Tag: concept financial planning


Is cash too safe?

One of the great themes of the past 15 months has been accidental savings: the amount people in the UK have “saved” by the simple expedient of not being able to go out and spend.

“Thrifty Brits stash the cash in lockdown” has been a typical headline, quickly followed by an estimate of how much cash we might have “stashed” through not going to the pub, eating out or buying new clothes. One estimate put the figure at £160bn, with the Bank of England suggesting that up to 5% of this could be spent, and hence boost the UK recovery, as lockdown eases. Economists at Deutsche Bank went further, suggesting that around 10% could be spent on nights out, holidays, cars and more.

“Would I be shocked by £20bn of extra spending? No,” said economist Sanjay Raja. Spending on this scale would comfortably add between 0.5% to 1% to UK GDP.

But however much is spent, that still leaves a huge amount of money that is not spent – a huge amount of money that remains “accidentally saved.” According to Peter Flavel, the CEO of Coutts, however, we are not saving wisely.

Looking at it from the point of view of an Australian who has lived and worked in several countries, and is now in the UK, Flavel makes a simple point. The UK’s Individual Savings Account (ISA) is “potentially the best medium term savings product globally.” But, he argues, “they are not used very well, [in fact] they are used badly.”

As you may well know, a couple can invest £40,000 per year into ISAs. Junior ISAs have a limit of £9,000 per year. The products enjoy tax advantages and give immediate access to your cash if it is needed. Small wonder that Flavel describes the ISA as a “World Champion” amongst saving options.

According to recent statistics around 20% of the UK adult population have invested in an ISA – but what concerns Flavel is that the overwhelming majority of these ISAs (76%) are held in cash, meaning that with low interest rates and inflation, the real value of the ISA could actually fall over time.

We take a balanced approach to financial planning. It’s often a good idea to keep some money in cash, after all none of us know when we will need access to our “emergency fund.” But Peter Flavel makes a very valid point: it is important that we don’t allow a disproportionate amount of our savings to accidentally accumulate in cash. It runs the risk of unbalancing your overall financial planning portfolio, giving you a more cautious approach than you might otherwise want or need, and, with low-interest rates likely to be the norm for some time, it also risks poor returns. Of course, where that balance lies is different from one individual to the next.

If you are interested in finding your own balance then do not hesitate to get in touch with us. While “I’ve accidentally got too much cash” doesn’t sound like a problem, in financial planning terms it very well could be.



Why is Cazoo worth Billions?

We have all seen the headlines: “XYZ Company valued at £3bn in latest funding round.”

Very often, it is a company we have never heard of. Almost always, the company has yet to make a profit. And yet, here it is, valued at billions of pounds (or dollars) and raising sums of money that make the amounts asked for on Dragons’ Den look like petty cash.

How? And why? How is it possible for a company that has never made a profit to raise that much money? And why do they attract such sky-high valuations, often way in excess of the valuations attached to companies that have premises we can walk into, and that have a long track record of making real profits?

A good example is Cazoo, founded in the UK less than four years ago. Cazoo’s business is simple: it sells cars. But what Cazoo is doing is “disrupting” the traditional car dealer/car salesman model. You buy your car online: Cazoo deliver it – and if you don’t like the car they’ll pick it up again. The company is very high-profile: it sponsors the shirts of Premier League clubs Everton and Aston Villa, and has just done a sponsorship deal with the Football League, giving it access to the clubs (and fans) lower down the football pyramid.

The company made a loss of £19m in its first year, but has just posted a profit of £3.7m (on turnover of £113.9m) for the first quarter of this year. But does that level of profit make the company worth £1.83bn – the valuation placed on it in October last year when it raised £217m in its latest funding round?

Perhaps we should explain the term “funding round.” Traditionally businesses borrowed money based on their track record of making profits and offered security for any loan taken out. There will be many business owners reading this who have had to offer their home as security for a business loan.

But when a start-up business, or a very new business like Cazoo, wants to borrow hundreds of millions, that becomes totally impractical. It has no track record, it generally isn’t making a profit – two years ago Uber famously warned that it “may never achieve profitability” as it geared up for a stock market float with an expected valuation of $100bn (£70.5bn at today’s exchange rate). And when his business is borrowing that much money, the founder’s house certainly won’t be adequate security.

So the company embarks on a funding round, giving outside investors the opportunity to invest cash in exchange for equity and/or partial control of the business.

For the investors, these early investments can sometimes pay off spectacularly. In 2004 Peter Thiel put $500,000 ($352,000) into Facebook when the company was valued at $5m (£3.52m). When the company went public in 2012, Thiel sold 16.8m shares for approximately $640m (£451m).

What investors are paying for is not profit – they are not expecting old-fashioned dividend income. They are paying for market share and/or a potentially dominant position in a lucrative market. In Cazoo’s case, for example, investors are paying for a potential pole position in the car sales market. In addition, a model which works well in one country will work well in another: one estimate puts the value of the used car market in the US at $2.15tn (£1.51tn) by 2027.

…And it looks like those investors who valued Cazoo at £1.83bn back in October may have got a bargain. By February the company was reported to be looking at a merger with its main rival in the US, and a stock market float potentially valuing the company at $£6bn.








Who will pay the bill for Covid-19?

Government borrowing is at its highest level since the Second World War. According to the Office for National Statistics it reached £303.1bn in the year to March – nearly £250bn higher than in the previous year. Borrowing in March was £28bn – the latest month to set an unwelcome record. Borrowing in the year to March was 14.5% of Gross Domestic Product: at the end of the War it was 15.2%. 

Many pundits are expecting a spending boom: depending on which article you read, we “accidentally saved” between £100bn and £125bn during lockdown. Nationwide, for example, have reported that customers’ savings “more than doubled” to £10.6bn during the pandemic. 

With the lockdowns now easing, surely this money will be spent, kick-starting the economy and fulfilling various predictions of the fastest growth since the Second World War? 

Perhaps not: a recent survey suggested that the army of accidental savers lockdown created has plans to stay prudent. As the BBC report put it, consumers are likely to “play it safe” as the UK emerges from lockdown. Neither can the Chancellor expect a windfall from Corporation Tax: with the pandemic having hit the profits of many, many companies’ tax receipts from business are certain to be reduced. 

But at some point the Chancellor has to start paying the money back. So just who will pay the bill for Covid? And how long will they be paying the bill for? 

It hardly sounds like a prudent way to run a country but perhaps the UK will never pay back the debt. In the last 100 years the UK has never not been in debt: in the last financial year (before Covid struck) the Government was planning to borrow £160bn – of which £100bn was to pay back old debt. 

Some of you – brought up with a strict understanding that debt must be repaid – will recoil in horror, but Government borrowing is not like a credit card: the debt (at least according to the experts) does not need to be paid down as quickly as possible. 

Borrowing is cheap at the moment, with interest rates at historic lows – so low that last year the Government issued negative-yield bonds. Effectively, institutions that bought the bonds were paying the Government to look after their money. 

What the Chancellor really needs is a healthy dose of inflation. In years gone by, when annual inflation was in double digits, that very quickly reduced the “real” amount of Government debt. But even though inflation increased to 1.5% in April, a sustained period of high inflation looks very unlikely. 

Your grandmother would not approve, but for now it looks like the Chancellor’s emphasis will be on servicing the debt, rather than paying it back – and on keeping his fingers crossed the predicted rebound in the economy really does happen, finally starting to swell his tax coffers.








Back to Normal! Or ‘the Great Resign?’

Two articles were published in early June. One, on the BBC website, had a very simple headline: “Five day office week will become the norm again.” The other article, in City AM. was equally straightforward: “Avoiding the great resignation will require some creative thinking.”

They can’t both be right. So which will it be? Will we all end up back in the office with the kitchen table and Zoom calls just a distant memory? Or will workers, re-acquainted with the joys of traffic jams and commuting, decide that their work/life balance should take precedence? 

Let’s look at both sides of the argument.

The BBC story was simple: within two years we’ll all be back in the old pattern of five days a week at the office. While there’ll be a blend of home and office as the UK recovers from the pandemic the Centre for Cities think tank is predicting it will ultimately be “back to normal.” Director of Research Paul Swinney says the reason is simple: “One of the benefits of being in the office is having interactions with other people. Coming up with new ideas and sharing information.” 

This was famously the view of Steve Jobs, perhaps the leading advocate of chance meetings in the office. “Ideas don’t happen in the boardroom,” Jobs said. “They happen in corridors.” 

So for the good of the UK economy, we’d better all get back into the office. But will people want to be there? Will there be anyone to spark an idea with in Steve Jobs’ corridor? 

City AM’s argument was equally simple. People have realised they can live on less money. They simply don’t want to return to the office. They’d rather be with their families. “As many as 40% of employees are considering changing jobs in the next six to 12 months” according to the article. 

While City AM was talking about London – it is, after all, a London-focused publication – the same could equally well be said about plenty of cities in the UK. Will people really want to spend the time and the money commuting? Yes, some will: for single people 15 months of working from home may well have been lonely and difficult. However, people with families may take a very different view. Shared childcare, the chance to balance work and family commitments – they are going to find being tied to the office five days a week a lot less attractive. 

The City AM article suggested that business owners and directors will need to be creative if they’re to avoid “the great resign.” That seems certain: lockdown saw a record number of businesses set-up in the UK. You wouldn’t bet against that record being broken again in the first year of working patterns being “back to normal.”




Is it time to abandon Diversification?

For many years it has been the accepted wisdom that you should diversify your investment portfolio. That means diversifying by types of investments – with say, your exposure to the stock market balanced by more cautious investments in bonds and, perhaps, funds that invest in property. 

Common wisdom says you should also diversify geographically – making sure that you don’t have too much of your portfolio invested in one country or region but, at the same time, giving yourself the chance to benefit from stock market gains in other parts of the world. After all, depending on which statistical measure you use, the UK only accounts for between 4% and 5% of world stock market capitalisation. 

All these points sound like simple common sense – and your Granny is nodding sagely and saying, “Don’t put all your eggs in one basket.” 

Recently though – and particularly in the light of the turbulence caused by the pandemic – some analysts have started to question this approach. All diversification does, they argue, is guarantee that some part of your portfolio will make a loss. And if the early months of 2020 repeat themselves, all of your portfolio will make a loss. As one headline put it. “You can’t diversify your way out of a financial hurricane.”

Some investors may agree – the growing army of ‘Teslanaires’ (people who’ve done remarkably well out of Tesla shares) would be an example of the ‘just invest in one company’ approach. 

You won’t be surprised to hear that there are flaws to this argument. For every Tesla there are a hundred companies where the share price goes in the opposite direction: but those stories rarely make the headlines. And people who are saving and investing for the long term and who are not professional investors simply do not have the time or the expertise for such a narrow approach. What’s more, they like to sleep at night.

We have always maintained that saving and investing is a long-term commitment. That achieving your financial planning goals comes not from finding the needle in the haystack, but from working consistently with your financial advisers: constructing a portfolio that matches your risk profile and your long-term goals, and monitoring that portfolio regularly and consistently. 

There will, inevitably, be good years and bad years but, over the long term, that approach has always paid off. 



What to do about the ‘bulls’ and the ‘bears’

You have likely heard the terms ‘bull market’ and ‘bear market.’ A bull market is one where stock markets are rising and investors are feeling confident: a bear market is the opposite. ‘Bullish’ has even come to be used in a wider sense, meaning generally optimistic: ”I’m feeling bullish about our chances of beating United this afternoon.”

But what do the terms really mean? What have been the most pronounced bull and bear markets in history? And what are the implications of bull and bear markets for investors?

A bull market – sometimes termed a bull run in the US – is a long, extended period in the stock market when prices are rising. One common rule of thumb to define a bull market is prices increasing at least 20% from their most recent low, with signs (and investor confidence) suggesting that they will continue to rise. 

Again, a bear market is exactly the opposite. The rule of thumb is that prices are down 20% from recent highs and investors are generally pessimistic. Where a bull market might be underpinned by strong economic data on, for example, jobs and growth, a bear market will see bad news on the economy. 

The good or bad news might be confined to a single country or – in our increasingly interconnected world – relate to the wider global economy. We saw a good example of this last year, when the pandemic coincided with the trade tensions – and reciprocal sanctions and tariffs – between the US and China. 

2020 therefore saw a bear market in many countries – although it is worth pointing out that many of the world’s leading stock markets actually gained ground last year. The most famous bear market, of course, was during the late 1920s. Highlighted by the Wall Street Crash, the bear market lasted nearly three years and saw the US S&P index lose more than 80% of its value.

Generally it is accepted that there have been eight bear markets from 1926 up to the bear market of 2020, ranging in length from six months to almost three years, and seeing declines in stock market values from 21.4% to the 83.4% drop of the late 1920s. 

There have been half a dozen bull markets since the end of the Second World War, with the one starting in March 2009 (after the global financial crash) generally held to be the longest, arguably running for 11 years until Coronavirus brought it to an abrupt end. Could we see another bull market as the world ‘bounces back’ from the pandemic? Time will tell.

One thing is certain though: investor psychology plays an important part in bull and bear markets. In a bull market it is tempting to think that every penny you have should be invested – and invested as aggressively as possible – while in a bear market many investors simply want to sell everything. But no investor can time bull and bear markets perfectly: you may invest just as the market finally turns down: you may sell everything just as the market finally starts to climb again. 

Bull and bear markets are not times to abandon long-held financial plans. Rather they are times to remember that saving and investing is always a long term commitment – and to talk to your financial advisers if you have any concerns.



Will it ever get better for first time buyers?

Over the past year we’ve seen tens of thousands of people lose their jobs. We’ve seen businesses up and down the country cease trading and we’ve seen enough uncertainty to last most of us a lifetime. 

At the moment the forecasts are that the UK economy will be back to pre-Covid levels by the second or third quarter of next year – assuming, of course, that there is no ‘third wave’ of the virus next winter. 

With all that going on – with the UK at one point facing the deepest recession for 300 years – there is surely one certainty in the financial world: house prices must have declined last year. Surely, at last, more first time buyers than ever must have had a chance to get a foot on the housing ladder. After all, there wasn’t just the pandemic, there was also the uncertainty of Brexit…

In fact, the opposite happened. Nationwide’s House Price Index for March showed that house prices were up 5.7% on a year-on-year basis, with the average house in the UK costing £232,134. After a year of lockdowns, house prices were still rising. 

For first time buyers – young people looking to get a foot on the housing ladder for the first time – rising prices over the past year must have come as a real blow. In fact – with young people the demographic most likely to have been affected by the pandemic in the jobs market – it has been the proverbial ‘double whammy.’ 

So is the position for first time buyers likely to improve? 

There are some grounds for optimism. The Chancellor’s stamp duty holiday is due to end on September 30th. As a consequence, the Office for Budget Responsibility expects house prices to fall by 1.7% next year. The forecasting organisation Oxford Economics, however, is suggesting that the fall will be between 4% and 5% in 2022. 

Will that be the case? Some pundits believe that as the housing market has stood up to the pandemic reasonably well, it will do even better as the economy starts to recover.

There are also regional factors to take into account. Many people have used the period of lockdown to reassess their lives and where they want to live. The BBC recently reported an ‘explosion’ in demand for property on England’s south coast and on the Welsh coastline. First time buyers in these areas are likely to face competition from people buying second homes or relocating from cities and downsizing. 

The Chancellor sought to give first time buyers a further boost in his March Budget, with the mortgage guarantee scheme providing government backing for 95% loans on both new builds and existing homes. But as the economy ‘bounces back’ first time buyers may need further help still in order to find a foot on the housing ladder. 




Could the UK have it’s own digital currency?

At a seminar in March, Haruhiko Kuroda, Governor of the Bank of Japan, suggested that the central bank should immediately start “preparing thoroughly” for a future with its own cryptocurrency.

While there were no immediate plans to introduce a cryptocurrency Kuroda stressed the importance of being ‘thoroughly prepared’ should the need arise. 

In April it was the Bank of England’s turn. Together with the Treasury they announced the preparation of a taskforce to explore the possibility of a central bank-backed digital currency. The aim is to look at the risks and opportunities involved in creating a new kind of digital money, which would exist alongside cash and bank deposits. 

Could – to use Harold Wilson’s famous phrase – ‘the pound in your pocket’ become the pound on your phone? More importantly, could it one day be the pound only on your phone? Is this the first step towards cash being eliminated – the step towards a fully trackable, fully traceable digital economy? 

It may be best to take a step back, and look at exactly what a digital – or crypto – currency is. In its simplest terms, a cryptocurrency is one secured by cryptography, making it impossible to counterfeit. It is based on sophisticated blockchain technology and spread over a network of computers. You may have heard of Bitcoin, the most well-known of the many cryptocurrencies that now exist. 

Unquestionably, Bitcoin is becoming increasingly widely accepted, with Tesla now using it as payment for their cars. So far, though, a key feature of cryptocurrencies is that they have not been controlled by central banks and have, therefore, remained free of political interference or manipulation.

Could that be about to change? Could the UK be about to go down the same route as Sweden, which is on course to become the world’s first cashless society from 2023? There are obvious drawbacks and risks. Many people might struggle to adapt. In recent years we have seen the damage that cyber attacks can do to companies and organisations. Could a nation’s currency fall foul to attacks of a similar nature?

For central banks however there are also obvious benefits. Moving money becomes faster. Cash transactions, which previously may have taken place under the table, could bring in a huge rise in tax revenue. Transactions become traceable, meaning that crimes such as money laundering would – in theory – become more difficult. 

The Bank of England’s task force will take some time to report – but cryptocurrencies have momentum and it is certainly an interesting space to see develop.







Financial planning in a post-pandemic world

‘Fail to plan, plan to fail.’ It’s an expression that anybody who has worked in management or the military must have heard a thousand times. Like all oft-repeated clichés, it carries a kernel of truth – and in no aspect of human life is the phrase more apt than in financial planning. 

Unless you have a financial plan; for retirement, for saving, for long-term investment, for buying your home, for estate planning; then you cannot realistically expect to achieve your financial objectives. 

Sceptics may ask ‘What’s the point of financial planning? What’s the point of any planning? We’ve just lived through the most turbulent, changeable year in any of our lifetimes.’ 

At first glance, it’s a valid point. On March 23rd last year the UK – like so many countries around the world – went into lockdown. Further lockdowns followed. Tens of thousands of people lost their jobs. Businesses which had taken years to build were wiped out overnight. Stock markets around the world experienced tumultuous times. 

But 13 months later a vaccine programme is being rapidly rolled out. The economy is rebounding. Many of the world’s leading stock markets actually gained ground in 2020. All the world’s leading markets – with the exception of China, which fell 1% – made gains in the first quarter of this year. 

What the last 13 months illustrates is not that there’s no point to financial planning: rather the reverse – that it is more important than ever. Pandemic or no pandemic, house sales continue, we still have to save for our retirement and – with a hefty bill for Covid to pay – the Government is still going to tax us on our savings, investments and our final estate. 

What is interesting is that the fundamentals of financial planning have been completely unaffected by the pandemic. If the last 13 months have taught us anything, it is that what we previously thought couldn’t happen can happen – and in many cases happen very quickly – so we need a plan, we need savings: we need a buffer.

It has also reminded us that saving and investing is a long term commitment, and that there will always be short term fluctuations. More than anything though, we have been reminded how important regular contact between a financial adviser and a client is. Plenty of our clients have needed reassurance over the last 13 months: plenty have had questions that needed answering. We have been happy to do both. 

There will undoubtedly be changes in the future, whether those are what Harold Macmillan famously called ‘events’ or clients drawing on the last year to re-evaluate what they want from life and their financial planning. We will always make sure that your financial planning is flexible enough to cope and to adapt. But make no mistake: the old adage ‘Fail to plan, plan to fail’  still rings true.  


Lessons in work life balance from Mr. Frostick

You may have come across the recent story of Jonathan Frostick. 

Mr Frostick is a contractor, managing a team of 20 people for HSBC. In the middle of April he sadly suffered a heart attack.

Starting his recovery in hospital he wrote a post on LinkedIn, vowing ‘to restructure his approach to work’ and confessing that his first thought as the heart attack struck was that ‘it wasn’t convenient: I had a meeting with my manager tomorrow.’ 

Mr Frostick’s post went viral, gaining more than 200,000 likes and over 11,000 comments – as he said that life ‘literally is too short.’ This story came hot on the heels of young bankers at Goldman Sachs complaining about their ‘inhumane’ working hours – and calling for an 80 hour a week cap. 

There is no doubt that the pandemic and the last 12 months have brought working practices under the spotlight. Many people have used lockdown and the new experience of working from home to reassess what they want from life and work. 

They’ve realised that they haven’t missed time spent commuting: the same sandwiches from the same sandwich shop. That they’ve enjoyed spending more time with their families, or simply having time to exercise, think and re-evaluate their lives. 

Even though many people are now going back to the office, it is likely that the process will continue. It is easy to think that a lot of people will initially go back to the office with enthusiasm – and three months later walk in to see their manager and say, “I need to have a word…” 

Of course, we will always recommend investing in long term financial planning. But as we’ve seen above, the last 12 months have shown us that there are equally important things to invest in. 

The most important of these – obviously – is your own health. With more limited options for both exercise and socialising, getting out for walks has become a popular past-time over the pandemic. Given all its health benefits – improved posture, a stronger heart, weight loss, improved mental health – perhaps we should all invest in a pair of walking boots! But whether walking is an option that works for you or not, it’s important to take care of your mental health. 

The pandemic has been tough on many levels and for a lot of people – especially frontline staff – the true mental health cost may only be seen as the pandemic comes to an end and they are no longer ‘living on adrenaline.’ Juggling work, family, home schooling and perhaps elderly relatives will have taken a big toll. 

As the pandemic ends it is important that we don’t simply slip back into our old ways of doing things: of never having enough time and getting our work/life balance completely unbalanced. We need to heed the lesson of Jonathan Frostick!