It is too early to know how everything will pan out, indeed it's only been three days since the UK electorate voted to leave the European Union, yet it has been the catalyst for some highly unpredictable political dynamics and for a fall in sterling to its lowest level for three decades. But above all we have had the media full of speculation and emotional commentary, talking of carnage, turmoil, negative territory and tanking in the "markets", falling house prices and rising mortgages.
Two things that effect our ability to make decisions are emotions and uncertainty
So how can we deal with the emotional bias and uncertainty and make the best decisions we can. I take a look at two important areas interest rates and investments.
By the close of business on Friday the FTSE 100 stood at 6138 or -3.15% from the previous day's close at 6338. The media called this carnage, given the fact that we have been experiencing volatility in the markets since last July and indeed during the last year the FTSE 100 lowest point was 5,499.50. In fact the FTSE 100 stood at 5,800 only last week.
The drop in the FTSE 100 was less than the German Dax -6.82% and less than the French CAC -8.04 and less than the Spanish IBEX -12.35 %
The FTSE 100 is made up of predominantly UK registered companies that trade globally and these companies will perform better than domestically focussed UK businesses. The pound's fall in value will not be without disadvantage as companies with oversea's earnings translate some of their profits back into sterling.
Many speculative investors had assumed that the UK would stay in and had taken positions in their portfolios to reflect this. When the result came in on Friday morning that the UK had voted to leave the EU, they were "caught with their pants down" and panic ensued. Stock was sold that would fare less favourably under a Brexit and a potential recession as a result of short term re-entrenchment of consumer and corporate spending. For example, some of the shares that came off worse were house builders on the back of fears of a recession and no longer being able to rely on a free flowing source of migrant workers needed to achieve the housebuilding targets. As the markets opened Redrow's shares fell 77% - this is not down to a sudden change in the management of Redrow as a company and interestingly a few hours later the shares recovered 57% of the fall.
I'm sure there were city traders shorting the market and making huge profits but in personal financial planning we don't operate in the same way. We leave that to the hedge fund managers and concentrate on the bigger picture, sustainable growth over the long term.
Investment principles remain the same :
1. Know what your financial goals are, how much you need and when you need it by and why you need it - then remain confident in your goals adjusting them to suit your needs not to fit in with circumstances.
2. Be clear on how much volatility you can personally deal with and what will keep you awake at night. Don't exceed your limits.
3. Ensure your investments are not in shares of one or two companies but in a fully diversified portfolio across geographic regions and across asset classes. Invest in well managed multi asset funds or in the services of a discretionary fund manager and you will be well positioned to see through any short term market volatility.
4. Volatility can also be your friend, if you are investing regular sums of money. Invest little and often, sometimes you will be buying "units" at a lower price and when prices move up, these are the ones that will make a significant difference to your overall wealth. You can't time the markets but you have more of an opportunity to benefit from up turns if you are continually investing small sums.
5. A loss is only a loss if you cash in your investments.
Fund managers that I speak to aim to make returns over the long term, in a world where investment returns are driven by the top down impact of global macroeconomic conditions as well as the bottom up factors of enterprise, innovation, management and profitability of companies. At the moment we are experiencing a higher amount of political influence or top down impact but their reasons for investing in selected companies will be based on deep analysis and conversations with the company directors. If the conviction was there in the first place any changes made in the underlying fund investments will not be as a result of a knee jerk reaction to a Brexit result.
For the of us not concentrating on saving and investing, Brexit will effect borrowers. So what's going to happen to my mortgage, should I get a fixed rate now?
Interest rates have been held at all time low by the Bank of England in order to allow time for the banks to build up their reserves and as a consequence of their concern over the total debt that each household currently runs. It is only a matter of time before interest rates increase but the time being it seems that the drop in the value of the pound has meant that interest rates may well be cut, even to zero!
The Bank of England has said it has stress tested worse case scenarios than a Brexit and will do all it can to support the economy. If the pound falls it makes UK goods and services cheaper to buy but puts pressure on exporters and creates inflationary pressure internally. Methods to counter this could be to reduce interest rates. There is speculation that rates could be cut by 0.25% by August and potentially go as low as 0%. The bank has also said it will consider monetary intervention with another programme of quantative easing if needs be. Interest rates could reduce.
But again, stick to your goals, if you are buying a property now with a mortgage and a fixed rate is right for you because it gives you stability of payments then it is right for you regardless. A lot has happened in the last three days let along the next two - five years.
We need to try and equip ourselves to counter emotional bias and uncertainty as best as possible so that we don't remain in a state of stasis. It is predicted that the UK will be in a state of limbo for the next two years whilst legislation is re written and the terms of a Brexit are agreed - don't let it become a personal limbo that denies you two years in progressing your own goals.
....and finally as I write it appears that we may have a constitutional crisis on our hands as the overall percentage of eligible voters who voted to leave the EU was 37% . This may have given a political mandate to leave but I understand it may not have the legal standing that is required, as it is less than the 40% trigger, which requires our Representatives of the House of Commons, our MP's to make up their own minds. Parliament has to protect the greater interests of the country and with the majority of MP's wanting a remain outcome...... yet more uncertainty lies ahead. So for now I won't look at pension legislation, not just yet.
What questions have you got about how Brexit may effect your financial planning? Let me know I'd love to hear from you. Please leave your questions in the comments section and lets get some conversations going.
Jill Turner - 26th June 2016
Five times as strong as steel and the main fabric of bulletproof vests. This post is inspired by the late Stephanie Kwolek, award winning chemist and inventor of Kevlar. It made me think, can I make a bullet proof financial plan for clients that will deflect the bullets and absorb the shocks of our volatile, uncertain, changing and ambiguous world.
Hello, my name's Jill Turner, I love to engage people with financial planning and it was my priveledge to put this presentation together for the Dales and Peak Business Networking Group
Here's 10#Hacks that can be implemented in your financial planning that will definitely make an impact on your lifestyle, beginning with :
1. Reduce uncertainty - underpin your financial goals with life, serious illness cover and income protection.
What will happen to our goals if we fall ill along the journey, we cannot work and our income dries up. " I'm saving, I have money in the bank", I hear you say - but how long will that last? The office of national statistics have published the average household savings as £177 per month. Leaving the money on deposit would take 12 years and nine months to save the average salary of £27,000.
Why not take a small portion of the £177 and buy life assurance or income protection. A 30 year old non smoker can have £13,470 per annum of short term income protection, paid after 13 weeks for up to five years, for £18.94 per month. That will go a long way to keeping the wheels turning.
2. Use a menu of protection benefits
You can buy differing levels of life protection, serious illness cover and income protection. For example if serious illness cover for the full amount of your mortgage borrowing blows your budget, then buy an amount equivalent to one or two years salary, this could be enough to take time out of work or pay for some medication that may not be available on the N.H.S.
Buy what you need, mix and match covers, make sure its index linked and there are guaranteed insurability options - then adapt as you journey on.
3. Make use of the appropriate trusts
Life insurance companies love trusts, it means they know who to pay any claims money to and there's no need to go through the probate process. It also keeps the money outside of your estate, essential if you are using life assurance to cover any inheritance tax bill.
4. Switch to clean share class funds
If you are saving through mutual funds or collectives ( OEICS ) examine a switch to the clean share class version, with no bid offer spread, no exit or entry charges and no kick backs to platforms or wealth managers. This could provide an immediate improvement to your financial planning but beware of incurring a capital gains charge.
An interesting paper was published in the 80's, "Determinants of Portfolio Performance" where 93.6 % of the variations in return on investments were attributed to asset allocation. Getting the right mix of assets and an investment strategy for your purposes, can seriously improve your financial planning outcomes.
6. Don't follow the herd.
There's a rather unsavoury phrase that sticks in my head when it comes to investments, "buy on the sound gunfire" apparently attributed to Nathan Rothschild in the 1800s. It means buy when things are out of favour or having a torrid time. The media is always full of what's doing well, its an easier story but Warren Buffet said, if everyones's talking about it, its time to sell. Sell before the doom mongers move in with greater negative sentiment by which time, its too late. Examine the figures and make decisions on facts.
7. Save little and often
How many times have I heard I can't afford to save, my business or my children are taking me for every penny. Its always easiest to save first rather than wait to the end of your pay period to see what's left. Besides, if you were to save the price of a coffee for five days a week, that would be £50 per month. With an investment return of 5% in a stocks and shares ISA over 10 years it could be at least £7,718. Regular investments can also give a better return through participating in pound cost averaging ( a subject for a future post ).
8. Use your tax allowances.
Most higher rate tax payers aim to be basic or non tax payers in retirement. If you can receive tax relief on your pension contributions at the higher rate of 40% or more when the money goes in and pay tax at the lower rate of 20% when you take your retirement income, its a no brainer to get an immediate uplift on your investment. Tax relief is costing the exchequer billions and in an age when the chancellor wants to bring in as much tax as possible, higher rate tax relief is definitely under threat. There has been a stay of execution with the introduction of the L-ISA. Higher rate tax relief for pension contributions may not be around forever so take advantage while you can, maximise contributions in this current tax year and even go back three years and carry forward any unused annual allowance in those years.
9. Consider blended retirement income solutions
Once upon a time there was a standard cup of instant coffee and fairly similarly there was a standard annuity that gave you an income in retirement in return for giving an insurance company your pension pot.
Then you were told annuities are bad because the insurance companies keep all the money if you die. Then interest rates fell which gave less annuity income in return for your pension pot. Then came drawdown, taking an income straight from the pension pot, which seemed a good idea until volatility entered the investment markets. So what do you do?
There have been a number of innovations in product design since the Taxation of Pensions Act in 2014. Short term annuities are coming back into favour providing secure income for set periods and leaving the remainder of the pension pot untouched or available for income drawdown. Annuities are now available with improved capital guarantees and longer guarantee periods, up to 30 years. There are even hybrid products which combine features of annuities with an income drawdown.
It's no longer all or nothing, a blended solution, mixing income drawdown with some secured income through annuities, could be the caramel machiatto of retirement income planning.
10. Nominate Beneficiaries
Good practice in financial planning has always included a discussion of what is to happen to any remaining pension fund upon the death of the member. The Taxation of Pension Act 2014 has widened out the class of beneficiaries from just dependants to include non dependants and introduced the concepts of nominee and successor beneficiaries. It's important to fill out the nomination forms correctly and consider nominees and successor beneficiaries.
In the course of my work as a financial planner, legislation and politics are always changing. We are living in a VUCA world, volatile, uncertain, changing and ambiguous but these things remain consistent:
These 10#Hacks won't constitute a bullet proof vest on their own and the caveat that this article is for information purposes only and does not constitute advice, applies. But I hope it gives food for thought and if you have any queries about your own position please don't hesitate to get in touch.
Jill Turner : May 2016 http://www.jillturnerassociates.co.uk
Whilst reading the blog articles please be aware of the following:
Welcome to the blog curated by Jill Turner. The pages are not intended to give advice, they are just the real life stories from a real life financial planner and the wonderful people I get to meet.
I want the pages to be engaging, informative and purposeful.
The information contained within this blog is based on our understanding of current government proposals and tax
law, both are liable to change in the future.
Jill Turner is a member of the Personal Financial Society