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Let Your Head, Not Your Heart, Guide Your Investment Decisions

Many of us will have spent the last two years longing for the time when most of the UK population had a good immunity against Covid-19, and pandemic restrictions were either being eased or completely dropped.

And although the pandemic isn’t over, these wishes have come to pass, and we’re closer to normal now than we have been for a long time. So why do we not feel like celebrating?

Well, the headlines still make grim reading. From soaring inflation to Russia’s attack on Ukraine, it’s clear that the global economic recovery from the pandemic isn’t going to be smooth, and this volatility is making many investors jittery.

However, we’d urge you not to panic in the face of international uncertainty. Hold firm, stick to your investment plan and don’t let emotions guide your decisions.

Keep a Lid on Your Emotions

Being an investor is like being a football fan, as you can face the highest of highs, crushing blows, and a regular struggle to process the dizzying range of feelings that comes with riding this rollercoaster.

But there’s a key difference with investors, as there can be a big financial cost to you if you go into panic mode as soon as the market falls.

You should be taking a long-term approach to your investments, rather than acting emotionally and impulsively.

Simply sitting tight until the markets recover from whatever has caused them to drop could be a much more lucrative approach than panicking as soon as things don’t go the way you want.

Markets Rise and Fall

Watching the value of your investments plummet as an international crisis escalates will naturally be a cause for worry.

But the markets rise and fall every single day, and while tough times might be difficult to swallow, the value of your investments will eventually bounce back. And that’s why it’s so important to be resilient and stick to your long-term strategy.

You could even use this opportunity to pick up some new investments while prices are low, with the expectation that their value will also rise at some point in the future.

This could be a great way to diversify your portfolio if you’re worried about keeping all your eggs in one basket, but as ever, you should research potential investments thoroughly before making any commitments.

How often do we see investors paying too much for stocks at a time when they are doing well? If you’re prepared to wait, perhaps for several years, for the markets to recover at some point in the future, it could pay off handsomely.

An interesting study by JP Morgan highlights exactly why it’s worth taking a long-term approach to investing. According to the study, an investor who was out of the market for just ten days between January 4th 1999 and December 31st 2018 would have seen their returns fall from 5.62 per cent a year to 2.01 per cent a year. And if you had missed the 60 days in which the market was performing at its best, you would have seen a 7.5 per cent loss per year on your investments.

This puts into context exactly why at times like these, investors should simply do nothing and hold onto their investments. Hopefully, the markets should pick up in the coming months or years, and work in your favour.

Diversifying Reduces Investment Risk

If you’re concerned about the level of risk you face from your investments, it may be time to consider diversifying, rather than selling up.

If you’ve invested solely in one company or one industry, the strength of your portfolio heavily relies on the specific problems and issues facing that particular sector. That means a diverse portfolio, covering shares, bonds and property in different countries and sectors could be more resilient in the face of global economic problems, and international crises such as the current Ukraine invasion.

Ultimately, the message to take away from this article is that now is not the time to panic and sell up. Sit tight, stay calm and stick to a long-term strategy, as that’s more likely to reap rewards for you in the future.

Sources
https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/market-updates/on-the-minds-of-investors/why-should-i-stay-invested/

What is ESG? Will it matter more than the bottom line?

There have been a thousand-and-one articles written since the pandemic on people’s changing attitude to work. Millennials and the generations that follow them – so we are told – want different things from work. Flexibility, the option of working from home and, above all, to work for a company that shares their values: that values purpose as much as profit. 

It is not surprising then that we are hearing more and more from companies about ESG – their environmental, social and governance credentials. What really is ESG? And can it possibly matter as much as profits? After all, without profit you cannot pay your employees: you cannot re-invest in the business and you cannot pay dividends to your shareholders. 

You could argue that companies’ concerns with ESG are not new. The origins could be traced back to the 1800s when religious groups such the Quakers and Methodists ran their businesses according to socially responsible principles, and established socially responsible investment guidelines for their followers. 

More recently – in 2006 – the United Nations launched a set of six investment principles which perhaps started the incorporation of ESG into mainstream investment practice. Simply put ESG criteria judge how a company meets its environmental obligations, how it manages relationships with employees, suppliers, customers and the local community and the principles, composition and behaviour of the leadership team. 

By the same token ESG investing looks to invest in companies that espouse those values. This, in some ways, brings us back to the generations mentioned above. Millennials and their successors not only want to work for companies that share their values, they want to invest in them as well. Often they want to go one step further, and make investments that have a positive and measurable social and economic impact. 

“Impact investing,” as it has been dubbed, is now the fastest growing area of responsible investment. The World Economic Forum estimated that $1tn (£730bn) of assets were committed to impact investing in 2020, with the sector forecast to grow at $250bn (£183bn) annually. 

It is small wonder then, that companies are paying more and more attention to meeting their ESG obligations. Of course the bottom line remains important – although many of us remember Uber famously being valued in the billions despite saying that it may never make a profit – but now both investors and employees are using other criteria to judge companies. You will hear a great deal more about ESG and impact investing in the months and years to come.

Sources
https://www.cityam.com/esg-social-mission-clash-corporate-governance-ben-jerrys-unilever/

Welcome to the National Infrastructure Bank

One of the most eye-catching announcements in Rishi Sunak’s recent Budget was the creation of  the National Infrastructure Bank, which – as part of the Government’s commitment to economic ‘levelling-up’ across the UK – will be based in Leeds. 

What is the new bank? Why is it being introduced? And what impact might it have on both the regional and national economies? 

The Bank is part of the Government’s stated aim to reach ‘net zero’ by 2050, part of what the Chancellor described as a “green industrial revolution.” 

Launched with £12bn of capital, the Bank is aiming to attract a further £40bn of private investment into green projects. According to UK Government documents, “the Bank will provide leadership in the development of new technologies.” The Bank will also be able to issue £10bn worth of guarantees, as well as having the ability to “draw capital from the Treasury and borrow from private markets.” 

Initially it looks as though much of the Bank’s lending will be to local authorities. It appears that one of the key aims of the Bank – as with the Budget’s freeports initiative – will be to regenerate areas that have previously suffered from a lack of investment. The Government’s initial briefing notes talk of ‘high value and strategic projects of at least £5m.’ The National Infrastructure Bank won’t be lending you and me money to put solar panels on our roof…

These are clearly early days – at the moment the Bank is little more than another headline. But it has been broadly welcomed: this was certainly true in Leeds, with the council seeing the Bank as confirmation of the city as the biggest financial hub outside London – and another feather in the region’s cap following Channel 4’s recent move to Leeds. 

There have, inevitably, been one or two dissenting voices. Mark Robinson, chief executive of procurement authority Scape said, “There is a pressing need for [the Bank] to move at speed to create the best conditions for local economic growth and sustainable inward investment.” 

In other words, if the economy is going to bounce back from the pandemic, then the Chancellor’s ‘green industrial revolution’ – and the Bank behind it – needs to get to work, quickly and effectively. 

In theory, it should be able to do this. According to figures produced by the Office for Budget Responsibility, the Bank will initially provide less than half the funding previously provided by the European Investment Bank (EIB). The Government’s intention is that the Bank will provide ‘more targeted’ support than the EIB and, with the UK no longer bound by European rules and the Government keen to press ahead with the ‘green industrial revolution,’ we may see the National Infrastructure Bank expand rapidly. 

Sources
https://www.yorkshirepost.co.uk/news/opinion/columnists/what-national-infrastructure-bank-will-mean-for-leeds-after-budget-boost-james-lewis-3153580

https://www.constructionnews.co.uk/government/budget-chancellor-launches-national-infrastructure-bank-03-03-2021/

The Investment Theories which go against conventional wisdom

Many of you will have heard the old stock market maxim; ‘Sell in May and go away.’ It ended with, ‘Don’t come back until St. Leger day’ and held that the best investment practice was to sell up in May and enjoy the English summer season, the Lord’s test, Ascot and Henley. 

Sadly, Wall Street and the Shanghai Composite Index don’t take too much notice of the English season, and that old advice has rather dropped out of favour!

But are there any other seemingly outdated investment theories and should you pay any attention to them? 

Perhaps we should start with the ‘Greater Fool Theory’ which, very simply, says it doesn’t matter what you pay for an investment as long as you can find a ‘greater fool’ to buy it at a higher price. These days the Financial Conduct Authority do not recognise ‘greater fool’ as wholly satisfying the requirement to ‘know your client…’ 

‘Buy the worst performing market.’ Has one of the world’s stock markets performed poorly this year? Then believers of this theory say you should invest in it next year. 2019 was generally a good year for world stock markets, but of major markets South Korea lagged behind, only rising 9%. The Brazilian market, in contrast, rose by 32%. What happened in 2020? South Korea was up by 31%, Brazil by just 3%. And anyone following this theory will be heavily invested in the UK’s FTSE index in 2021 – compared to other countries, the UK’s leading index performed poorly in 2020. 

The ‘Prospect Theory’ tells us that investors are more worried about the prospect of loss than they are attracted by the expectation of profit. If a portfolio grows at a steady 5% for three years it will – allowing for compound interest – have the same return as one which grows 12%, falls 2.5% and then grows by 6%. 

The theory tells us the majority of investors will opt for the steady 5% return and, in many ways, this theory goes right to the heart of what a good financial adviser does. It is not about the latest fashionable investment theory or the return of an old favourite, it is about knowing your client, working with your client over the long term and building a savings and investment portfolio that matches the client’s level of risk and financial goals. Theories may come and go and that is a fundamental which will never change. 

Sources
https://www.investopedia.com/articles/financial-theory/controversial-financial-theories.asp

The emotions that arise when investing

Emotions are important. We should listen to them… most of the time at least. However, investing is one case when it’s best to let rational thought take priority over your emotions. By all means, listen to your emotions, but don’t be led by them.

Here’s a slightly shocking fact: In 2018, the S&P 500 generated an average return of 9.85% annually. However, research by Dalbar found that the average investor earned roughly half of that: 5.19%.

 Why? Humans are emotional creatures and investing is an emotional experience, therefore investors are tempted to make rash decisions like rapidly selling during a market downturn. 

When investing, a patient, logical approach is usually the most effective over the years. This means prioritising long-term investments over the impulse to buy and sell based on your emotions or short-term goals. 

We’ll admit that it’s hard to avoid becoming entangled in media hype or fear, something that can lead you to buying at the peak and selling at the bottom of the market, so you need to be self-aware enough to recognise when this is happening.

The cycle of investor emotions

It’s common for investors’ emotions to move in something of a cycle, similar to the one shown in the diagram below. The point of maximum financial risk lies at the top of the market curve. Here, there is the potential to make a decision motivated by short term gains, when it’s likely that the best gains have already passed.

Investors who wait until this point are often at risk of ploughing their cash into a market that might soon crash.

On the other hand, during times of rising market volatility, investors should remember the importance of looking beyond short-term market fluctuations and remember that although markets take time to recover, they usually do. If you sell during a downturn due to fear, you risk selling at the point where markets are lowest. 

You are essentially at much greater risk of being harmed by the adverse effects of ‘bad timing’ if you let your emotions get the better of you.

A better perspective

Resisting your emotional impulses isn’t easy while in the grip of a savage bear market or a raging bull. Because of the risk of long term goals being overtaken by emotionally motivated decisions, a mindset shift is necessary.

You should try to avoid thinking of your investments as immediate assets and stop dwelling on the daily fluctuations to your net worth. Rather than thinking “I lost £15,000 today” on the day of a large market fall, try to think in terms of your averages and your long term financial goals. You might have lost £15,000 on a single, awful day, such as some we saw in the ‘Covid Crash’ earlier this year. However, your portfolio might have gained £300,000 in overall value.

A balanced, long term investment strategy generally has a couple of features: 

Firstly, it takes into account that stock markets aren’t rational. You can’t rely on predicting the future of stock markets – billions have been lost on global markets to testify this. 

When looking back at stocks, it’s easy to fall into the trap of thinking “I wish I had invested at this time”. Unfortunately, it’s impossible to actually work out when the perfect time to buy or sell is when it’s actually happening. 

For instance, when markets fall, they often have small rises that form part of an overall downward slope. An investor might think that they are being smart by investing heavily in one of these ‘mini-troughs’, following the much lauded ‘buy low and sell high’ investment strategy. However, there’s no way of knowing for certain that this is actually the lowest point on the stock market. It might just be a momentary trough as part of a much steeper decline.

Another approach could be to consider ‘drip-feeding’ your money into investments, a strategy known as Pound Cost Averaging. 

Secondly, stronger investment portfolios tend to be diversified. There’s that old saying about not putting your eggs in one basket. Investing all your money in one place makes you far more financially vulnerable if those stocks crash. 

A stronger investment strategy would spread your money through different asset classes and different assets within each asset class. 

Whatever investment strategy you use, it’s best to try to gain a bit of emotional distance from your investments. Understanding what emotions you’re likely to be feeling is a good way to enable you to make effective decisions, but don’t let these emotions rule you. 

Sources
https://www.moneycrashers.com/emotion-enemy-investing/

https://www.moneycrashers.com/reasons-shouldnt-time-market/

Stamp duty’s been slashed! Is it worth buying a holiday home to let out when you’re not there?

On 8 July, Chancellor Rishi Sunak announced a cut to stamp duty that could save holiday home buyers up to £15,000 if they complete the purchase before 31 March 2021. The government raised the threshold on stamp duty to £500,000, in a move to restart the stagnant housing market. 

Second home buyers will still have to pay the additional stamp duty surcharge at a rate of 3% for properties up to £500,000. For properties over £500,000, you would have to pay 8% rate of stamp duty up to £925,000. This figure includes the second home surcharge.

With a ‘staycation’ likely to be as much as most holidaymakers feel comfortable taking this year, it’s not surprising that demand for holiday lets has surged, meaning buyers could profit from letting out their property when they’re not there.

All this seems to make the prospect of buying a holiday property rather tempting. But is now the best time to buy?

Data from cottages.com shows that queries from investors wanting to buy holiday lets are already up 25% since Sunak’s statement.

What’s more, demand for such properties was already surging because of the fact that most Brits will holiday at home this year. Unsurprisingly, coastal areas like Cornwall have seen the highest rise in interest. 

Paul Le Blas, Regional Director of Millerson estate agents across West Cornwall, says his firm has done as many deals in the six weeks since markets reopened as it usually would in three months.

In holiday hotspots, it’s very much a seller’s market. There are reports of people making offers even before viewing properties and houses selling for as much as 7% above asking price. 

Despite forecasts that house prices could fall by as much as 5% this year, experts believe that holiday lets and second homes are outperforming the rest of the market and prices could even increase because of the extra demand. 

Now could be a good time for buyers to get in the market before prices increase any further.

At the moment, holiday let owners can take advantage of tax breaks no longer available to buy-to-let landlords. 

As of this financial year, buy-to-let investors will no longer be able to deduct the interest they pay on their mortgage from the rental income they declare to HMRC. 

However, holiday lets are still classed as a business rather than an investment, so holiday-let owners can continue to deduct their mortgage interest from their rental income.

Sources
https://www.thisismoney.co.uk/money/news/article-8522353/Britons-buy-holiday-homes-cash-rise-staycations.html

https://www.zoopla.co.uk/discover/buying/q-a-new-3-stamp-duty-surcharges/

How to make the most of a Junior ISA nest egg

As of 6 April, the amount you can put into a Junior ISA (JISA) per annum has increased to £9,000 – quite a jump from the previous allowance of £4,368.

The tax saving this provides makes it an effective way of building up a nest egg for your children if you want to help with a gap year, university fees, or to enable them to get a foot on the property ladder.  

Which type of JISA?

You can choose to put the money into either a cash JISA or a stocks and shares one. Even in these low-interest rate days, the cash ones can attract quite generous rates with some as high as 3.6%. Another advantage is that they don’t have the volatility associated with the stock market, a particular issue at the current time.          

Yet while the majority of JISAs tend to be in cash, experts state that this can be a wasted opportunity. Despite the recent turmoil, the stock market will usually outperform cash savings over the long term. Wealth manager, Jason Hollands, calculates that if you achieved a 6 per cent annual return – which he describes as ‘quite modest’ – a JISA that had £9,000 invested in it each year would be worth more than £290,000 after 18 years. As you can see, once compound interest kicks in, it can have a considerable effect. He estimates that even JISAs that had smaller sums of £50 or £100 a month invested into them would accumulate pots of £19,367 or £38,735 respectively.

So if you’re wanting to use the JISA as a vehicle for a long-term investment to get your child through a degree course or to help them to buy a property, cash is not the most effective way to do so. 

It’s also advisable to invest a regular amount on a monthly basis amount rather than just put in lump sums at specific times. This avoids the worry of knowing whether it’s the right time to invest and also has the benefit of smoothing out the peaks and troughs in share prices.  

Inheritance Tax Implications

Parents or guardians are the only ones who can actually open a JISA but grandparents can pay money into the account. This can be a productive way of using up their annual gift allowance. They do just need to bear in mind the Inheritance Tax rules, though, especially now the JISA allowance has increased. The annual gift allowance on an Inheritance Tax free basis is £3,000 per donor (with one year’s allowance carried forward). Inheritance Tax would be charged on anything over this limit in the seven years before their death. Gifts of up to £250 per person can be given during the tax year as long as another exemption has not been used on the same person.

Once your child turns 18, the JISA becomes theirs. They can either access it directly or transfer it into an adult ISA. This encourages them to develop a lifelong interest in money and helps build up a great investment discipline. In fact, the Government’s decision to increase the JISA allowance was all part of its aim to create a generation of savers.    

The new JISA allowance could mean that your child comes of age on a much sounder financial footing.  

Sources
https://www.thisismoney.co.uk/money/isainvesting/article-8116351/How-build-290-000-nest-egg-child-Junior-Isa.html

https://www.express.co.uk/finance/personalfinance/1256356/junior-isa-allowance-changes-inheritance-tax-latest-news

https://www.gov.uk/inheritance-tax/gifts

The link between human behaviour and investing

Financial planning… Isn’t that based on cold, hard facts and scientific reasoning? Surely feelings  and emotions don’t have much to do with investing?        

We think they do. And here’s why.

A little thing called human behaviour gets involved, you see. Only it’s not so little. 

Human beings are highly complex systems, motivated by many different factors and emotions. This makes us volatile, unpredictable and irrational. We also hold values and beliefs that drive our behaviour; some logical and valid, others not quite so much. 

But despite being so important, human behaviour is often one of the most frequently overlooked aspects of financial decision making.   

Factors that influence us

Our financial behaviours are influenced in many ways, from sensational media headlines about the next downturn or star fund to family members telling us they know best. You know the type of thing: ”It worked for me, so you should do the same.” 

Your situation, your objectives and the current market could be very different, so it’s important to draw your own conclusions.          

Beware of the biases

You may think your decisions are based on sound, rational judgement, and sometimes they may be, but equally, the framework in which you are making the decision could be distorted. And that’s not helpful.

This is where you need to be aware of bias. It’s all part of what makes us who we are, but it’s not always useful when making decisions.   

We suffer from two common biases that can cloud our judgment and impede us from achieving our financial goals:

  • Cognitive bias
  • Emotional bias

Cognitive bias generally involves decision making based on established concepts that may or may not be accurate. Emotional bias typically occurs spontaneously and is based on the personal feelings of an individual at the time a decision is made.

These types of bias can be particularly significant in relation to risk. For example, being either overconfident or excessively cautious could each have a damaging effect on your financial well-being.

If you’re an optimist, you may tend to take too much risk, managing your money in a way that may have severe consequences in the future. On the other hand, if you’re risk averse, you may be holding yourself back from achieving true financial independence.

If you’re what’s known as ‘loss averse’, you may fear losing money to such an extent that you avoid making a loss more than trying to make a profit. So your financial decisions may be driven by the desire not to lose £2,000 rather than to make £3,000. Such a bias can be reinforced so that the more losses you experience, the more loss averse you become.        

Another common issue is inertia. This may cause you to put off making a decision altogether. Maybe the whole process just feels too difficult. Maybe you don’t have the time. Maybe you fear making the wrong decision. Whatever the reason, inertia is the enemy of financial well-being, because it gets in the way of action. 

An objective eye 

Whether your financial decision-making is being impeded by an incorrect bias, be that cognitive or emotional, or an unwillingness to move forward at all, working with an independent financial planner can help. Our role is to help you make clear, objective decisions, free from clouded judgment. Those decisions could help you secure better financial outcomes, whether that be retiring on your own terms or passing money to the next generation. 

So the next time you think of financial planning as ‘boring’ or ‘disappointing’, think of the ‘human behaviour’ element. We think you’ll find it a great deal more enjoyable and emotionally rewarding if approached in this way. 

     

Sources
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/list-top-10-types-cognitive-bias/

Understanding Active vs Passive investment strategies

The debate about whether a passive or an active investment strategy produces a better return for investors is one that has rumbled amongst financial planners for as long as passive strategies have been in existence. For you as a client, the method favoured by your adviser can have a major impact on your investment experience, so understanding the two different approaches is important.

An active strategy is one in which the investor – possibly a fund manager or other investment professional – will make investment choices on a regular basis, buying or selling holdings when they think it is necessary, often when they believe they can make a peak profit. An active strategy is highly involved and requires constant management.

A passive strategy meanwhile is one which requires hardly any trading whatsoever. Instead, money is invested into funds linked to indexes, such as the FTSE 100, by way of just one of many possible examples. Relying on the market to make your gain, passive investing is typically seen as a longer term strategy and, although it may sound easier than active from a management point of view, there is still a lot to do in terms of selecting the right funds and creating a well-balanced portfolio of asset classes that meet client’s needs.

On the active side, proponents claim that such a strategy is the only way to generate better-than-average returns; the only way to ‘beat the market’. After all, passive strategies, though divested across indexes and asset classes, are by their very design market-linked. If the index your passive strategy invests in goes up, so will your investments, with the negative being true if the index falls. Your investment may never outperform the market but it will also never lose more than the market as a whole.

Passive proponents, meanwhile, point out that active investment strategies typically cost more in fees, with these fees potentially impacting on the ability of the strategy to produce a better return. Those who favour passive investments also point out the increased volatility of active strategies, stemming from the higher frequency of investment movements and the timing of those movements, which also produce the potential for market-beating gains.

the impact of climate change fears on ethical investing

As pressure mounts on governments and financial institutions to do more to combat climate change, the demand for ethical investment opportunities is on the rise. 

Triodos Bank’s annual impact investing survey has found that nearly half (45%) of investors say that they would be keen to move their money to an ethical fund as a result of news surrounding the environment. When asked, investors state that they would put an average of £3,744 into an impact investment fund, marking an increase of £1,000 when compared with 2018. 

53% of respondents believe that responsible investment is one of the best ways to fight climate change and 75% agreed that financial institutions should be more transparent about where their money is invested. 

Gareth Griffiths, head of retail banking at Triodos Bank UK, said: “Many investors are no longer waiting for governments to take the lead in our transition to a fairer, greener society – they are using their own money to back the change they want to see.” 

Ethical investing isn’t a new practice by any stretch. In fact, some ethical funds have been available for the past 30 years, though they still only make up 1.6% of the UK industry total, according to research carried out by Shroders. 

That then poses the question, why haven’t they earned popularity in the past?

The old consensus was that investing ethically meant you were sacrificing performance for morality. A thought which seems to be changing, however, as research conducted by BofA Merrill Lynch found that a strategy of buying stocks that ranked well on ethical, social and governance metrics would have outperformed the S&P 500’s yearly result for the past five years. 

Further to this, a survey conducted by Rathbone Greenbank Investments found that over 80% of the UK’s high net worth individuals are interested in investing ethically. Many want to back the fight against climate change and plastic waste reduction but say that due to a lack of choice they still end up investing in fossil fuels or mining companies.   

The investment industry has recognised the change in attitude, leading to more and more fund management companies including ethical, social and governance factors in their core investment strategies. However, with the movement only just beginning to gain true momentum, it seems that time will tell when it comes to the mass adoption of ethical investment practices. 

If you have any questions about ethical investment please feel free to get in contact. 

Sources
https://uk.finance.yahoo.com/news/climate-fears-could-prompt-more-014547488.htm

https://www.independent.co.uk/money/spend-save/good-money-week-ethical-investing-blue-planet-environment-fossil-fuels-plastic-a9142446.html