News and Views
Simply click on the list below to get the full story:
Deborah Stokes joins the Russell Ulyatt team - January 2012
Learning from the past - how Ireland's problems show the value of a diversified personal investment portfolio - December 2011
The Chancellor's Autumn Statement - December 2011
Exam success for Mark Winterton and Tim Stubbins - September 2011
Passive investment funds and portfolio rebalancing - September 2011
Investment commentary - June 2011
Collaborative Divorce - March 2011
The 2011 Budget - March 2011
Russell Ulyatt staff raise in excess of £100 for the Eve Appeal - March 2011
Pension reforms - March 2011
Local IFA group scoops national award - March 2011
The Financial Services Compensation Scheme - February 2011
Raising professional standards for Financial Advisers - February 2011
Long Term Care - December 2010
The ups and downs of the stockmarkets can work in your favour - November 2010
Deborah Stokes joins the Russell Ulyatt team
January 2012
A very warm welcome to Deborah Stokes who has recently joined the Russell Ulyatt team. Deborah will be based at our Sheffield office and brings a wealth of experience with her. She has previously worked for both a major insurance company and locally based firm of Independent Financial Advisers.
In her spare time, Deborah enjoys cookery, wine, watching films & walking Buddy her Boston Terrier.
LEARNING FROM THE PAST - How Ireland's problems show the value of a diversified personal investment portfolio
December 2011
Reaching understanding on the right way to invest often starts with studying bad investment decisions. But the lessons are far less painful when they are built on others’ experiences.
Recent events in Europe provide case studies on what can go wrong when a wealth-building strategy is built on too much debt, too little diversification and too little awareness of risk.
It is now almost a year since this article first appeared on our website and we are now very pleased to acknowledge that the hard work of both the politicians and the people of Ireland is now starting to bear fruit and the Irish economy appears to be improving. However, we still feel that lessons of a year ago serve as a useful reminder to individual investors that it is always important to hold a range of diversified investments and to keep one’s risk profile clearly in mind.
Ireland in recent years, for whatever reason, became heavily dependent on a couple of industries – namely construction and banking. The IMF1 in a report this year described the causes of these imbalances as “rapid credit growth, inflated property prices and high wage and price levels”.
Now, an economy is clearly much more complex than any individual and the ability of governments to control the composition of growth is limited. But there still are lessons here for individuals if they fail to spread their wealth-building strategies across different asset classes and diversify within those asset classes.
Becoming more diversified leaves you less open to idiosyncratic risks that are related to one sector or one company or one asset class. And you can do this without significantly compromising your expected return.
Another lesson from Ireland is not to base your investment strategy only on what happens during the good times or only in the bad.
Real interest rates in Ireland were very low before the crisis, which encouraged people to load up on debt. That debt now has to be repaid in an environment of falling prices, higher real interest rates and sluggish growth. The problem was too much focus on return and not enough on risk.
For individuals, the take-out is that leverage, while increasing the potential upside in boom times, magnifies the downside in the bust. So people swing from greed to fear and back again.
A better approach is to have a realistic, measured and long-term approach to risk. This means that during rising markets, you don’t take on more risk than you originally intended. And it means that during falling markets, you don’t become more risk averse than you first planned.
A third lesson is the importance of liquidity. This means you can quickly turn your investments back into hard cash if you need to.
Ireland’s banks got into trouble because their loan portfolios were dominated by speculative property ventures. When the crisis hit, their recourse to short-term funding dried up and they were unable to call in loans because of the illiquid nature of the assets.
For individuals, the lesson is there is value in having portfolios with sufficient liquidity. That means publicly traded equity and fixed income securities that can be turned into cash if needed.
So Ireland has some lessons for all of us:
• Holding concentrated portfolios exposes you to risks you don’t need to take. Diversification is the answer, both across and within asset classes.
• Basing your strategy only on the good times means you can end up taking more risk than you intended. And grounding your strategy only on the bad times means you can miss real opportunity. A balanced approach to risk and return is the answer.
• Finally, staking everything on illiquid assets can leave you high and dry when you need quick access to cash. So keep a proportion of your portfolio in liquid investments.
• All these strategic decisions are ones you should make in consultation with an adviser who understands your risk appetite, personal situation and goals.
Just don’t count on the luck of the Irish.
If you would like to discuss your portfolio, please contact us on 0115 9075100 or email .
1IMF Country Report No 10/209, Ireland, July 2010
The value of investments and the level of income taken from them can fluctuate.
Past performance is not a reliable indicator of future performance and your capital may be at risk.
The Chancellor's Autumn Statement
December 2011
The Chancellor’s Autumn Statement was very predictable because everyone knows the economic situation. However, the future is unpredictable as the effect and resolution of the European sovereign debt issues is, for now, unknown. It is probably for this reason that the Chancellor has chosen to bide his time in some respects. He intends to adhere to his plans to cut the fiscal deficit, but to accept a longer time scale. It is in the area of economic growth that he has disappointed most but we can probably expect his plans to evolve as the economic position becomes clearer.
Key Points
• The government will need to borrow £111bn more between 2011 and 2016 than previously forecast.
• The spending cuts will now continue until 2017.
• There is a 1 in 3 chance that the UK will fall back into recession.
• There will be changes to public sector pay and state pension age. Also, tax credits will be frozen.
• GDP is now forecast to grow by 0.9% this year and by 0.7% in 2012. It was previously expected to be 1.7% this year.
• The proportion of debt as a percentage of GDP will rise to 78%.
There will be measures to encourage growth:
• £500bn investment in infrastructure.
• £40bn low interest loans to businesses.
• £1.2bn extra spending on schools.
• A mortgage indemnity scheme to encourage house purchases.
It seems to be accepted that the Chancellor had no alternative but to set out these stark facts and his resolute stance that, although it will have to take longer, the deficit will still be eroded and further borrowing will be kept to the minimum has been well received. This is important at a time when low gilt yields depend on confidence and will help to keep down the cost of government borrowing.
The main concerns are that it will take a long time for the measures to have an effect on economic growth and that it would have been better if more could have been done to encourage short term demand. Any increase in demand will have to come from both private and government consumption. There are worries that the UK is set for a lost decade in which there will have been negligible growth between 2007 and 2016.
The effects of all this are that unemployment is forecast to rise to 2.7m, which is approaching 9% of the working population, and living standards are likely to fall. The government’s debt will rise to a high of £1.5 trillion before it starts to fall and so it is vital that this money is raised at competitive rates. Hence, it is extremely welcome that the bond markets have responded positively to the measures.
It should not be forgotten though that we are living at the time when it is most difficult to make reliable economic predictions and all of the figures quoted pre-suppose that the European situation will not cause even more trouble.
It seems that the Chancellor would have liked to have done a lot more to encourage more immediate growth and it is his determination to address the fundamental issue first that has prevented him from doing so. Even more borrowing is “just not an option” (although there appears to be £111bn of it). If he can keep borrowing under control and efficient by keeping the international confidence that will maintain low gilt yields, then he will be looking for the chance to build on the secure foundations that he is trying to establish. Presumably, it won’t be too long before tax and national insurance cuts are a first move towards this.
Exam success for Mark Winterton and Tim Stubbins
September 2011
Congratulations to Mark Winterton and Tim Stubbins on
their recent exam success. Mark has passed the Diploma in Regulated Financial
Planning - Financial Protection exam. Tim has passed the Diploma in Financial Planning - Pensions & Retirement Planning exam.
Once again, this confirms our on-going commitment to great people and the highest possible professional standards.
Passive investment funds and portfolio rebalancing
September 2011
Since 2007, we have been researching and studying the
investment philosophy of Dimensional Fund Advisors, whose investment
funds are all based on investing in a broad portfolio of stocks with the
aim of achieving the market return from the main equity markets. The
funds are available to Russell Ulyatt clients through our Wealth
Management Programme.
Dimensional minimise management charges by
not actively managing the portfolio. Instead, most of the shares in an
index are held with a bias towards smaller companies, which have
produced higher returns in the past. Dimensional buy shares to hold for
the longer term with the minimum of dealing, research and management
cost. Although there are some similarities, we do not refer these as
“tracker” funds. These funds have a slant to value stocks and the shares
of smaller companies, with the aim of improving long term performance.
Also, by not aiming to perfectly track an index unnecessary dealing
costs are often avoided.
The principal is to deliver the market
rate of return at the lowest possible cost and the investment strategy
means that such funds will move closely in line with the chosen markets.
So the funds are unlikely to be out of line with other funds invested
in the same type of assets. In fact, Dimensional aim to be consistently
just above average, which is designed to provide consistent
out-performance over the long term.
By using the whole range of
passively managed equity and fixed interest funds, known as asset class
investing, we are able to offer portfolios which are designed to match a
client’s investment risk profile. Furthermore, by using the facility
available as part of our wealth management programme, we offer regular
rebalancing of funds to maintain the original risk profile.
We
match portfolios with the level of risk that is likely to be required to
meet the investment objective and rebalance portfolios from time to
time to maintain the chosen proportions of the different assets in line
with the appropriate risk profile over the longer term.
In the
event that stock markets should fall, however, providing the market
return will mean that Dimensional’s funds will fall, approximately in
line with the market. Regular rebalancing will help to control this
risk, but it does not remove the market volatility and these funds
should be viewed as being for the longer term.
Research has shown
that there is no optimum frequency for rebalancing a portfolio, neither
does a rebalance lead to enhanced returns from a portfolio. The primary
benefit is to reduce investment risk by adhering to the chosen asset
allocation according to the required risk profile. We therefore monitor
the balance of the assets in a client’s portfolio regularly, but aim not
to incur the cost of a rebalance too frequently.
The market rate
of return has been exceeded by many active fund managers, some of whom
have done so consistently. Unfortunately, not many are consistent and
evidence shows that passive funds, which benefit from lower charges as
they do not incur the same management and research costs, can use this
advantage to provide above average investment returns. However, we also
offer actively managed portfolios in which we again look to match the
investment objective with the required level of investment risk.
Summary
- We aim to match a portfolio with the level of risk that is likely to be required to meet the investment objective.
- We rebalance portfolios from time to time to maintain the risk profile over the longer term. This will not necessarily occur at equal time intervals, although it will be reviewed at regular intervals.
- The principal of asset class investing is to deliver the market rate of return at the lowest possible cost to the investor.
- This strategy will give extremely low relative volatility, but absolute volatility can be high and the value of an investment is likely to move closely in line with the chosen markets.
- As such, previous levels of return might not be repeated and these funds should be viewed as being for the longer term.
- Although Dimensional’s fund managers do not actively research and select stocks, they are not tracker funds and are designed to have a bias to smaller companies and value stocks.
- We can also arrange actively managed funds.
Investment Commentary
June 2011
• The steady global recovery has been slowed by inflationary worries, European debt and signs of a slowdown in the US.
• Economic indicators are peaking and there is talk about the economic cycle ending more suddenly than anticipated.
• Despite the over heating in China, Asian and emerging economies are still expected to drive future economic growth.
• Unemployment, the end of quantitative easing and falling house prices are all causing the US economy to slow.
• Concerns about the deficits of Greece, Portugal and Ireland are
all causing serious problems for the Eurozone. A break up of which is
impractical and will be resisted, but “muddling through” is the
alternative.
• Growth has slowed again in the UK and so low interest rates are
likely to remain, maybe for the next 18 months, but at the risk of
inflation becoming more entrenched.
• Inflation is an issue in Asia and emerging markets because of high
commodity prices and, in the UK, because of weak Sterling.
• Equities remain the favoured investment but a market correction is
anticipated. Markets may well go up and down, making little or no real
progress, for some time.
• Government bonds remain out of favour, although Greek bonds offer
a yield of 15% for speculative investors. With interest rates so low,
there is little prospect of capital appreciation. Corporate bonds face
similar issues but are preferable to government bonds for
diversification in a portfolio.
• Commercial property continues to face headwinds in the UK, mainly
due to the slowing economy. However. Property is fairly valued at the
moment and does offer a stable and sustainable yield.
Please note
This is an investment commentary which should be viewed as providing general information to UK investors only. It is not investment advice and should not be taken as such. The naming of any asset class, specific fund, fund manager or product provider should not be taken as a recommendation. No reader should take any action based on the content of the publication without first obtaining personal advice from Russell Ulyatt Financial Services Ltd. or their own financial advisers.
Any figures mentioned in this article should only be considered to be a current guideline as at the date of issue and may be subject to change. Any opinions expressed are intended to be a consensus view from a wide range of investment information and views expressed may change in the future.
The value of investments and any income taken from them can go
down as well as up. Exchange rates may cause the value of underlying
investments to fall as well as rise. You may not get back the value of
your original investment. Past performance is not a guide to future
performance.
Collaborative Divorce
March 2011
Collaborative law arrived in this country from the United States. Whilst not all financial disputes within divorce proceedings end in going to court, many do. So what makes the Collaborative process different? The key difference is that both parties decide at outset that they will not go to court. Also it involves sorting issues out through constructive face to face discussion, rather than through correspondence. If the process breaks down they will both need to find new representation and start the process again.
Helen Lindo is a member of the East Midlands Collaborative Law Group.
In a presentation to the group Helen talked about role of the Independent Financial Adviser (IFA) in the resolution of financial disputes. She talked through recent cases that she had been involved in and demonstrated the benefit of the input.
Family Lawyer Rachel Brennan Secretary of the East Midlands Collaborative Law Group said “The presentation was very well received by the Family Lawyers. Helen explained the role of the IFA in a clear and concise manner. Helen’s assistance has been invaluable in helping to resolve some of my cases. It is also important that both the Lawyer and client engage an IFA with the appropriate qualification to deal with the complex financial issues surrounding divorce.”
Helen Lindo IFA from Russell Ulyatt is a Resolution Accredited Divorce Specialist. Resolution is a group of family lawyers committed to the constructive resolution of family disputes.
THE 2011 BUDGET
March 2011
George Osborne’s second Budget was a predictably very different despatch box exercise from his emergency Budget of last June. It marked the first of a new style of Budgets, with a more considered legislative approach: much of what would once have been announced in the Budget was already known, thanks to December's publication of more than 500 pages of draft Finance Bill 2011 legislation and accompanying notes. There were still a few surprises in the Chancellor’s speech though – the increase to the EIS investment limit, the 1% further reduction in the main rate of corporation tax and the doubling of entrepreneurs’ relief to £10 million were good examples.
The 2011 Budget was also different because, in the best of political traditions, so many planned tax increases and reforms had already been announced. The previous three Budgets – Mr Osborne’s first and Alistair Darling’s final pair – all contained promises of pain deferred. For example, in his first Budget, Mr Osborne nodded through no less than 31 tax measures announced by Mr Darling.
These inherited tax changes, such as the 1% rise in National Insurance Contributions, will start to bite from next month. The first stage of expenditure cuts will begin at the same time, although there has already been some pre-emption; witness the fall in public sector employment. The 2011 Budget could be seen as simply the firing of the starting gun for the government’s plan to eliminate an annual deficit of nearly £150bn.
The economic backdrop against which the tax rises and spending cuts are taking place is worse than was forecast at the time of last year’s emergency Budget. National Statistics' latest figures show that the UK economy contracted by 0.6% in the final quarter of 2010, leaving it much the same size in real terms as it was five years ago. Annual inflation, measured on the government’s favoured CPI basis, is running at 4.4%, while the more familiar RPI is registering a year-on-year rise of 5.5%.
A few of the headline-grabbing moves announced in the Budget were:
- The promise of a further rise in the personal allowance to £8,105 for 2012/13.
- An increase in the tax levy on ‘non-doms’ to £50,000 a year from 2012/13.
- A reduction in the main rate of corporation tax to 26% from 1 April 2011
- An increase of the capital gains tax annual exemption by RPI to £10,600.
- Consultation to commence on an eventual merger of the current income tax and National Insurance Contributions to form a new Income Tax.
And as mentioned above
- The doubling of entrepreneurs’ relief to £10 million for disposals of qualifying business assets on or after 6 April 2011.
CLICK HERE to view our newsletter in which we look at the impact of the main changes – both announced and pre-announced – on different groups. If you need further information on how you will be affected personally, we strongly recommended that you get in touch with your usual financial adviser, ring 0115 9075100 or email .
Russell Ulyatt staff raise in excess of £100 for the Eve Appeal
March 2011
Well done to everyone at Russell Ulyatt who raised a very impressive £107.00 for the Eve Appeal.
The Eve Appeal fundraises for research into gynaecological cancers and raises awareness of the diseases.
A very special thank you to Sally Cook and Michelle Bacon who organised a raffle and made some delicious cakes for everyone to enjoy.
Pension Reforms
March 2011
PERSONAL ACCOUNTS
Background
It’s no secret that the UK is facing a pension crisis. This fact has been recognised for many years and Government estimates suggest that around 7 million people are not saving enough to give them the retirement income they want or expect.
The Pensions Act 2008 establishes new duties on employers aimed at tackling this challenge that start to be introduced from 2012.
At the core of these reforms is a new requirement for employers to include all eligible employees in a pension scheme automatically, known as auto-enrolment, within a strict timescale.
Key Facts
1. All eligible employees to be automatically enrolled into a pension scheme by their employer.
2. Eligible employees are those employees who are aged at least 22 but are not yet State Pension Age and work or ordinarily work in Great Britain or Northern Ireland and earn more than £7,475 a year.
3. The minimum contribution to an employee’s retirement plan needs to be at least 8% of their qualifying earnings. Of this 8%, the employer will have to contribute a minimum of 3%. The remainder will be made up of tax relief and the employee’s contribution.
4. Contributions will be phased in and will increase gradually to the minimum level to help employers and employees adjust.
5. All employees will be able to opt out of the pension scheme if they choose.
6. The National Employment Savings Trust (NEST) is a new low cost pension scheme that employers can use to meet their pension obligations from 2012.
7. Employers can choose NEST or another qualifying pension scheme to meet their new legal duties.
For help and advice in understanding the new regulations and how they may affect you please contact us on 0115 9075100 or .
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Local IFA group scoops national award
March 2011
Nottingham-based Russell Ulyatt Group has been awarded the ‘Client Service/Value Proposition of the Year Award’ at the recent “Forward Thinking” Conference sponsored by Standard Life held at the prestigious Celtic Manor Resort.
The 2 day conference was attended by 350 delegates from 150 adviser firms focussing on using new technologies to enhance the client service offering. The awards were judged by a panel of industry leaders and presented by comedian Rory Bremner at a black tie gala dinner.
The judges commented that “Russell Ulyatt clearly understand their client and displayed a confident approach in the presentation of the services offered and clearly add value to their clients.”
Speaking after the presentation, Director Kevin Jow said: “this award underlines our belief that by putting clients’ needs at the heart of everything we do, we can continue to grow from strength to strength.”
Winning team: [L-R]; Kevin Jow, Helen Lindo, Chris O’Sullivan, Andy Dyke
The Financial Services Compensation Scheme
February 2011
The Financial Services Authority recently confirmed that the new deposit compensation limit for the United Kingdom will increase from £50,000 to £85,000 per person, per authorised firm.
This is the Sterling equivalent of the €100,000 deposit compensation limit which came into force in all European Economic Area (EEA) member states at the end of last year.
There were also other changes:
- Fast payout rules, with a target of a seven day payout for the majority of claimants and the remainder within the required 20 days.
- Gross payout, which protects customers by ring fencing their deposits if they have savings and loans with the same firm. Compensation will now be paid regardless of any money you owe to a firm declared in default. An exception to this is if your savings or current account is combined with your mortgage account, and operates as a single overdraft.
- The depositor will still be responsible for the debt, such as a loan, mortgage or credit card debt.
- This new pan European requirement replaces the existing UK arrangement which has been in place since 2009, and which allowed for separate compensation cover for customers with deposits in two merging building societies.
The FSA explained that the need to maintain customer confidence in the banking system is one of the key lessons from the financial crisis and this completes a radical overhaul of depositor compensation. In future, all the still-separate national compensation schemes across the entire European Economic Area will offer cover at €100,000 or the local currency equivalent - a limit which will protect the majority of depositors.
Investors need to understand the type of firm they are doing business with, and how this can affect which scheme would pay the compensation should anything go wrong.
The UK’s Financial Services Compensation Scheme (FSCS) covers deposits with UK banks and 'subsidiaries' of foreign banks which operate in the UK. However, deposits in 'branches' of EEA banks operating in the UK will not be covered by the FSCS, but rather by the scheme of the country where the branch has its headquarters.
If a UK financial services firm is unable, or likely to be unable, to pay money you have deposited with it, the Financial Services Compensation Scheme (FSCS) may be able to pay compensation.
If you have a joint account you will each be able to claim up to £85,000, up to a total of £170,000.
Find out more about how the FSCS works.
Raising
professional
standards for Financial Advisers - The new Retail Distribution Review
February 2011
Russell Ulyatt can claim to have a long tradition of professionalism and as we have naturally endeavoured to maintain this, we have always encouraged our advisers and administrators to keep ahead with regard to professional qualifications. For a long time there have been calls for a competency framework for financial advisers and, some time ago, the Financial Services Authority (FSA) published its Retail Distribution Review setting out its intentions in this respect.
“Distribution of Retail Investments: Delivering the RDR” is a far-reaching document that is designed to reach into all areas of financial advice.
The background to the paper is that the FSA consider the three main areas in which they wish to improve the interaction between advisers and consumers to:
- Improve clarity for consumers
- Raise professional standards
-
Reduce conflicts of interest in remuneration policies and improve
transparency of the cost of all advisory services.
The review covers many points, but the main thrust is in following four areas.
- There will be Independent Advice and Restricted Advice. Independent advisers will have to offer unbiased, unrestricted advice.
- Remuneration will be set by the adviser and there must be no influence by product providers.
- The minimum qualification level for advisers will be raised to QCA level 4. This is broadly equivalent to the Diploma of the Personal Finance Society, Dip. PFS, which most of our advisers already hold.
- A new Independent Professional Standards Board will introduce an overarching standards agency to maintain ethical standards.
We mentioned earlier that we have always encouraged professional qualifications among our staff and we continue with our strong commitment to independent financial advice. It is some time now since we changed to a fee-charging basis for the advice that we give, removing influence by product providers. We are therefore ready to embrace the new regime that will be required of all financial advisers from the end of 2012. Fees are the basis of all our remuneration and our Wealth Management Programme, which provides an excellent platform for risk based independent advice, is designed to facilitate this.
Russell Ulyatt welcome these proposals, which were confirmed in March 2010. We will continue to play our part in enhancing the professional reputation of the financial adviser.
Long Term Care
December 2010
The election campaigns included a lot of reference to the care of elderly people, but since then this subject appears to have receded into the background and the coalition Government has announced that there should be a commission to look into the issue. This will provide an opportunity for interested parties to contribute to the debate. Firm proposals should be included in the Queen’s speech.
The current system is unsustainable and a key task for the commission will be to deliver something that is a fair partnership between the state and individual.
The commission has been generally welcomed, but many have made the point that a lot of thought has already been put into the reform of social care which should not be ignored. This should enable the commission to arrive at its conclusions in a timely manner. There have also been calls for the government to protect existing national and local care budgets.
There has already been consultation with the Department of Health which addressed four key areas.
• Personal Injury compensation
• Single Premium investment bonds
• Disregard of pre-paid funeral plans
• Deferred self top-ups during the 12 weeks property disregard
Delayed by the General Election, the consultation finally ended in June and these limited outcomes should serve to inform the new commission in these areas.
It is expected that individuals will have to contribute more and this will generate interest in ways of planning for the costs, which few people presently do. At the moment, anyone with capital in excess of £23,250 has to pay for the cost of residential care. This still leaves a great number of people who for many reasons are dependent on the local authorities who, in this difficult economic climate, cannot afford the cost of care.
One view is that local authorities should become more pro-active at an earlier stage, when better advice might be given at various different levels.
There are various types of plans which can help in these circumstances. Probably the best idea has always been to plan ahead, but few have done this and instead might utilise an immediate needs annuity, where a lifetime income will provide some certainty. This can provide income at a sufficient level to cover care fees whilst maintaining the value of an estate to be passed to beneficiaries. This is an area in which government or local authority support might be available to encourage this sort of financial planning.
Another option is domiciliary care, whereby people are able to be cared for whilst remaining in their own home.
This is a specialist area for individual financial advice for which five Russell Ulyatt advisers have been specifically trained. We would be pleased to assist anyone who might require guidance.
The ups and downs of the stockmarkets can work in your favour - particularly for regular investors
November 2010
At a time of uncertainty when one commentator might predict a rising market one day to be followed by a prophet of doom the next, it can be difficult to know when to invest. This is one of the main reasons why we always encourage clients to buy and hold their investments for the long term, discouraging investors from trying to “time the market”.
On May 6th this year, the New York Stock Exchange experienced extreme volatility and the Vix index, which is a measure of market volatility, is currently at a high level. A lot of this might be short term and correct itself very quickly, the initial falls often being caused by automated computer driven sell orders. However, for the long term investor, it is a worry that the markets don’t seem to know whether we are at the beginning of a bull market, or we are just experiencing a correction in a long term bear market. At the present time, there is a lot of value to be found and equity investments are expected to reflect good value for the long term, but there might well be continued volatility for a while yet – which could well re-occur again later.
Patience is a virtue for investors and funds should only be allocated to speculative investments if they will not be required for a long time, or the investor can afford to lose money. It is disconcerting when markets fall – even for the investor who might have taken a positive view when investing. Losing money, even if it is only paper money until a loss is crystallised, is painful for everyone.
However, it is usually at the time of market panic that the greatest opportunities arise. It is just that it is impossible to tell when the market is at its lowest point. The same point applies, in reverse, to deciding when to sell near a high point. Hence our long term view of investments and reluctance to try to time the market.
A cautious investor might be more re-assured by regular contributions and this will be the only option available to someone who is looking to invest from income. Even for someone who has substantial capital available, it might still be wise to invest in stages.
This is often referred to as Pound Cost Averaging which implies that the ups and downs of market volatility are averaged out. It is a principle that is generally more applicable to unitised funds, rather than specific shares, as these units can be purchased on a regular monthly basis. The same principle would also apply to regular contributions to investment trust savings plans.
Particularly in the early days of an investment, it is actually advantageous if values fall, as for a given regular investment, a greater number of units are purchased. The principle does not work in a steadily rising market and it becomes less important as time goes on and the capital value grows. The higher the accumulated fund in relation to the regular investment, the lesser is the effect of pound cost averaging.
This last point does not have to be a reason for not investing, our purpose here has been to briefly explain that the nervous investor, or someone faced with a difficult decision at a time of market volatility, might feel more comfortable by contributing regularly rather than all in one go.
As always, please contact your financial adviser or us if you require any investment advice.
The value of investments and any income taken from them can go down as well as up. Exchange rates may cause the value of underlying investments to fall as well as rise. You may not get back the value of your original investment. Past performance is not a guide to future performance.
