invested assets during periods of extreme market correction.

We’re staying the course because we know that attempting to time investment markets is futile.  When markets are volatile, there’s always a temptation to try and sell before they have fallen to the bottom and then buy again before they rise to the top.  Nobody can do this consistently well. The more likely outcome is selling low before buying high and, if you do this on enough occasions, this can lead to wealth destruction.

We understand that it can be unpleasant to watch investment market volatility and experience falls in the value of your portfolio.  Regardless of how often we remind investors and our clients that volatility is a normal part of the long-term investing journey, our heart is bound to overrule our head on occasion, especially when the media does its level best to be sensationalist.

If you’re feeling nervous about investment markets in the wake of the Brexit news this week, talk to Wells Gibson.  We’re always happy to discuss any concerns you might have.

Why market timing is futile and it’s time in the market that counts

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There’s a lot for investors to worry about.  High market valuations, rising interest rates, the prospect of a no-deal Brexit and escalating trade tensions fuelled by Donald Trump, all raise the likelihood of greater market volatility.

When markets are more volatile and investor sentiment turns negative, resulting in short-term falls in value, it can be tempting to try and time the markets.  Timing the markets involves attempting to sell before equity markets hit the bottom and then buying before they start to rise.  This sounds good in theory but, in practice, it doesn’t usually work out that way.  Instead, investors can find themselves selling low and buying high!  If investors repeat this process enough times they will soon run out of money to invest.  At the very least, the value of their portfolios will take a big hit.

One of the biggest problems with attempting to time the market is that you can easily miss out on a few of the best days of returns.  Do this, and your overall long-term returns will be significantly worse.  According to a study from Fidelity International a couple of years ago, an investor who invested £1,000 in the FTSE All-Share index 30 years ago, but missed the best 10 days in the market, would have achieved an annualised return of 7.09% and ended up with a total investment of £7,811.55.  This compares with an annualised return of 9.38% and an investment worth £14,733.64 if they had stayed in the market the whole time – an opportunity loss of £6,922.09.  If an investor had missed the best 20 days, their annualised return would be 5.55%, which would have resulted in an even worse shortfall of £9,676.56.

This research should remind us that volatility is the price we pay as investors, for long-term outperformance from equities, relative to other investment asset classes.  The potential for long-term returns comes from risk in the form of market volatility.

There are significant risks associated with trying to time the markets.  This is because it is so difficult to predict the best time to get out and then get back in to equity markets, during periods of market volatility.  These risks are magnified by the impact of the very best and worst days of market performance tending to be grouped together during periods of increased market volatility.

A more sensible approach to investing is to keep your money exposed to the markets throughout the entire market cycle, during the ups and the downs.  There’s an old stock market adage which says time in the market matters more than timing the market.  At Wells Gibson, we would tend to agree.

When markets are especially volatile, the value we add as financial planners, is to guide our clients and keep them focused on their long-term, lifestyle, financial and investment objectives.  Furthermore, because we can demonstrate the value of time in the market, and the futility of market timing, we are able to secure the best long-term results for our clients.

If you have been tempted to try market timing in the past or perhaps, during the current bout of market volatility, why not give us a call and see if we can keep you on the right track.

Is the tax tail of EIS and VCT investment wagging the investment dog?

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Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) represent tax-advantaged opportunities to invest equity capital into very small and often very early stage, or even start-up, privately held businesses.  The words ‘equity’, ‘privately held’, ‘small’ and ‘early stage’ immediately point out some of the risks.

There is a certain human appeal towards investing in the next potential Google or similar tech start-up or to own a share of a biotech firm commercialising some aspect of research for the good of mankind.  Intuitively, one knows that this is a risky, dice-rolling business and that for every winner there are bound to be some losers and some also-rans.  However, the tax breaks afforded by HM Government, for these schemes, risk clouding the due diligence that these investments duly deserve.

It is a mistake to think that these tax breaks are noble in nature.  Their purpose is to encourage the supply of capital to these companies in the hope that they will employ more people, who will pay income tax, make NI contributions (individual and company) and pay VAT on goods bought with their wages – and that they will generate higher corporate earnings on which corporation tax can be charged.  The tax breaks are provided to improve the risk-return relationship that potential investors in these companies face.

EIS was launched in 1993-1994, as an evolution of the Business Expansion Scheme that went before it.  Since it began, it has raised billions of pounds for thousands of small companies.  In fact, according to the EIS Association, the official trade body for the Enterprise Investment Scheme, in May 2018, HMRC released the first of its estimates in respect of the number of companies raising funds and the amounts raised through EIS for 2016-17:  3,470 companies raised a total of £1.8mn of funds under the EIS scheme in 2016/17.  Remember this is an estimate and judging by previous years, we can expect these numbers to increase.

The VCT scheme was first introduced in 1995.  VCTs are similar to investment trusts, raising capital by the sale of shares in the trust, which is then invested into qualifying trading companies.

Researchpoints out that around three quarters of advisers recommend EIS investments and a great majority of these advisers stated that tax benefits were one of the main reasons why they recommend EIS to clients. These findings are surprising and even alarming to us.  The tax tail seems to be wagging the investment dog, particularly because a majority believe these investments should be considered before other more mainstream tax breaks (e.g. ISA and pension) have been fully utilised.

Furthermore, it seems a high percentage of private investors who regard themselves as sophisticated or experienced hold EIS investments and an even greater percentage had considered them.  When choosing an investment, a high percentage stated that the expected level of return was one of the most important criteria.  This alarms us.  Even self-selected ‘sophisticated’ investors would appear to be taking far higher risks than they are aware of, not least the risk of real disappointment that returns are poor (or their capital is lost entirely, before the tax breaks they receive).

The fees on EIS and VCT funds are, as one might expect, high in comparison to passive or systematic mutual funds.  Annual management charges in the region of 2% to 3% and around 3.5% in terms of total costs strip out considerable upside, and that is before any form of performance fee is deducted.  Don’t forget that there are often arrangement fees representing around 2% of each transaction.  In the end, investors only receive returns net of costs.  When costs are high as they are in this case, intermediaries take an unjustified share of the upside.  The proof of the pudding is in the eating.

The risks of EIS and VCT investments are varied and considerable as they both invest in very small unquoted companies.  It is our belief that many investors do not have a clear insight into the risk they are taking on.  These range from the risk of failure, to owning minority stakes in illiquid private businesses and the risk of changes in the tax regime that may affect the attractiveness of the tax breaks on offer.

The conclusion that we arrive at is that we would not recommend EIS and VCT investments in the event that a client’s other tax reliefs (e.g. pension, ISA, CGT) have not yet been fully utilised.  When it comes to investing, diversification, keeping costs low and only taking risks supported by evidence is what matters, yet EIS and VCT products don’t tick these boxes!

These high-risk, tax planning products should only be considered and recommended in very client specific circumstances where all other avenues have been explored, and only for those clients who meet stringent net worth and investor sophistication criteria.

Is the tax tail wagging the investment dog in the UK?  From what we can see the answer is yes.