Efficient Wealth Update February 2018
What’s Going on with the Markets?
As is often the case, global markets take their lead from the US and the week ending the 2nd of February saw the biggest weekly decline in US equities since the Chinese slowdown fears of early 2016 with the selloff continuing the week after. Despite more mixed data recently, it’s not the health of the US economy that is worrying US (and world) markets, but rather inflation. Most of the falls come after the announcement of a stronger than expected 2.9% year on year rise in average hourly earnings. The fear is extremely low unemployment is (finally) driving wages up significantly which will inevitably lead to higher inflation and thus higher rates from the US Federal Reserve. And at some point, the fear is that whilst growth may be strong, higher rates lead to lower stock prices through mechanisms such increased debt costs for companies, future profits being discounted back to present day at a higher rate and bonds with higher yields looking more attractive relative to expensive equities.
Now, to be clear, as the chart below from the FT shows, the pullback so far is only a blip in the context of the massive run-up in US equities prices over the past 5 years so another valid reason for the selloff is that markets had just run too hard recently. The sell-off so far has only erased January’s gains.
There are also some patterns bubbling along that don’t make sense given the increasing likelihood of US rates rising more quickly than expected. Notably, the weakening of the dollar, which has been in place since the beginning of 2017 and which, has continued this year. Rising rates should mean a stronger dollar, particularly if you think that Trump’s tax cuts will lead to repatriation of company profits held in other currencies.
We don’t have a crystal ball, so we don’t know for sure what will happen over the next few weeks. It may be that market participants step in to buy the dip (as they have done for the past almost 2 years) or the sell-off may accelerate over the short-term. A longer-term selloff seems unlikely though, as severe bear markets tend to coincide with recessions and the proximate trigger for this particular sell-off actually appears to be stronger than expected growth. However, even during the good times, we never ignore the fact that markets are inherently risky and it’s never a good idea to rely on them rising forever.
Our client’s portfolios are positioned appropriately for this uncertainty, continuing to rely on diversification as well fund manager expertise to ensure client portfolios remain robust to surprises. As a result, whilst their portfolio’s have fallen this year, the main purpose of a diversified portfolio is to protect against big losses in a downward market. Depending on the level of risk their portfolio takes, whilst there has been a fall, it has been nothing like as dramatic as that of the FTSE 100 for example. The chart below shows year to date performance of portfolio levels of risk 1/100, 100/100, and 5 stops in between.
Carillion Demise Raises Pension Concerns
Hot on the heels of the problems at Toys R Us discussed in last month’s Efficient Wealth Update, Carillion is the latest firm to fold with a large pension deficit. So, it begs the question, who will be next?
Defined Benefit Pensions, such as Carillion’s, have always been considered to be reliable and usually have more favourable benefits than newer policies or Defined Contribution Schemes. A combination of these reasons, as well as many others, means that those with Defined Benefit Schemes are reluctant to transfer away from this pension security. But is staying put the right thing to do?
Yes, Defined Benefit Pensions can be very reliable, very substantial and give you a clear idea of exactly how much you will receive each year in your retirement. But, this will only be the case if the backing of the pension is strong. Many companies are struggling with their Defined Benefit Schemes and are working with a pension deficit, which means there is not enough money in the scheme to meet the projected withdrawals when their members begin to retire.
Many schemes working with such a deficit have a plan in place to ensure the deficit is reduced and that funds will be available for those retiring in the future, but it relies on that plan panning out. So maybe Defined Benefit Pensions are not as reliable as everyone thinks. Well, in Carillion’s case, KPMG’s audit of Carillion’s financial results between 2014 and 2016 is being investigated by the UK’s accountancy watchdog. It will certainly be interesting to see what that investigation unearths.
If you have a Defined Benefit Pension and you aren’t sure of the details, get in touch with us and we can arrange to do a full audit of your pensions to make sure they are what you think they are.
For more information on compensation if a Defined Benefit Pension Scheme goes bust, please see the link below:
House Prices Set to Be Static
House prices remained positive last year with average growth of 2.6%. While this was 1.9% down on 2016/17, you can’t argue with a positive. It was bad news for those in London, however, where prices fell for the first time in eight years!
Projections suggest the figures this year probably won’t be positive, with Brexit and rising interest rates putting the brakes on the property market. It is not clear whether these effects will cause prices to fall, or just slow, but either way it is set to be an underwhelming year for property prices in comparison with previous surges.
Those likely to be most affected by stagnant property prices are buy-to-let landlords, as many are now relying on capital gain to boost their returns because the recently introduced new laws and charges are eroding rental yields.
This really is a case of watch this space; there are so many influences to consider that current projections are not reliable.
Notes on Brexit
As the next round of negotiations resumed only at the end of January, there is no progress to report this month. However, as the current negotiations are due to address the post-Brexit transition period, I’m sure there will be some key outcomes that will indicate the likelihood of either a Hard or Soft Brexit. So, watch this space!
Cash ISA Slump
Historically, Cash ISAs have been the ‘go to’ account for savers but, as we keep saying in our monthly updates, they are just not producing the returns savers need.
Since the Bank of England cut interest rates to 0.5% in March 2009, Cash ISA rates, and savings rates generally, have dwindled. They experienced their worst year on record in 2017, with average returns much lower than Stocks and Shares ISAs which, for our clients, saw an average return of 11% for the year.
Unless there is a massive shake up with increased competition between banks and building societies, little will change with Cash ISAs. So, if you are after potential returns, the only way to go with ISAs at the moment is Stocks and Shares.
If you don’t have a Stocks and Shares ISA, but do have a Cash ISA that is seeing little or no growth, speak to us about how to get your money working for you.
If you are an existing client, don’t forget that you have only a few months to benefit from the annual ISA allowance (currently £20,000). It is use it or lose it, so make sure you use it, otherwise you could be missing out on another 9.6% on that cash!
Trump in Davos …
The World Economic Forum took place from 23rd to 26th January. Held annually in Switzerland, its mission is to be “committed to improving the state of the world by engaging business, political, academic, and other leaders of society to shape global, regional, and industry agendas”.
The main talking point was centred around Donald Trump (of course) and his decision to increase trade tariffs by up to 50% on items such as washing machines and solar panels, effecting particularly China and South Korea.
His stated reason for such a steep increase is “inappropriate behaviours” relating to “unfair foreign competition”, although no one is sure exactly what that means. This kind of behaviour from Trump is almost certain to start a trade war amongst nations – not fantastic news for the world or the economy, which is sure to be negatively affected in the long run.
Trump arrived at the forum with the largest group in history, so it would seem they were determined to make an impact. We can only hope that Trump’s ‘America First’ ideology does not mean isolating the rest of the world in the process.
What Is Open Banking?
New rules brought in on 13th January this year mean that banks must allow you to share your financial information with other authorised providers. There are some key words underlined there –banks will only do this if you allow it, and will only share information with other banks, building societies or other authorised organisations.
The reason for the new rules is to encourage more competition and innovation in financial services, which will hopefully result in better products to help the consumer – a.k.a. you! For example, it will allow you to link your bank account, transactions, regular payments, etc. to an App that could analyse this and suggest the best product in the marketplace for you. Quite nifty if you like that kind of thing!
Let’s be clear – you do not have to share your information. Banks cannot give out information without your express permission. Each account you want to link will contact you to ask your permission to release the information, it will then contact your bank to get that information. Be aware, you can only use this if you have online banking.
Now here’s the serious bit: Be careful who you share your information with. It must be an authorised company if you are to have any protection (if something goes wrong) from your bank. So, proceed with caution.
Will a Bank Always Offer You the Best Mortgage Rate?
According to figures from Moneywise the answer is no.
The figures showed the average two-year fixed-rate from a building society is 2.27 per cent, 0.06 percentage points lower than the average offered by the main banks.
With five-year fixed-rates the difference is more pronounced, with the average building society rate at 2.59 per cent, 0.41 percentage points cheaper than banks.
Sometimes it pays to look a little further, Charlotte Nelson, finance expert and Moneyfacts, said that the difference was particularly prominent when it comes to first-time buyer mortgages, where all of the places in the best-buy tables are taken by building societies. At 90 per cent loan to value, the difference between banks and building societies was up to 0.72 per cent.
For years mortgage rates have been falling, but the end of 2017 bought with it the first rise in the Bank of England’s Bank Rate in a decade, prompting fears that mortgage costs could rise.
Many respected industry experts are predicting two further Bank Rate rises this year, and possibly three.
November’s increase has already resulted in most lenders raising the cost of their variable rate mortgages. These are the roll-on arrangements which borrowers are moved onto at the end of any fixed deal.
Protecting against future increases makes shopping around for the best fixed rates even more pressing.
Here at Efficient Portfolio we offer an independent, whole of market, mortgage proposition, so you can always be confident that we will find you the best rate available.
Lending is expected to be flat through 2018, which we are hoping will help to keep rates competitive, especially from challenger banks and niche lender.
Ready to Secure Your Retirement and Financial Future for Good?
If retirement is looming on your horizon, how prepared do you really feel? Will you have enough money for the future? Will you be able to tick off that bucket list? Or will you end up with too much wealth that leaves a heavy tax -burden on your loved ones?
People always ask me what they should be doing now for a better tomorrow, but the answers are never black and white. Planning your finances can be quite a complex beast, with many factors to consider. However, there is one truth that applies to everyone: ‘an investment in knowledge pays the best interest’.
My passion in life is helping people fulfil their goals. I love giving people the peace of mind of knowing they have something special to look forward to, and I’ve found that the most empowering way to do this is through education.
So, what do I teach my clients?
How to Save SMART Not Hard
Understanding how to maximise your money will help you to save SMART. You need to build a back-up plan, in case things go wrong, and utilise the most suitable systems to boost your wealth. By saving in the right way now, you will have the freedom to fill your future with what you love.
A Clear Vision of Your Financial Future
Non-one wants to worry about running out of money in retirement; however, you equally don’t want to end up as the richest person un the graveyard. A successful retirement is founded on the ability to look into the future, see what you need, and then plan how you can get there, including what you can afford today.
This aspect in particular is the key to having peace of mind in your financial life. Without it, you will feel uncertain and worried about what the future holds. If you are failing to plan, you are planning to fail!
How to Get Your Money Growing
Saving money is important, but if you don’t get that money working harder for you, you’ll have to save twice as much, or work twice as long. To combat this, you’ve got to get your money growing; but not just any growth, growth over and above inflation.
How to Build a Flexible Income, Which Could Maximise Your Money and Minimise Tax
How would you like to maximise your hard-fought savings and turn them into a flexible, dynamic income that can deliver what you want, when you want it, so you can have an amazing retirement?
I can show you can you can have choice of how much income you take, and how you can draw what you need without paying more tax than you need to, and still do all those amazing things you’ve dreamed of.
Create a Legacy for Your Future Generations
We all want to be remembered by our families and loved ones, whether that is through the financial inheritance we leave or by making your mark on the world. I help people leave a long-lasting legacy, rather than a liability, by helping to create the personal side of retirement.
You can learn these techniques and more at my free Wealth Workshop, which run once per month in London and Rutland. At the event, which runs from 1000-1700, you will learn:
- How to make your money grow FASTER than inflation
- How to reduce the risk of your investments and get BETTER returns
- How to map out your financial future so you NEVER have to downgrade your lifestyle
- How you can enjoy an EXCITING and ADVENTUROUS retirement without having to worry about running out of money
- And much more
So, what are you waiting for? Book your place today by calling 01572 898060 or emailing firstname.lastname@example.org
Book of the Month
This month’s book recommendation is ‘Sapiens: A Brief History of Humankind’, by Yuval Noah Harar. Everyone thinks they know the history of our species, but you haven’t heard the story of humans told like this before.
Insightfully combining science with history, economics with psychology and sociology, facts with solid analysis. It sounds cliché, but it really does make you rethink the way you look at things, and how small a part you actually play.
Money isn’t real, countries don’t exist, and companies only have power because we allow them to. Everything that we live by only exists in our own imagination. Whilst not agreeing with or blindly accepting each assertion of the author, it certainly provides the proverbial ‘food for thought’ and opens up some pretty powerful internal dialogue that has us thinking more deeply about who we are, where we came from and where we’re going to as a species.
Charlie’s Mini blog
On the 11th of January I landed at Schiphol Airport, Amsterdam, for what was, quite literally, a flying visit. Last year I completed the EVOKE training to become a registered Life Planner, and my 24-hour visit was the final stage of this qualification.
Now I know what you are thinking; ‘A Life Planner? That sounds a bit ‘hippie’ for a Financial Adviser!’ It is actually something we have incorporated into our financial planning for the last 4 years, with amazing success. Whilst you won’t get me showing up to client meetings in a pair of day-glow, tie-dyed trousers, helping people see what is important to them in the future is a key part of our role. After all, if we aren’t clear on what’s important to you in the future, how can we help you plan for it? Understanding your goals and personal concerns helps us ensure we are creating a financial plan focused on the most important things to you and your family. This is why financial planning is about so much more than selling pensions!
When I arrived at the taxi rank at Schiphol, I was greeted by a long line of Teslas, waiting to escort me to my hotel. Just in case you aren’t sure, and bearing in mind I was in Amsterdam, I will stress that a Tesla is an eco-friendly car, not anything else associated with the Dutch capital! I was so impressed that this city had created the infrastructure to allow the tax drivers to shuttle people around without creating noise or pollution. Surely if the canal strewn, bicycle ‘infested’ streets of Amsterdam can do this, other European cities could easily follow suit? After all, less pollution leads to a much more pleasant city for people to enjoy.
Surely transport in cities has to go this way in the future? It is the future. And I believe the same applies to Life Planning. Whilst you never see the term Life Planner on my business cards, only by using processes that allow me to truly help a client see what’s really important to them in the future can I create inspirational financial planning, and that is exactly what we expect to do.
I hope you are flourishing!