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Protecting Investments

Sitting Out an Equity Market Fall

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For many of our clients, the purpose of accumulating wealth in a portfolio is to provide a sustainable income either now or in the future that is, at the very least, able to cover their basic needs and hopefully a bit more.

The level of portfolio-derived income required is unique to each client.  Some of our clients have pensions from final salary schemes and possibly other income from other sources, such as property.  Other clients need to rely more fully on their portfolios.

Portfolio income comes from the natural yield that a portfolio throws off in the form of dividends from companies and coupons (interest payments) from bonds, and capital makes up any shortfall.  When markets rise, as they have done most years since the Global Financial Crisis a decade ago, portfolios may even grow after an income has been taken, although this will not always be the case.  When markets fall, it can begin to feel a little uncomfortable as dividends may be cut and equity / share values may be down materially, as we have seen in the first quarter of 2020 (albeit, the upturn in April has helped).

The cardinal investment sin at these times is to sell equities when they are down and turn falls into losses.  To avoid doing this, income required above a portfolio’s natural yield can be taken from bonds or cash reserves.

You first question might be, ‘How long might I have to do this for?’. 

The figure below, helps to answer this question.  It uses a range of regional (Europe, Asia-Pacific ex-Japan, Emerging and World) and major individual equity markets (US, UK, Japan) and plots the top 10 largest market falls for each and the time taken to recover back to the previous high, in, before-inflation terms[1].

Some overlaps obviously occur (e.g. the US is a material part of the World), but broad insights can be gleaned: most market falls recover within 5-6 years, some may take a up to a decade or so, and outliers can and do occur, such as Japan which took 27 years to recover (in GBP terms) from its market high in 1989.

Figure 1: How long will we have to wait?

Data source: Morningstar Direct © All rights reserved.

What is also evident is that, with the exception of Japan, these market falls all sat well within most investors’ true investment horizons.  Whilst Japan provides a helpful lesson that investing outcomes are uncertain, widely diversified portfolios do help to mitigate country-specific risks.  Even investors in their 80s should be planning to live to at least 100, giving them a 20-year investment horizon (today an 80-year-old woman has a 1-in-10 chance of reaching 98[2]).

The question of how much cash or bonds an investor should hold will vary depending on how important it is for them to meet their basic income needs and how important it is having more discretionary spending[3].  Using a sensible multiple of basic annual spending, and possibly additional discretionary spending, is a sensible starting point from which to reach a suitable minimum.  For those to whom certainty of income is critical this could be significantly higher and for those to whom it is less critical, it might be lower.  For all investors, it should be sufficient to ensure that they can sit out any market fall relatively comfortably, without having to sell their equities.

Sitting out an equity market fall is not so bad, when you know how long the wait might be and you come well prepared to sit it out.

As always please get in contact if you have any questions.

[1] MSCI World NR, IA SBBI US Large Stock TR, MSCI United Kingdom NR from Jan-72; MSCI Japan NR, MSCI Emerging Market GR, MSCI Europe NR, MSCI AC Asia Ex Japan GR from Jan-1988.
[2] https://www.ons.gov.uk/
[3] It will also depend on other factors such as their need to take risk, their risk profile, and their financial capacity for loss, all of which should be discussed in detail as part of the ongoing financial planning process.
Photo by Martin Zangerl on Unsplash

Don’t Tinker with Your Portfolio – Top 5 Tips

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Modern life provides us with so much news, information and opinion, which typically focuses on the here and now, so much so, that it is easy to be overwhelmed with the feeling of doom and gloom.  The list of things to concern us is long and worrisome; the uncertainty of a vaccine for Covid-19; the prospect of a long and drawn out recession; US/China tensions resurfacing; and the prospect of no UK/EU trade agreement, to name a few.

The natural extension of this is to worry about what the impact of all this uncertainty will have on your portfolio and in turn, on your future wealth and desired lifestyle.  The first mistake is to believe that the world is falling apart around our ears.  It most certainly is not.  The second mistake is to think that your globally diversified portfolio needs to be repositioned to mitigate these events. There are 5 key reasons why tinkering with your portfolio is unlikely to be a sensible course of action.

Today’s ‘unprecedented’ turmoil is different – So WAS 9/11 and BREXIT

Today’s worries dominate our thinking; but can you remember what you were worrying about a year ago, or two years ago? Probably not.  It has always been like this, yet the overwhelming take-away is to acknowledge capital markets thrive because they succeed over the long-term, despite world events.

Bad news sells – so don’t ignore the underreported good news

We are all aware that bad news sells.  For example, the Bank of England predicts the UK economy will sink by as much as 25% in the three months to June.  Yet, the S&P 500 Index of largest companies in the US, closed higher on the 7th May, than it was on 31st May 2019.  It is not all bad news.

The futility of futurology

Futurology is the financial markets’ version of astrology.  There is a huge industry out there from the International Monetary Fund and the UK’s Office for Budget Responsibility to investment banks, academics and BBC reporters all peddling their own view of the future.  These futurologists have one thing in common; they are nearly always wrong in their predictions and are rarely held to account for their poor forecasts. Take forecasts with a pinch of salt.

The news is already in market prices

It is normal to be worried about the potential impact of what is going on in the world and how this will affect markets and, therefore, your portfolio.  The reality is that you are not alone; in fact, all active investors have some view on how Covid-19, a global recession, US/China and UK/EU trade talks – to name a few – will impact bond and equity prices.  These global, diversified views are already reflected in the equilibrium price of securities, agreed freely between buyers and sellers.

Your portfolio is already structured to manage uncertainty

Today’s concerns are endlessly recycled through the 24/7 media soundbite process, alarming some who are invested in the markets.  Well-structured investment portfolios seek to ensure that any market conditions can be weathered in the future, whatever drives these storms.  Your highly diversified portfolio, balancing global equity assets with high-quality shorter-dated bonds, is well positioned to do so.  Try not to worry.

As always please keep safe and if you have any questions please get in contact.

Top Tips for Staying Calm in Today’s Markets

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At times like this, it is sometimes worth reminding ourselves that it is this very uncertainty of shorter-term market outcomes that delivers investors with returns above those of placing bank deposits.

 

This allows us to grow our purchasing power over time.  In the case of equities / shares, this uncertainty can be high as the market adjusts its view of long-term earnings and the discount rate it uses to establish market prices.  If there was no uncertainty, then there would be no equity premium.

 

In contrast to the recent sensationalist headlines, such as the BBC’s ‘Coronavirus fears wipe £200 billion off UK firm’s value’, the never-published headline of, ‘Over the past 10 years global equity markets have turned £100 into £266, so giving a bit back is perhaps to be expected’ provides some comfort to those already invested.

 

To those who aren’t invested or have money to invest, equities / shares are cheaper than they were at the start of the year.  Good news does not sell as well as bad news!

 

You may be asking yourself whether this health-driven market event is different to those that have gone before.  It is, but only because every market fall is driven by a different combination of events that impact on future corporate earnings.  What should remain the same is our response to it; avoid panic, avoid unnecessary emotionally driven investment activity, believe in your portfolio and the power of markets and capitalism to recover in time.

 

Here are some tips for clients of Wells Gibson, to help keep things in perspective: 10 things to remember during a market fall.

 

  1. Embrace the uncertainty of markets – that’s what delivers us strong, long-term returns. Remember that you own lower-risk, defensive bonds in your portfolio too.  Your portfolio won’t have fallen in value as much as the headlines.

 

  1. Don’t measure your portfolio’s performance from the top of the market, but over a longer and more sensible timeframe. Over the past five years, investors have received handsome growth.  Even over the past year, equities are only a little below where they started.

 

  1. Don’t look at your portfolio too often. Get on with more important things.  Once a year is more than enough.  If you are looking every day, don’t.  Stop listening to the news too, if it concerns you.

 

  1. 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.

 

  1. If markets have fallen, remember that you still own everything you did before (the same number of shares in the same companies, and the same bonds holdings).

 

  1. Most crucially, 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?  Falls in the markets and recoveries to previous highs are likely to sit well inside your long-term investment horizon i.e. when you need your money.

 

  1. The balance between your growth (equity / share) assets and defensive (high quality bond) assets was established by Wells Gibson to make sure that you can withstand temporary falls in the value of your portfolio, both emotionally and financially. If necessary, we can rebalance your portfolio to make sure that you have the right level of equities to benefit from future market rises.

 

  1. 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 different baskets.

 

  1. If you are taking an income from your portfolio, remember that if equities have fallen in value, you will be taking a lot of your income from your bonds and not all from equities when they are down.

 

  1. Wells Gibson is here – at any time – to talk to you. We will urge you to stay the course and hopefully 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 just the opposite.

 

 

Six warning signs of an investment scam

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It can be a dangerous world when it comes to our personal finances.  Sadly, scammers and fraudsters are widespread, always looking for their next unsuspecting victim.

New figures highlighted by the Financial Conduct Authority (FCA) show nearly £200 million was lost to reported investment scams last year.  The average victim lost £29,000 in 2018, with common scams reported involving investments in shares and bonds, foreign currency exchange trading (forex) and cryptocurrencies.

The data comes from Action Fraud, which revealed more than £197 million of reported investment scam losses last year.  They also pointed out that scammers are resorting to increasingly sophisticated tactics in order to persuade their victims to give up their cash.

According to the FCA and data from their call centre, it’s investments from unregulated firms that are most commonly reported as scams. These include investments in shares and bonds, forex and cryptocurrencies, all from firms that are not FCA authorised.  These investment scams represent 85% of all suspected investment scams reported last year.

With the first quarter of the year considered to be a peak season for investing, with end of the tax year approaching, investors are being warned to be particularly vigilant.  The FCA warned that the profile of investment scams is changing, with more of these taking place online.  It means scammers are increasingly moving away from traditional cold calling on the telephone to find victims, although this approach does continue to exist.

Fraudsters are now contacting people through emails, professional looking websites, and social media channels, including Facebook and Instagram.

Research carried out by the FCA found that, last year, more than half of potential fraud victims did the right thing by checking first with the FCA Warnings List at www.fca.org.uk/scamsmart/warning-list.  This is a tool that helps users to find out more about the risks associated with an investment and search a list of firms the FCA knows are operating without its authorisation.

The FCA is urging investors to consider the following six warning signs when making investment decisions:

  1. Unexpected contact – Traditionally scammers cold-call but contact can also come from online sources e.g. email or social media, post, word of mouth or even in person at a seminar or exhibition.
  2. Time pressure – They might offer you a bonus or discount if you invest before a set date or say the opportunity is only available for a short period.
  3. Social proof – They may share fake reviews and claim other clients have invested or want in on the deal.
  4. Unrealistic returns – Fraudsters often promise tempting returns that sound too good to be true, such as much better interest rates than elsewhere.
  5. False authority – Using convincing literature and websites, claiming to be regulated, speaking with authority on investment products.
  6. Flattery – Building a friendship with you to lull you into a false sense of security.

Mark Steward, Executive Director of Enforcement and Market Oversight, FCA, said:

“Investment scams are becoming more and more sophisticated and fraudsters are using fake credentials to make themselves look legitimate.  The FCA is working harder than ever to help protect the public against this threat.  Last year we published over 360 warnings about potentially fraudulent firms.  And we want to spread the message so we can all better protect ourselves from investment scams.”

Director of Action Fraud, Pauline Smith, said:

“We are working with the FCA to raise awareness of investment fraud and would urge anyone who is considering in investing to check with the FCA before parting with their money.

“If you think you have been a victim of investment fraud, report it to Action Fraud.”

The FCA is advising investors to reduce their chances of falling victim to investment fraud by carrying out three simple steps. You should always reject unsolicited investment offers, whether these are made

online, via social media, or over the telephone. The recent introduction of new legislation makes it illegal for anyone to cold call you about pensions.  This should serve as a strong warning that any investment-related cold calling is likely to be an attempted scam, as legitimate firms do not cold call prospect customers.

Before investing any money, always check the FCA Register to make sure that the individual or firm involved is authorised.  You should also check the FCA Warning List to make sure the firm you are dealing with is not listed there.

And finally, you should seek impartial advice before investing.  There is never any harm in seeking a second opinion before investing your money.

There are more tips at the FCA’s ScamSmart website, which can be found at www.fca.org.uk/scamsmart.

If you’ve lost money in a scam, contact Action Fraud on 0300 123 2040 or visit their website at www.actionfraud.police.uk.

There’s still time to top-up your State Pension

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Time is running out to top-up your State Pension before a price rise being introduced in April.

Paying voluntary National Insurance contributions can be a financially attractive way to boost your income in retirement.  However, filling these gaps in your National Insurance contribution record, and receiving a higher State Pension in return, is set to become more expensive from 6th April 2019.

If you reach your State Pension age after 5th April 2016, and therefore qualify for the new State Pension system, then you can currently fill any gaps in your National Insurance contribution record at very favourable rates. These concessionary rates are however due to expire on 5th April 2019, making the cost of filling the same contribution gaps hundreds of pounds more expensive.

The first step is to check your National Insurance contribution record for any gaps.  The simplest way to do this is to visit www.gov.uk/check-national-insurance-record and use your Government Gateway check your National Insurance record online.  This online check will tell you:

  • what you’ve paid, up to the start of the current tax year;
  • any National Insurance credits you’ve received;
  • if gaps in contributions or credits mean some years don’t count towards your State Pension (they aren’t ‘qualifying years’); and
  • if you can pay voluntary contributions to fill any gaps and how much this will cost.

Once you have this information, you will need to act before the end of this tax year to fill any gaps in your ‘qualifying years’ to benefit from the current concessionary rates and boost your State Pension income.

As things stand, if you’re covered by the new State Pension system and you have a gap in your contribution record for any year from 2006/07 to 2015/16, you have until 5th April 2023 to fill those gaps.  Despite this generous amount of time to fill the gaps, the current concessionary rates for making voluntary National Insurance contributions will expire on 5th April 2019.

The normal rate for buying back each week of National Insurance contributions will revert to £15 following this deadline.  Different rates are being charged for those acting before 6th April 2019.  In fact, the weekly rate varies from £12.05 for the 2010/11 tax year to £14.10 for 2015/16.

Depending on which gap of your National Insurance record you need to fill, the difference between the ordinary and concessionary voluntary rates of National Insurance contributions could represent hundreds of pounds.  For example, if you want to fill a National Insurance contribution gap for 2010/11, you will save more than £150 by doing so before 6th April 2019.

The potential saving will be more than £500 for anyone wanting to fill six years of contribution gap between 2010/11 and 2015/16.

Before deciding to top up any gaps with voluntary National Insurance contributions, it’s important to check that doing so will boost your State Pension income.  The challenge here is that a rather complex set of transitional rules mean it is not always the case that filling these gaps with voluntary contributions will result in a higher State Pension.

In order to check, you can contact the DWP Future Pension Centre on 0800 731 0175 or by using the online form at https://www2.dwp.gov.uk/tps-directgov/en/contact-tps/fpc.asp.

Commenting on this opportunity, Royal London Director of Policy Steve Webb said:

“For many people, topping up their state pension through paying voluntary NICs can produce a good rate of return because the cost of doing so is subsidised by the government.  

“But the price of voluntary NICs will rise sharply in April so those considering doing so may wish to act quickly and could save hundreds of pounds by doing so.”

Your State Pension is a valuable part of your overall retirement income, so it’s important to maximise this inflation proofed income where possible and affordable.

With this looming deadline to benefit from concessionary rates of voluntary National Insurance contribution, it’s important to take a few simple steps to understand whether you can save hundreds of pounds on the cost of topping up your State Pension income.