Investments

For many investors, an active investment strategy appears to be a good idea. It can be reassuring to know that there is someone in the background, making informed decisions about how to invest your money. And more importantly, where not to invest it, since they will be more than familiar with the pitfalls of risky investments.

But recent years have seen an increase in the appetite for passive investment solutions. So what is the difference, and is it worth pursuing an active investment strategy?

The Argument for Active

Most of the traditional investment companies offer mainly active strategies. This means that a fund manager has responsibility for choosing the underlying investments, making switches and altering the proportions as necessary.

Now, there are many variations to this. Some managers actively choose stocks and trade frequently. Others prefer to buy and hold, adding new stocks as opportunities arise. Some aim for consistent asset allocation while others will shift proportions depending on what is happening in the market. In any case, a ‘bespoke’ service, including an element of expert judgement can be very appealing, particularly in this era of uncertainty.

But reliance on human judgement is fading, with most active managers now operating robust processes or complex algorithms to decide what they should include in their portfolios. With today’s technology and access to information, the talented fund managers of the past are being phased out in favour of teams of analysts and clever software.

While consistency and technology reduce the risk of human error, another question arises. If everyone has access to the same information at the same time, does any active manager genuinely have insight that the others don’t? And will that insight consistently lead to higher returns? By consistently, we are not talking about the last 6 months, or even the last 5 years. A 5 years performance history is not that significant when considering a 30 years retirement plan.

The Passive Position

Some may argue that active fund management is like trying to get ahead on a busy motorway. You can switch lanes, weave in and out of traffic and take shortcuts. You might gain a small advantage, but it is equally possible that your efforts will be counterproductive. Ultimately you will end up in the same place, and will probably have used more petrol.

A passive investment strategy does not attempt to perform ahead of the market, simply to participate in the growth. Passive investors generally accept the following to be true:

• The market is efficient. There is no point in trying to time investment decisions based on economic news or world events, as by the time you hear about it, it has already been priced into the market.
• Asset allocation contributes more to your performance than the individual stocks chosen.
• Diversification is vital, as the various asset types behave differently. When one goes up, others may go down.
• Diversification can lead to steadier long term growth.
• Charges are a certainty, while performance is unpredictable. It therefore makes sense to keep charges as low as possible.

A quick snapshot of the Mixed Investment 40% – 85% index (which is broadly comparable with a typical balanced portfolio) indicates that of the 170 funds within the sector, 71 outperformed the index over 5 years. 99, or 58% of the funds, did not.

In the UK All Companies sector, 85 out of 251 funds outperformed the FTSE All Share. This means that 66% of funds in the sector underperformed when compared to the average of the UK share market.

While it is simple enough to point out an actively managed fund that has outperformed its benchmark, the odds of choosing the right fund at outset and maintaining the outperformance over a lifetime of investing are extremely slim.

Of course, in certain areas, there is little doubt that an active manager can add value. Investing in certain sectors or economies requires specialist knowledge that a typical investor does not have. But this type of investment can be risky, and should form only part of a well-diversified portfolio.

What to Consider

There is a place for both active and passive funds in a diverse portfolio. These are our top tips for choosing between active and passive funds in the same sector:

1. Look at the charges. If the active option charges 1% more than the passive equivalent, that’s 1% in extra performance needed every single year to be in the same position. Is it worth it?
2. Has the active fund genuinely outperformed? Compare it to the passive equivalent as well as the benchmark. Measure the longest possible period – one year’s good performance is not statistically significant. Look at discrete figures as well as cumulative.
3. How do the funds stack up when the market falls? Does one appear to provide better capital protection, even if the upside is lower?
4. What do the funds invest in? For a straightforward equity fund, a passive investment may meet your needs best. Active funds may be more suitable if you want to invest in specialist areas.
5. What are the trends in the sector? In some sectors, it is very difficult for active managers to outperform passives, while in others, passive funds lag behind.

At FAS, we can agree on an investment strategy with you, one that you understand and feel comfortable with, designed to meet your long term objectives that can help you face the future with confidence.

Please do not hesitate to contact a member of our team if you would like to find out more about your investment options.

Many people love the idea of investing in property. After all, a home is an asset you can smell, feel and easily understand. Plus, the beauty of many properties can also make the investment an artistic one and a labour of love. It has also been argued that homeownership is an important cultural value within British society, and property investing taps into that.

However, the picture isn’t completely clear. Despite the importance of homeownership to many British people, for instance, the UK now holds one of the lowest rates of homeownership in Europe (about 63.5%); lower than Croatia, Slovakia and Hungary. Much of the decline has been attributed to rising house prices and increasing unaffordability particularly for young people.

Homeownership is still widely regarded as a sign of economic progression. A property portfolio, therefore, is commonly viewed as a hallmark of high personal wealth and success. Yet, is building a property portfolio the best way forward for most people? In particular, could the stock markets hold better prospects for building and preserving wealth for you and your loved ones?

In this short guide, we will be offering some thoughts on these very questions and we hope you find this content informative.

Property vs. the Stock Market

The question of whether or not property beats the stock market as an investment depends on the perspective you take. Below are some of the main areas to consider:

Returns

Here, the question essentially asks which investment generates a greater profit but this isn’t as easy to establish as you might think. It is important to remember that there are many hidden costs involved with both property and stock market investing. The former will carry maintenance costs and repairs which affect your property portfolio, whilst the latter could be affected by excessive annual investment management fees that deplete rates of return.

There is also the investment timeline to consider. How many years should your comparison analysis be over and in addition to this, which properties or stocks are you comparing? For instance, properties in one part of the country may rise in value whilst others fall. Certain market indexes are also likely to vary in performance.

One interesting study is the research conducted by the Credit Suisse Research Institute, which compiled data over the last 118 years to find out where property out-performed stocks when it comes to rates of returns. They found that, on average, investing in UK stocks between 1900 and 2017 would have net a 5.5% rate of return each year, whilst house prices rose by 1.8% per year. So despite popular belief, Property does not necessarily provide a better return than the stock market over a period of time.

Taxes

Many believe that property holds better tax benefits than the stock market, yet this is a complex area.

Take Capital Gains Tax as an example. In 2019-20, you can earn up to £12,000 per year in Capital Gains without incurring any tax liability. This applies to the sale of owned property (excluding your main residential home) and to stock market investments, which you might sell after they have increased in value.

However, stocks still arguably have an edge over property as far as taxation is concerned, for at least two reasons. Firstly, you can shelter up to £20,000 of stock market investments within an ISA each year where gains made on investments are exempt from Capital Gains Tax (CGT). This is not possible with a Buy to Let property. Secondly, you can buy and sell your shareholdings over time, possibly keeping everything under your £12,000 CGT annual allowance. However, Capital Gains on property sales must be dealt with all at once and are likely to far exceed this allowance.

Risk

Investment risk is closely linked to rates of return. As a general rule, the greater the risk, the higher the level of potential return from an investment. So in theory, since stocks appear to offer greater returns than property, the latter should be less risky?

Over time, the stock market is likely to be more volatile than the property market. If you choose not to invest for the longer term (i.e. more than 5 years) then stocks and shares could be considered a more speculative investment depending on how markets have performed. However, there are at least two ways to mitigate this risk. First of all, diversifying your portfolio across different types of holdings, geographical areas and asset types can help spread the risk. Secondly, stock markets have historically grown over the years despite short-term volatility. By staying invested in the market when prices fall rather than “panic selling”, you can often weather the storm and benefit from the eventual upturn when markets recover.

Of course, it’s important to note that property investments are not inherently risk-free or immune from volatility either, as the 2008 financial crisis should remind us.

This content is for information purposes only. It does not constitute investment advice or financial advice. If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS please get in touch.

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.

2020: reasons to be sceptical

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:

• The US-China trade war, which is taking centre-stage to many macro forecasts. For the last 18 months, these two major powers have been imposing tariffs on each other’s goods, escalating from $34bn US tariffs in July 2018 to $200bn in May 2019. Despite the welcome news that a tentative “phase one” agreement has been reached, tariffs will stay in place for many goods for the time being and it remains to be seen how this will impact various industries (e.g. manufacturing) and the wider global economy in 2020.
• The UK’s withdrawal from the EU, currently scheduled for 31st January. The possibility of a “no-deal” Brexit still appears to be on the cards, with Prime Minister Boris Johnson insisting on not extending the time to agree on a new UK-EU trade deal beyond December 2020 (whilst the EU claims this is not enough time).
• Increasing tensions in the Middle East, which have the potential to dampen sentiment and potentially lead to higher Oil prices.

2020: reasons to be optimistic

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.

An overview of bonds

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.

Bonds in 2010, and looking ahead to 2020

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.

Why include bonds in a portfolio?

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.

It’s probably fair to say that in 2019, environmentalism is moving increasingly into mainstream public consciousness. People are now more concerned about how their behaviour, habits and even investments are impacting on the planet. To note just a few developments:

David Attenborough released his “Climate Change: The Facts” documentary earlier this year, which had a huge impact on bringing the topic to the fore in public discussions.

Extinction Rebellion (an activist movement advocating rapid, far-reaching measures to combat climate change) has run protests and rallies across the country, throughout the year, to raise awareness and influence politicians on climate change.

More and more celebrities (such as Prince Harry) are being scrutinised by the media over their use of private jets, due to the carbon footprint they produce.

Whilst opinions may vary on the above events, demonstrations and productions in question, undoubtedly more British people are coming to accept the broad scientific consensus about humanity’s impact on climate change, and want to do something about it. Indeed, many are even asking how their money and investments can be put to responsible use in this regard.

This is where our Financial Planners can often start to talk about ethical investing with certain clients. Other broad, related categories on this subject include “ESG investing” (Environmental, Social & Governance) and “social impact investing”.

Here, we’ll be outlining what “ESG investing” looks like and what it tends to involve. Please note that this content is for information and inspiration purposes only. It should not be taken as investment advice or financial advice.

What Is ESG Investing?

There is no doubt that different companies have a varying impact on the planet and human society. A financial planning business such as FAS, for instance, is a service-based business. It does not have a supply-chain in the same way as a car manufacturer. Whilst both companies will produce a carbon footprint, the latter is likely to have a much greater direct impact on the environment due to the size of the business and the nature of their core product.

ESG investing is an approach to investing which factors in the impact of different companies and other assets upon our physical environment, such as their approach to pollution and consumption of natural resources. It also factors in the governance of these companies (e.g. their approach to anti-corruption and gender diversity on the company board), as well as their impact on the society they inhabit (e.g. wage fairness and corporate social responsibility).

Is ESG Investing New?

It might surprise you to learn that ESG investing was quite a “fringe” approach to investing until recent years, as investor demands have brought it increasingly into the mainstream of investment management solutions.

There are many reasons for this, but among them include the fact that investor demographics are shifting. “Millennials” are growing as a target market of investment firms, and this group, in particular, tends to be very environmentally-conscious.

There is also the fact that many companies themselves have experienced considerable internal change with regards to beliefs about their ESG profile, as mounting evidence about climate change has accumulated over time.

There is also now increasing evidence to suggest that, with a viable strategy, ESG investments can offer investors attractive returns. This is gradually supplanting a common, previous belief widespread in the sector that ESG generally provides lower returns than non-ESG investments.

How Do I Start ESG Investing?

The important thing to recognise with ESG investing is that it is broadly intended to achieve two primary goals, simultaneously:

1/. Meaningful returns for the investor;
2/. Positive impact on the environment, governance and society.

To a degree, these two goals are in constant tension. Sometimes investors are tempted to sacrifice investment performance in the hopes of producing a positive sustainable impact. Whilst this is noble, it achieves little for your financial goals to lose money over the long term. Investing and charitable giving are called two different things for a reason.

On the other hand, there is also the temptation for investors (and fund managers) to chase after investment opportunities with a poor or dubious ESG profile, but which might offer more attractive potential returns. The more you go down this road, the more you dilute the definition of ESG and eradicate the second goal, above.

A good Independent Financial Planner will be able to help you navigate the world of ESG investing carefully with these two goals (as well as your own financial goals) in mind.

For some people, they might want to reconstruct an existing investment portfolio gradually, to include more ESG investments over time. This can help to reduce instability and risk in the portfolio, although some people might find such an approach in tension with their conscience.

Other people reading this article might be nearer the beginning of their investing journey and would like help setting up a portfolio which reflects their “ESG values” to a high degree, from the very outset. One of the challenges here will be establishing your financial goals and selecting an appropriate range of investments which can be justifiably labelled as “ESG”, and which also achieve an appropriate level of diversification, risk-minimisation and potential of return.

Final Thoughts

We have only managed to scratch the surface of ESG investing here in this article. However, we hope it has given you enough information to inspire you and help gather your thoughts on this increasingly important topic.

We understand some people will want to act quickly out of intentions to “make a difference”. Whilst this is completely understandable and noble, it is also important to look after yourself – and your loved ones – by not putting your capital at unnecessary risk.

If you are interested in discussing an ESG investment strategy with us, please do get in touch.

In recent years, pension savers have faced a number of changes in the tax landscape. On the one hand, most people now have a lot more flexibility and control over their pension savings since the 2015 Pension Freedoms, which allows you to start drawing from your workplace and/or private pension(s) from the age of 55. You are also no longer required to use your pension savings to buy an annuity, but now have other options available such as the likes of a ‘drawdown’ arrangement.

On the other hand, pension savers also arguably face new restrictions in respect of tax reliefs. For instance, in 2006-07, it was possible to commit up to £215,000 for the tax year into pension savings. Today in 2019-20, the Annual Allowance is significantly lower at £40,000, or up to your yearly salary – whichever is higher.

This, coupled with the ISA savings limit of £20,000 per year, is causing many higher earners in particular to question whether there are other tax efficient avenues open to them to save for the longer term and retirement. For those in this position, there are fortunately a range of options available.

In this article, we’ll be taking a look at three in particular: Venture Capital Trusts, Enterprise Investment Schemes and Seed Enterprise Investment Schemes.

Below, you will find a brief overview of each one and a short summary of some of their respective pros and cons. Please note that this content is for information purposes only and should not be taken as financial advice. To receive tailored, regulated financial advice about your own situation please speak to one of our Financial Planners.

1. VCTs

Venture Capital Trusts (VCTs) can be a compelling option for those clients with a higher risk appetite who are interested in investing in small businesses and who want to take advantage of some attractive tax reliefs.

A VCT is a company which typically trades on the London Stock Exchange (LSE), and its main purpose is to achieve growth and income by investing in a portfolio of unquoted businesses. The businesses are selected by the fund manager or team, who will be experienced in finding strong positions for the portfolio.

One powerful reason to consider a VCT is the 30% Income Tax relief which you can claim on the value of your investment. Two important conditions are that you can only invest up to £200,000 per year into VCTs, and you must hold shares for 5 years to retain the tax relief.

So, suppose you invest £10,000 of capital into a VCT, you would receive Tax Relief of £3,000 (i.e. 30%) assuming you hold the investment for the qualifying period, and pay this much Income Tax in the Tax Year in question.

There are drawbacks, however, which you need to be aware of. First of all, there are fees which you will need to pay for the management of the VCTs. These can be around 2%-3% per year, and this naturally eats into your investment returns. Secondly, you will need to factor the 5 years holding period into your financial plan, which might not work for everyone.

2. EIS

The Enterprise Investment Scheme (EIS) is often confused with VCTs, as they can sound very similar. However, there are some important differences – not least being that the former is a Government Scheme, whilst the latter are quoted companies.

Similar to VCTs, investing in EIS-qualifying companies allows you to claim back 30% of your investment as Income Tax relief. However, one significant difference is the treatment of dividends. VCTs allow you to generate an income via tax-free dividends, which can make them an attractive supplementary tax-free retirement income source.

One of the crucial advantages of EIS investments is that they are exempt from Inheritance Tax, provided the investments qualify for Business Property Relief (BPR) and provided you have owned them for at least 2 years. In addition, whilst you can only commit up to £200,000 per tax year into a VCT, you can put up to £1m per year into EIS-qualifying companies. Indeed, you can even commit up to £2m provided the EIS companies qualify as “knowledge intensive”. Regardless, you must hold EIS shares for at least 3 years to retain the tax relief.

However, you should also be aware that the EIS can carry a higher level of investment risk than VCTs due to the nature of EIS companies. In general, EIS-qualifying companies tend to be smaller with a lot more growth potential, but also carrying a higher risk of failure.

3. SEIS

The Seed Enterprise Investment Scheme (SEIS) is similar to EIS, but with some important differences. Notably, you can only commit up to £100,000 per tax year into SEIS-qualifying companies or funds, but you can claim 50% Income Tax relief on the value of your investments.

Similar to the EIS, you must hold the shares for at least 3 years to retain tax relief and any dividends are also taxable (unlike VCTs). One important drawback to be aware of with SEIS is that companies that qualify for SEIS relief need to be very early stage and therefore the risks are higher than EIS qualifying investments.

Final thoughts

VCTs, EIS and SEIS all offer some attractive benefits to especially higher rate tax payers which are well worth considering within your wider financial plan, especially as you approach retirement. However, their nature as a higher investment risk means that you should consult a Financial Planner about how to integrate these into your financial plan, prior to making any big decisions. If you would like to speak to us about this, then please do get in touch.

Gold was the currency of states and countries across the world throughout history i.e. Byzantium used a gold standard over 1,500 years ago to support its empire and for centuries leading up to the 20th Century, it was the globe’s reserve currency.

Given its longevity, many people consider investing in gold as a “safe haven”, particularly during periods of stock market volatility. In the days following the 24th June 2016 Brexit referendum result, the FTSE 100 declined by 8% but the price of gold continued to rise, as it has done since April 2016.

Yet investing in gold, whilst it may sound glamorous and “safe”, comes with its advantages and disadvantages, which are important to be aware of before committing to this type of investment.

In this short guide, we will be sharing some of these benefits and drawbacks with you. Please note that this content is for information purposes only and should not be taken as financial/investment advice.

Pros: Why people turn to gold

Gold is tangible and “feels real” to us – similar to property. This (in addition to the prestige and attraction of jewellery) makes gold an appealing investment, compared to more intangible assets such as stocks and bonds.

As mentioned, gold can be a compelling choice for worried investors since its value is often not linked to other assets. During a decline in the stock or property markets, for instance, the value of gold might hold steady or even rise in value (since people often turn to it during market turbulence). Other advantages of investing in gold include:

● Liquidity. Property and gold are both “tangible” assets which you can see and touch. However, the advantage of the latter is that it can be bought and sold fairly quickly, which tends to be harder to achieve with property. Virtually anywhere across the globe, you can convert gold into cash with relative ease if you choose to do so.

● Diversification. Your investment portfolio should contain a range of asset types and classes in order to spread the risk. This might include a range of stocks, bonds, cash and property investments. Adding another asset type such as gold can help diversify your portfolio even further.

● Steady value. Over time, gold tends to retain its value due to the limited amount of gold available around the world. This can make it an attractive hedge within an investment portfolio, especially during times of rising inflation.

Cons: Reasons not to commit everything to gold

Gold offers lots of advantages to an investor but most Financial Planners would caution against leaning towards gold investments for the following reasons:

● Bubbles. We mentioned earlier that many people turn to gold during times of market volatility. This can cause the price of gold to rise, but if too many people rush to gold as a haven then it could lead the commodity to become overpriced. It’s then only a matter of time before a price correction happens, which could be harmful to your portfolio.

● Insurance & storage. You may choose to buy gold coins or bars yourself and you will obviously need a safe place to keep them. In all likelihood, you will also need to take out insurance. All this added expense erodes the value of your investment returns.

● Lack of income. When you invest in companies, it is possible to generate a “passive” income in the form of dividends. Similarly, when you invest in property such as a Buy to Let, you can also create an income stream via rent from your tenants. Gold, on the other hand, does not generate income (unless you buy shares in a gold producing company).

● Returns over time. If you are hoping to invest in an asset and hold it for 20 or 30 years in the hope that it will generate a long-term return, then gold is at a disadvantage compared to other assets. As mentioned earlier, gold tends to retain its core value over time whilst stocks/equities such as the FTSE 100, historically, have risen considerably in value. Whilst gold can be a useful hedge, it is not really a great wealth creator.

Ways to invest in gold

● Direct purchase. This is the “old fashioned way” of investing in gold – buying physical gold coins or bullion. You then hold and store these yourself, potentially to sell later.

● Gold company shares. You could buy shares in gold mining companies. The share prices will be strongly influenced by the price of gold as well as the success of the individual companies.

● Gold options/futures. It is possible to invest in gold via financial derivatives, using call and put options. This is quite a risky strategy, however, as most people try to “time the market” by purchasing a “put” when they anticipate a drop in the price of gold, or by buying a “call” if they think it will go up. This is very hard to predict accurately.

● Gold ETF. An exchange-traded fund (ETF) behaves a bit like individual stocks, trading on an exchange. A gold ETF will hold derivative contracts in gold, which are, themselves, backed by gold.

Final thoughts

Everyone’s financial situation and investment goals are different, so it’s unwise to make blanket recommendations regarding the position that gold should take within your investment portfolio. That said, it would be fair to say that, for most investors, gold is likely to occupy a small part of a wider investment strategy, if it is present at all.