Financial planning can be a challenge when simply dealing with your own personal wealth and finances. Trying to tie your pension, taxes, protection and estate planning into one coherent strategy, for instance, required considerable thought and ongoing review. For business owners, however, things can be even more complex; often blurring the lines between professional and personal financial planning.
For those regularly following the news, you will have likely seen many headlines about several financial firms expecting stock market gains in 2020. The Bank of America, for instance, has stated that it expects “higher U.S. yields and a softer dollar”, whilst Barclays has predicted “positive, if modest, returns in major asset classes”. Several market commentators point to 2019 as an (overall) strong year for global stocks and anticipate this upward trend to continue.
As Financial Planners, we have a careful balance to strike. On the one hand, we don’t want to over-exaggerate some of the risks posed to investment portfolios in 2020. On the other, we would caution against much of the over-optimism exhibited in the press. There are reasons to be positive, and reasons to include defensive assets in your portfolio.
One should always be wary when it seems that all financial “experts” are converging around a prediction about what will happen in the stock markets. Remember, in the final quarter of 2018, the US and global stock markets missed their targets considerably, with almost £4.8tn wiped off the stock market. Following this steep decline, professional investors overwhelmingly predicted that 2019 would see performance continue downwards. As mentioned above, this turned out to be false. Most of the major indexes (e.g. the S&P 500 and FTSE 100) rose respectably, or even by as much as 27%.
At the moment, a large number of professional investors seem to be “riding on the high” of 2019, expecting strong growth from riskier investments such as US tech companies. However, there are good reasons to avoid impulsively piling all of your capital into stocks at this time, avoiding other asset classes. Including at least some level of protection (e.g. defensive, fixed-income assets) is important to help shield your portfolio in case 2020 does not transpire as these optimistic forecasters expect.
Here are just a few reasons to be sceptical about sky-high stock market gains in 2020:
It is not all bad news, however. In its assessment for market outlook in 2020, Deutsche Bank argues that periods of high stock market growth (e.g. 2019) are usually followed by modest growth, not steep falls. Whilst this does not guarantee, we will avoid stock market volatility or decline in 2020, it should help caution anyone against spiralling into panic.
Moreover, remember that almost half of the world’s global capitalisation emanates from the US, so investors should take some encouragement from the fact that America’s economy remains quite strong as we enter 2020. GDP is still growing (although more slowly than in some previous quarters), and fears of a US recession seem to have lowered at the time of writing.
(The US-China trade war remains a concern for investors. However, recently there do appear to be some signs of progress. In the latter part of 2019, China agreed with the US to roll back some of its tariffs, totalling as much as £280bn on its imports (e.g. electrical appliances).)
Another interesting development across the world is that many governments are now regarding monetary stimulus as decreasingly effective. The result? Political leaders are starting to turn their attention more towards fiscal expansion. Prime Minister Boris Johnson, for instance, was recently elected in December 2019 partly on a platform to increase public spending (e.g. £34bn more for the NHS per year by 2023-24). Although it is not guaranteed, higher public spending does tend to accompany higher inflation, which benefits shares over fixed-income assets such as bonds.
At this point, you might still feel like you have no certainty over what will happen to stock markets in 2020, and that’s the point. Nobody has a crystal ball on these matters, and so it’s vital to ensure your portfolio is well-constructed and prepared for different scenarios. Diversifying appropriately across different funds and asset classes will be key, as will following good investment practices such as investing for the long-term and avoiding impulsive decisions.
If you need to discuss your investment strategy or financial plan with an experienced member of our planning team at FAS, please give us a call.
With Brexit now looking almost certain to go ahead on 31st January 2020, many people are wondering what the impact might be on their investments. For those concerned about possible volatility or decline, it can be tempting to consider other, less “risky” asset classes in a preemptive attempt to try and shield your portfolio.
Whilst we would caution against making rash, ill-informed decisions about re-constituting your portfolio, it can certainly help to be aware of how fixed-security asset classes work, and how they might be appropriate following discussion with your financial planner. In this short guide, we will be sharing a brief outline on one of these types of securities (i.e. bonds), and how they might be important in 2020.
Bonds are actually quite a simple concept. It’s a similar dynamic to when you go to your local bank branch and ask them for a loan. If they agree to give it to you (say, £10,000), then you will be obliged to pay this amount back over an agreed period, with interest.
With bonds, however, you (i.e. the investor) are the loan provider and it might be a company, or government, which agrees to borrow money from you. Specific names are often given to different types of bonds. For instance, UK government bonds are often called “gilts”, whilst “corporate bonds” refer to bonds issued by companies to raise capital.
Many market commentators have noted that the 2010s saw a lot of interesting behaviour in the bond markets. In 2016 following the Brexit vote, in particular, investors witnessed government bonds across the world (possibly as much as 30% of the total bond market) produce negative yields. A similar thing happened in 2019 during the summer, where $17trn-worth of government and corporate debt produced negative returns. Historically speaking, this is quite unusual and it happens when an investor (e.g. you) buys a bond for more than its face value. If the interest due over the lifetime of the bond amounts to less than what you originally paid for it, then it produces a negative yield, effectively translating into lost money.
Looking ahead to the 2020s, however, many market commentators are speculating that this era of ultra-low yields may be coming to an end. Sweden has recently abandoned negative interest rates, for instance, recognising that they cause issues for the wider economy. The final quarter of 2019 saw steady growth in bond yields. However, it’s important for financial planners to advise clients that speculation is always dangerous. Nobody knows what will happen in the UK and the global economy in 2020. Much hinges on the precise form Brexit takes, and whether the EU and UK are able to negotiate a satisfactory trade deal and avoid a “no-deal” scenario.
Every investment portfolio will, of course, be different depending on your financial goals, interests, stage of life and risk tolerance. That said, bonds are often a feature within a portfolio recommended by a financial planner, to a greater or lesser extent.
The fact is, risk is built into the nature of money, wealth and investing. Opening yourself up to the possibility of greater financial reward usually means accepting a greater level of risk. Holding cash savings is typically seen as one of the lowest-risk options available to you, but in today’s world of low interest rates, it usually results in capital erosion over time (once inflation is taken into account).
Bonds and other fixed-interest investments are commonly seen as the next step up from cash. Investing in UK government bonds (gilts), for instance, is likely to be less risky than investing in company stocks within a fund, yet the potential returns are also likely to be lower.
Where bonds can really add value is by acting as a “buffer” within your portfolio. Bonds are often classed as “defensive” assets because they tend to experience less volatility than other assets, such as property or stocks. They are also deemed less risky because companies tend to pay out income to bonds before they pay out to shareholders. Bond payouts take particular priority over shareholders if a company goes bust.
Suppose the UK experiences an economic slowdown. Quite often, this tends to lead to lower inflation, which can make bond income more compelling. Such a slowdown also can lead to lower company profits and return on the stock market, which can push up the value of bonds even further. Moreover, if the stock market takes a dive then fixed-income securities such as bonds can provide a powerful hedge within your portfolio, shielding you until market recovery.
These can all be powerful reasons to consider including bonds within your portfolio, but it’s important to understand the downsides too. Remember, if the market believes interest rates are likely to go up then this tends to result in a reduction in the value of existing bonds (which have lower rates). On the other hand, if market expectation is for interest rates go down then any bonds you hold are likely to go up in value.
If you are interested in discussing your savings or investment strategy with one of our financial planners at FAS, then please don’t hesitate to contact us to arrange a meeting.
This content is for information purposes only and does not constitute investment advice or financial advice.
The Governor of the Bank of England made headlines following an interview with BBC Radio 4 on 30th December 2019. Mark Carney’s claim was that certain assets would eventually lose their value entirely due to climate change, and many pension funds invested in those assets (e.g. fossil fuels) are, therefore, at risk.
This has, understandably, caused concern amongst many retired people as well as those saving for future retirement, who are worried that their investments could be under threat.
When you save money into a workplace or personal pension, it doesn’t simply go into a regular savings account. Instead, it goes into a set of investments, such as collective investments or unit trusts, together with capital from other investors. Each of these funds might contain a range of different companies which, as they grow, should provide a return on your investment.
Some of these businesses might be large or small, ranging across sectors or industries such as aerospace, transport, computing or energy. Each of these areas tends to come with a distinct carbon footprint (although different companies are likely to produce less or more, depending on their structure, operations etc). Businesses involved in fossil fuels or agriculture, for instance, tend to produce more CO2 than certain professional services.
We need to take a step back for a minute to answer this question. Scientists across the world generally agree that a global temperature rise of 4C would have serious planetary effects, including 9m rises in sea levels, food shortages and unimaginable heatwaves. Mark Carney’s claim in the Radio 4 interview is that is: “If you add up the policies of all of companies out there, they are consistent with warming of 3.7-3.8C.” Carney’s belief seems to be that these companies (and the pension funds which invest in them) will face enormous political and consumer pressure in the 2020s, to address this dangerous trend. According to Peter Uhlenbruch at the Asset Owners Disclosure Project, those who fail to take action “May be facing significant exposure to unassessed climate-related transition and physical risks”, which could put beneficiaries’ savings at risk.
Under Mark Carney’s tenure as Governor (he is set to leave at the end of January 2020), the BoE introduced a radical new “climate change stress test” in 2019. The idea is to subject banks insurers and building societies to a similar stress test which they already undergo for their financials (e.g. financial stability), except the focus is on environmental sustainability. It is early days with this new scheme, but many commentators believe it will ultimately lead banks and other financial firms holding more capital to conduct specific types of business.
Two main types of risk are officially recognised by the BoE, regarding the potential financial impact in the UK of climate change. There is, of course, the direct physical risk posed by weather and temperature to infrastructure (e.g. flooding in England). Then there are also the risks posed by changing the UK more toward a low/zero-carbon economy. For instance, house prices could increase due to a requirement that each home insulated, or restaurants and supermarket sales could be impacted by an increase in the price of meat.
The climate stress tests introduced by the BoE are arguably a step in the right direction. Yet questions remain over how quickly financial firms and pension funds can adapt to this evolving regulatory landscape. At the time of writing, only a minority of institutions report on investments in fossil fuels, etc. Yet the BoE estimates that nearly “$120tn worth of balance sheets of banks and asset managers are wanting this disclosure.”
At FAS, we would offer two pieces of advice at this stage. The first is not to panic about your pension, and the second would be to raise any concerns you have with us. The good news is that the BoE’s warning is likely to offer a huge incentive to the pension industry, encouraging them to invest more in companies which are accounting for changing consumer behaviour and regulations concerning climate change.
This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs and goals, please consult a member of our financial planning team.
Regardless of the circumstances, Divorce is one of the most painful, stressful experiences a person can go through and it’s important to surround yourself with trusted family and friends who can support you.
It’s also important to pay attention to your wealth and finances during this difficult time. Your assets, investment strategy and financial future are likely to all be thrown into chaos by a marital split and therefore, it can be hugely helpful to seek a professional financial planner to manage these areas sensitively, and sensibly.
Over the years, we have supported a large number of clients during their divorce and it is much better to seek financial advice early on in the process, if possible. Once you have appointed your solicitor and started completing Form E (listing your assets), consider contacting a financial planner at this stage.
If you leave matters until the settlement stage, then you may miss opportunities for a financial planner to recommend some important and valuable changes. At this point, the assets have been distributed and the window has closed to conduct the careful planning required to avoid unnecessary taxes or damage caused by the splitting of your assets. An example of this can be demonstrated through Capital Gains Tax (CGT). If any assets are liable to CGT, then a financial planner might be able to help you organise an inter spouse CGT exemption (assuming any transfer of assets is completed before the end of the tax year, during which time your separation occurred).
A financial planner can also be invaluable at the “Form E stage”, helping you gather all of the information you need about your finances and assets. This can be especially useful if you were not heavily involved or familiar with managing these areas during your marriage. It is really important to make a full list of everything you own, where they are and how much they are worth. Failing to do so can have serious consequences during a divorce case, particularly if one party tries to conceal an asset from negotiations. Non-disclosure can also sometimes happen by mistake, particularly in the area of pensions. Again, this can have serious ramifications, so engaging a financial planner early on in the process can help you to avoid any oversights or mistakes in this regard.
Financial planning can be valuable during divorce negotiations, but it is also highly beneficial once the settlement is completed and the time has come to move on with your life. During your marriage, it is likely that you and your spouse made joint financial decisions about your future together. You likely both shared the same lifestyle and perhaps took a similar approach to investment risk and loss. Now you have a new life, it is quite likely that you are faced with a different set of financial goals, risk tolerance or lifestyle. You might imagine a different future, which requires a new financial plan to get you there.
Engaging a financial planner at this stage can help you set out a new strategy to achieve your new aspirations and put things in order for your own future. Doing so can help give you a new sense of purpose, security and peace of mind about the road ahead.
In the short term, it is usually wise to keep a reasonable portion of your assets in cash, in case of emergencies and to help get you back on your feet. As you navigate the first few months and years following the settlement, a financial planner can help you start moving assets into a more appropriate place once everything is clearer.
The immediate financial concerns are, of course, to ensure you can meet your necessary expenses month-by-month and avoid falling into debt, which can easily spiral out of control. However, at the right time, it is also important to start planning for the longer term, paying attention to areas which are often neglected by divorcees such as their pension. A financial planner can help you invest in these areas with the right timing, helping to bring focus to those important areas in need of attention.
If you need to discuss your current situation or financial plan with one of our experienced team here at FAS, please do give us a call.
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