Monthly Archives

October 2019

A Short Guide to Brexit and How to Cope With Market Volatility

By | Investment Planning

Investors are understandably concerned about the impact of Brexit, regardless of the form or timing it might take. There is enough negativity and scaremongering in the press, and we can’t control the impact of Brexit over the coming years. Understanding what we can’t control and building in contingencies, however, are part of financial planning.

In this guide, we look at how your investments interact with your financial plan, and why you probably shouldn’t worry too much.

 

Diversification is Key

The market may experience some short-term volatility as any Brexit plan plays out. This is one of the factors we can’t control. However, a strong investment portfolio invests across the globe in different industries and sectors. Some of these may thrive in the event of Brexit. Some companies may struggle and ultimately go out of business. Others may not be affected at all.

The idea behind diversification is that you should invest in multiple assets that are not correlated with each other. In simple terms, equities and bonds often move in opposite directions depending on the economic situation at the time. This means that if share prices fall, the fixed interest element of the portfolio should provide a baseline of security and compensate for some of the losses.

In an investment portfolio, the strategy is a little more complex, but works on the same principle. Your portfolio may invest in thousands of different companies (either directly or through funds), all of which may be affected differently.

A diverse portfolio is well-positioned to absorb the worst of any volatility.

 

Markets are Not Always Predictable

After the Brexit vote in 2016, many investment portfolios thrived despite the uncertainty. While this was a positive development for many investors, it was partly due to the pound’s fall in value. This meant that overseas assets were valued higher, simply due to foreign currencies being worth more relative to Sterling.

Returns were further boosted, as UK companies trading overseas benefited from a weak pound.
There are gains and losses in every major political or economic shift. Even inherently negative events (such as a drop in the value of the pound) can have some benefits.

 

Markets are Efficient

There may be some tactical advantage to be gained by skilled investment managers, particularly in the more specialist asset sectors. However, investing all of your money in these areas is incredibly risky as they do not always get it right.

A typical, well-diversified investment portfolio may have some holdings in these funds. They will receive modest benefits from the gains, but be protected from large losses.

At the portfolio level, investors don’t really benefit from tactical decisions or attempts to time the market. It may seem like a good idea to sell your investments or switch funds, but chances are that several thousand other investors have also had the same idea.

Information is so readily available today, that any data that may influence your decision to buy, sell or hold is already priced into the market.

This means that any decision taken now, with the aim of benefiting (or at least not losing money) from Brexit, is likely to be detrimental in the long term.

 

Historic Trends

There were times between 2008 and 2010 that it seemed like the world was ending. Funds, companies, banks and economies collapsed. Investors lost millions, and years of austerity followed, with many people still feeling the impact.

When we look at fund performance charts ten years on, this devastation is reflected as a small blip in an otherwise upwards trajectory. Most investors are vastly better off having had faith in their investment strategy and not panicking.

A feature of an efficient market is that it is impossible to know when to buy and sell. An investor could, in theory, sell their assets at the high point just before the crash, before reinvesting at the lowest point to benefit from the low prices and subsequent recovery. The problem is that no one actually knows when the high and low point will occur.

For most investors, it is far more beneficial to trust the markets than to try and make these decisions.
Your Risk Capacity

Of course, there may be some losses in the short term, and some investors simply cannot cope with that. Personal tolerance and capacity for risk is a key discussion point at our meetings with clients.
Keeping calm and staying the course is the best advice for most clients.

But for others, the idea of losing even a small amount in the short term is a worry. The idea of long term returns and keeping pace with inflation does not really help when someone has just retired, as early losses could throw their plans off-track.

This is why we take the time to get to know our clients and understand their worries as well as their financial situation.

 

Your Long Term Plan

Investment decisions should be taken as part of a wider financial plan, rather than in isolation.
A young investor with high earning potential can afford to take significantly more risk than a retired person living on their pension. There are numerous other factors to take into account, and every client is unique.

Part of financial planning involves planning for the worst. For example, keeping an easily accessible cash reserve means that you can cope with any emergencies and will not need early access to your investments. Any investment withdrawals should be planned in advance as far as possible.

When we create a financial plan, we do not aim to avoid difficult events as this would be impossible. Instead, we plan for the risks, and ensure that even if the worst happens that you can still achieve your goals.

Please do not hesitate to contact a member of the team if you would like to find out more about our investment proposition and how we manage volatility.

Protecting Your Financial Plan: 5 Key Steps

By | Financial Planning

This content is for information and inspiration purposes only. It should not be taken as financial advice. To attain bespoke, regulated financial advice for your own affairs and financial goals please consult one of our independent financial planners.

What would happen to your loved ones if the worst were to happen? It isn’t a pleasant thought, of course, but it’s important to think about this seriously; especially if people are depending on you, such as young children.

Research suggests that as many as 8/10 mortgage holders have no insurance protection. That means that millions of working people are leaving their families vulnerable if they were to suddenly, tragically die. Moreover, as many as 1/3 people admit that if either they or their partner were to unexpectedly become seriously ill and could no longer work, then they would be unable to make ends meet on just one income. Less than half believed that their short term savings would carry them beyond two or three months in such circumstances.

It’s natural for many of us to think that horrible things only happen to “someone else”; not to us. Yet none of us know what life might bring, and it’s important to be as prepared as possible whilst aiming and hoping for the best. In this short guide, we at WMM will be sharing 5 key steps to consider with a financial adviser to help protect your family’s financial plan.

 

Emergency Funds

Whilst short-term savings are unlikely to carry you and your family through protracted, incapacitating illness, they can certainly act as an important “shock absorber” during difficult circumstances (e.g. sudden redundancy).

Generally speaking, financial advisers tend to recommend that it is sensible to try to accumulate between 3-6 months of living costs, and set these aside as an emergency fund. This can give you enough “breathing space” to find a new job, for instance, or cover a large unexpected bill (e.g. a major roof repair) without it crippling your finances.

 

Wills & Power of Attorney

A comprehensive financial plan will typically outline how your estate will be handled and distributed when you pass on. The primary way to deal with this is via a Will, which stipulates who should receive your possessions, assets and property, as well as the manner and timing of the handover. Failing to devise a will leaves your estate vulnerable to the UK’s “intestacy rules”, which might not divide your estate in accordance with your wishes.

Creating a will is especially important to think about if you have dependants who might benefit considerably from a meaningful inheritance in the future. Yet it’s also a good idea to consider going a step further and looking into power of attorney. This can enable another trusted person to make decisions about your estate for you, if you are no longer able/willing to make them.

 

Term/Whole-of-Life Insurance

A life insurance policy is designed to provide a much-needed lump sum to your family if the worst should happen to you. Broadly speaking there are two types: term life insurance and whole-of-life insurance.

The former covers you for a set period, whilst the latter provides cover indefinitely. Naturally, term life tends to be cheaper since whole-of-life insurance is guaranteed to pay out one day. However, the costs for both types of life insurance can vary quite widely depending on several important factors, particularly your state of health and the level of cover required.

There are many policies available on the market and it’s easy to feel overwhelmed, or end up paying more than you need to (sometimes for less cover). As independent financial planners WMM will be able to help you survey your options more widely, and find the ideal product for your needs.

 

Critical Illness Cover

For many people, critical illness cover (CIC) can feel excessive – especially if we are fit and healthy right now. It’s important to remember that health is not guaranteed, and serious illness can unexpectedly befall any of us, at any time. Having a financial plan which is prepared for this possibility is, therefore, certainly wise.

Even if you are single, CIC could help you cover your mortgage and other monthly commitments if you suddenly found yourself incapable of going to work. For couples (especially those with young children), the lump sum from a CIC policy can help relieve financial pressure from an already difficult situation.

Again, consider speaking to one of our financial planners if you feel that CIC could be an important part of your financial thinking. Sometimes this can be combined with income insurance, for instance, to cover multiple eventualities whilst keeping costs and administrative hassle to a minimum.

 

Income Protection

Critical illness cover and income protection are quite similar. However, one important area where they differ concerns the “pay out”. The former provides a single lump sum if the terms of the policy are met. Once this money is gone, however, then it’s gone and the policy often ends on pay out of a successful claim. Income protection, however, agrees to pay out a percentage of your salary (e.g. 2/3rds) each month for as long as you are unable to work, due to illness or injury.

Be aware, however, that there are different types of income protection. Some will only pay out for a limited period (e.g. 6-12 months), and many will only cover you up to a certain age.

 

Final Thoughts

Above, we have outlined some of the main strategies available to those seeking greater protection over their financial plans, and by extension, over the future welfare of their family. Many of these approaches can be combined to provide a bespoke solution for each person, depending on their individual needs and financial goals.

We recommend that you consult an experienced financial planner to help you with this, to ensure that you do not mistakenly “double up” the benefits of multiple insurance policies or fail to provide the level of cover you need. Contact us on 01869 331469 if you would like to discuss this aspect further.

 

How Do I Create Wealth For My Children?

By | Financial Planning

This content is for information purposes only and intends to inspire your thinking. It should not be taken as financial advice. To receive tailored, regulated financial advice please consult us here in Oxford.

It is very natural for parents to want to give their children a better chance in life. When it comes to building wealth for your children, we at WMM tend to come at this from two angles as financial planners:

  1. Building up wealth with your child gradually, especially through saving and investing.
  2. Passing on wealth to your children one day as an inheritance.

Every family is different with regards to its composition, financial situation and goals. So it’s always best to consider seeking professional financial advice to identify the best options for your particular needs. In this article, we’ll be sharing some ideas on the above two areas which you can discuss with them.

We hope you find these thoughts helpful, and if you would like to discuss your own financial plan with us, please get in touch to arrange a free, no-commitment consultation with a member of our team here at WMM.

 

Building up Child Wealth

Perhaps you want to give your child a set of financial savings for University one day. Or, maybe you want to start building up their pension, or help them prepare a strong house deposit. Whatever your goals, you are likely going to want to consider some options for efficient saving and investing to help achieve them.

Savings Accounts

One of the best ways to build wealth for your child is to help instil a sense of responsibility for saving for the future. When they are young, this might be as simple as encouraging them to keep a piggy bank which they can build up with pocket money; even if this is as small as 10p. Eventually, you can introduce them to a children’s savings account at a bank or building society, which they can take responsibility for after the age of 7.

ISA’s -including Junior ISA’s (JISA)

An individual savings account (ISA) can be a good step to consider with your child, especially because it helps to educate them about “tax efficient saving”. Remember, in 2019-20 all interest earned within an ISA is tax-free. They can only access the money in an ISA once they reach age 18, but the money still belongs to them. A Stocks & Shares JISA can be a particularly useful account type to consider, since it helps children to learn about the “ups and downs” of investing in the short term, whilst achieving growth in the long term. However, these are not allowed if your child has a child trust fund (CTF).

Child Pensions

In 2019-20 parents can open a pension for their child (such as a SIPP; or Self-invested Personal Pension), and contribute up to £2,880 per year. So, if you opened one shortly after your child’s birth and put in the maximum amount over 18 years, then they would likely have £51,840 in their pension before investment growth is even taken into account. This could give your child a much stronger financial foundation in retirement, but bear in mind that under current pension rules the money will be inaccessible until they reach the age of 55.

 

Passing on Wealth to Children

The above are just a handful of ways you might help your child financially, whilst you are around and whilst they are growing up. Once they are older and (hopefully) financially independent, how can you continue to support them? Also, what can you do to ensure that as much of your wealth as possible passes on to them when you are no longer around?

Here, it helps to have a strong grasp, ahead of time, of the foundational elements of inheritance tax. After all, the more you know about this early on, the more you can do to better-prepare your estate to pass on tax-efficiently to your children. Here are just some of the important areas you might want to discuss with one of our financial planners:

Thresholds

In 2019-20 you are entitled to pass on up to £325,000 of your “estate” to beneficiaries when you die, without facing inheritance tax (IHT). Your estate includes things like:

  • Property (including your family home).
  • Vehicles
  • Jewellery and other possessions
  • Investments and savings
  • Businesses you own

However, your estate does exclude certain things which are important to be aware of for IHT purposes. For instance, certain investments are exempt such as Enterprise Investment Scheme (EIS) shares which you have held for at least 2 years. Pensions are also excluded.

You can raise your own IHT threshold, however, if you pass on your family home to direct descendants such as children or grandchildren. This allows you to claim an Additional Nil Rate Band of £150,000 in 2019-20.

Allowances

The above would theoretically mean that a single person could potentially pass on at least £475,000 to one or more children without facing IHT (i.e. £325,000 + £150,000).

If you are married or in a civil partnership, however, then each of you are entitled to your own Nil Rate Band and Additional Nil Rate Band. So, in some cases a married/civil partnered couple could pass on up to £950,000 to their children in 2019-20, free of IHT.

Other Options

These are just two important areas to mention when it comes to passing on family wealth to children as an inheritance. There are many other important strategies available to you which you could discuss with a financial planner, such as leveraging your pension or taking advantage of Annual Exemptions for gifts.

The key point here is that growing wealth for your children involves thinking strategically, both over the short and long term. There is much you can do right now, practically, to help lay a foundation of wealth for your child whilst helping to teach them about the importance of saving, investing and planning for the long haul. You can also prepare you own estate appropriately with a financial adviser to help ensure your wealth goes into the right hands in the future.

If you would like to discuss your own financial plan or estate with a professional financial adviser here in Oxford, then we invite you to get in touch to arrange a no-commitment consultation with our team at WMM, at our expense. You can reach us on 01869 331469.