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Long Term Investments

Retirement rule of thumb from new living standards

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It’s hard to picture the future.  Various studies have found that we tend to reward ourselves today, at the expense of our future selves.  This can apply in areas including health, diet (one more doughnut surely won’t hurt?!) and our personal finances.

When it comes to retirement planning, 51% of us focus on current needs and wants at the expense of providing for the future.  Only 23% of people are confident they know how much they need to save.

This new research supports the launch of the UK Retirement Living Standards, which could help people picture their future retirement and what that might cost.  Produced by the Pensions and Lifetime Savings Association (PLSA), the New Retirement Living Standards are pitched at three different levels – minimum, moderate and comfortable.  The standards are based on a basket of goods and services, including food, drink and holidays.  The independent research was conducted by the Centre for Research in Social Policy at Loughborough University.  It was based on the well-respected Minimum Income Standard developed for the Joseph Rowntree Foundation.

In each new Retirement Living Standard, there are different standards of living, with a relevant basket of goods and associated costs for each.  Each was established based on what members of the public feel are realistic and appropriate expectations for living standards in retirement.  The basket of goods is made up of household bills, food and drink, transport, holidays and leisure, clothing and personal and helping others.

These new Retirement Living Standards are a useful way to fill gaps in current approaches towards planning for retirement.  They can form a practical first step on a retirement planning journey.

The PLSA wants the Retirement Living Standards to become a widely adopted industry standard.  For example, some pension schemes will use them in general information for scheme members, in annual benefit statements, or to develop personalised targets for pension planning.

The minimum living standard in retirement has been set at £10,200 a year for a single person and £15,700 for a couple.  These amounts cover the cost of basic needs in retirement, as well as enough to have some fun.  For example, within this budget is enough to holiday in the UK, eat out about once a month, and do some affordable leisure activities a couple of times each week.

With a combination of a full state pension of £8.767.20 a year and auto-enrolment in a workplace pension, this minimum standard should be achievable by most.

The cost of a moderate retirement lifestyle was calculated at £20,200 a year for an individual or £29,100 a year for a couple.  At this level of retirement income, there’s more financial security on offer and greater flexibility.  There’s more money for fun too; the budget includes a two-week holiday in Europe and eating out a couple of times each month.

The comfortable level has been set at £33,000 a year for an individual or £47,500 for a couple.  This income is sufficient to cover some luxuries, including regular beauty treatments, theatre trips, and three weeks in Europe a year.

To make these Retirement Living Standards easier to remember, the PLSA has summarised them as £10,000 a year for minimum, £20,000 a year for moderate, and £30,000 a year for comfortable; or 10k-20k-30k.  For couples, it’s 15k-30k-45k.

Nigel Peaple, Director of Policy and Research, PLSA, said:

“The Retirement Living Standards will support better saver engagement.  They distil robust, in-depth research with the public into an easy to understand basket of goods that helps people picture the future – and relatable figures that can provide a powerful and practical tool for encouraging engagement with saving.

“A recent PLSA survey showed 76% of people with a workplace pension agree that Retirement Living Standards would help them know if they were on track for the lifestyle they want in retirement.

“The PLSA looks forward to working closely with the pensions industry to ensure widespread adoption of the Retirement Living Standards to transform the way people think about saving for spending in later life.”

Guy Opperman, Minister for Pensions and Financial Inclusion, said:

“We have transformed saving for retirement for millions of people and the next challenge is to make it easier for them to engage more with their pensions. It’s great to see what the PLSA has developed which has the potential to help savers think about the future and plan for the retirement they want.”

Jackie Spencer, Senior Policy and Propositions Manager, Money and Pensions Service, said:

“Saving for something is easier to do when you can visualise what you’re working towards, which is why people are often more motivated to save for short-term goals like holidays and new cars than they are for their retirement.

“The new Retirement Living Standards are a great way of offering savers some practical examples of what they can expect from their lives when they stop working. The Money and Pensions Service has agreed to be an early adopter of the new standards and will be looking to incorporate them into pension guidance and our online pension calculator.”

Of course, our income needs in retirement are very personal and will differ between individuals and couples.  While these standards represent a good starting point for thinking about the cost of retirement, it’s essential to tailor the exercise to suit personal requirements.

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.

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.

Investing can bring you closer to your financial goals than cash

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Should you invest your money to achieve long-term financial goals or keep the money safely in cash?

This is a common dilemma and can be a difficult decision, especially for first-time investors who are yet to experience the ups and downs of stock market investing.  Yet, history tells us that investments typically outperform cash over longer periods of time.

New research has shown that those who invested in a stocks and shares Individual Savings Account (ISA) 15 years ago could have enjoyed gains of almost double those experienced by individuals leaving money in cash over the same period.  The research from Fidelity International also pointed out a gender difference when it comes to the preference to invest or leave money in cash.  Almost half of women prefer to save in cash, which could be detrimental to achieving their long-term financial goals.

This is supported by new figures from HM Revenue & Customs (HMRC) which show more women subscribing to cash ISAs than men.  More men than women were shown to invest their ISAs than open a cash ISA.

Fidelity carried out the analysis based on using the full ISA allowance invested in an index tracker fund which aimed to track the performance of the FTSE All Share and compared this to average cash savings rates over 5, 10 and 15 years.  This analysis demonstrates the cost of cash, with the investment worth £20,174 more over 5 years, £55,541 more over 10 years and £104,217 more over 15 years.  They concluded that, by investing in the stock market, women (and men) can reach their financial goals sooner.  These financial goals might include building up a deposit for a first home, paying school fees or saving for retirement.

Earlier research from Fidelity in their Financial Power of Women report found that 43% of women were likely to save using a cash ISA in the next two years compared to the 19% who said they would invest via a stocks and shares ISA.  This finding was based on a survey of more than 1,000 men and 1,000 women, who were asked about their views on money and investing.

Maike Currie, Investment Director at Fidelity International, said:

“Many women will have long-term goals and diligently stick to these whether saving for a child’s education or putting something away for a comfortable retirement.  But while we tend to be diligent and committed savers, we often steer clear of the stock market altogether.

“Factors such as the gender pay gap, time off work to cover childcare and more women engaged in part-time work already contribute to a significant gap in women’s’ earnings versus their male counterparts.  That’s why it’s important not to put yourself at a further disadvantage by not making your money work as hard as you are.  With interest rates at record lows for almost a decade now and inflation rapidly rising, anyone holding an investment in cash will struggle to achieve a decent real return – that’s a return that keeps abreast of rising prices.

“Granted, the stock market is a riskier option than cash, but it is a well-established fact that over the long-term equities tend to outperform cash.  Women risk falling into a glaring ‘investment gap’ by leaving their money languishing in cash.  Don’t lose out over the long term and run the risk of missing out on your long term financial goals – take the plunge and get invested.”

There is of course an important role for cash in long-term financial planning.  It’s usually recommended to hold a short-term cash emergency savings fund in order to cover between three to six months essential expenditure.  Cash is also often preferable to investments where there is a short time horizon for your financial goals, such as buying a property in the next few years.

As investments can go down as well as up in value, the certainty of cash is important where a known amount of money is required in the short-term however, for longer-term financial goals, including retirement planning, the buying power of cash will typically be eroded by price inflation over time.

Investing money does involve risk and exposure to volatility, so you need to have sufficient tolerance for risk, capacity for any losses and the need to experience investment returns to achieve your financial goals.

Please get in touch if you would like to talk about the difference between saving in cash and investing your money, and how to determine a suitable allocation of cash and investments within your portfolio.