Monthly Archives

September 2022

Sep 21
0

Ethical investing: a short guide for 2022-23

By | Investment Planning

How can you grow your wealth whilst putting it towards good causes? Ethical investing – often now called ESG investing (environment, society and governance) – seeks to answer that question. In this guide, our team at WMM explains how ethical investing works, its main forms in 2022 and ways that it can integrate into an investment portfolio. 

 

How ethical investing works

Traditionally, companies were mainly selected for their potential to generate strong returns at acceptable risk. In recent years, however, investors have also sought to choose companies which fit with their personal moral code. This might involve focusing on areas such as workers’ rights and climate change, perhaps also avoiding areas like animal testing and arms. 

Here, an investor can choose individual company stocks to build a portfolio that meets their criteria. Yet ESG funds are now increasingly available – allowing investors to pool their money into multiple ethical companies. Most of these funds are actively managed, but demand for (typically) cheaper “passive” ESG funds is rapidly outpacing them.

 

Types of ethical investing

There are various terms used to describe ethical investing, many that are synonymous or describe a specific aspect. “Green investing”, for instance, tends to focus on environmental causes when investing (e.g. carbon emission reduction). Socially responsible investing, conversely, can refer more specifically to concentrating on positive impact within local communities – e.g. ensuring a healthy water supply in developing countries where a company supply chain operates. 

This highlights why it is important to not just include an “ESG investment” in your portfolio due to its labelling. Rather, investors should explore the methodologies, priorities and strategies of a fund (and its manager) before committing to it. A fund that merely excludes arms and tobacco from its holdings but describes itself as “sustainable”, for example, may not justify the label if it does not include any sustainable assets. 

 

Ways to adopt ethical investing in a portfolio

Investors will differ on which aspects of ethical investing they feel are most important, and how ESG investing should be brought into their portfolios. There can be a difficult balancing act, as you should not lose sight of the fact that you want to generate a return. ESG investing is not the same as giving to charity. 

Fortunately, investing ethically does not need to involve compromising on quality. Indeed, there is some evidence suggesting that ESG investing can generate higher returns. Some investors may want to “dip their toes” into including more ethical investments in their portfolio. Others may want to take a more “radical” approach and focus primarily on ESG investments. Here is an overview of some different ESG strategies to discuss with your financial planner:

  • Exclusionary screening. Here, a fund or company is left out of the portfolio if it does not align with the investor’s ESG criteria (e.g. regarding human rights).
  • Positive screening. Rather than omitting entire industries – such as fossil fuels – this approach rewards companies that are “leading their peers” on ESG principles.
  • ESG integration. A more “balanced” approach to ESG investing, where compromises on principles may be made to achieve higher returns.
  • Impact investing. Looks for companies that are focused on specific, measurable ESG “projects” (e.g. building local schools).
  • Ownership. Do you own shares in your own company? As a major shareholder, you can help raise ESG issues to the board and bring about some positive change.

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

Sep 21
0

How to build an inflation-ready pension plan

By | Pensions

With UK inflation now standing at 10.1% (a 40-year high) and possibly set to rise to 18% early next year, pensioners (and those nearing retirement) are understandably looking to understand how to protect their nest egg. In this article our financial planning team at WMM offers some ideas on safeguarding your pension(s) against inflation, helping you to enjoy a sustainable and comfortable retirement. 

 

Invest in (but don’t rely on) your State Pension

The UK State Pension is one of the few sources of retirement income that offers a guaranteed annual increase of at least 2.5% (more, if CPI inflation or average wages are higher). In April 2023, it could rise as much as 10%. This would take it from the current £185.15 per week to around £203.67. Your State Pension lasts for the rest of your life and is not affected by stock market movements, due to its financing via National Insurance contributions.

However, the State Pension is not enough, alone, for most people to live a comfortable retirement. It is also coming under increasing scrutiny due to affordability. Liz Truss, the UK’s new Prime Minister is exploring whether the “triple lock” system can be kept due to its high cost. As such, it is wise to also build other non-State Pension income sources into a retirement plan.

 

Defined benefit pensions & annuities

Some employers – such as the NHS and Police – offer their workers a defined benefit pension which can greatly mitigate the impact of inflation on a retirement plan. These schemes offer a guaranteed, lifetime income in retirement (e.g. based on years of service and average career earnings) and often this will rise each year with inflation. 

Speak to a financial adviser, therefore, if you are considering transferring away from a defined benefit (or “final salary”) pension as the benefits are often attractive and difficult to replicate elsewhere. For those with defined contribution pension savings (involving a pension “pot”), buying an annuity can help to provide an indefinite, inflation-linked income in retirement. 

Annuities have been out of fashion for a while due to low interest rates, leading to relatively low annuity income offers. However, with rates now rising again, this may start to change.

 

Examine your strategy & withdrawal rate

If you see the value of your pension going down, be careful not to panic and impulsively sell your investments. Remember, not only does this potentially serve to crystallise your losses, but the cash you are left with is especially vulnerable to high inflation (due to poor interest rates on regular savings accounts). 

With that said, it often makes sense to re-examine your investment strategy as you near retirement. This may, or may not, involve moving from “riskier” assets to more “cautious” ones which provide lower volatility now, but with likely lower future returns. A lot will depend on your own unique plans for retirement, but just remember that if you plan to tick off a few ‘bucket list items’, or expect a long and healthy retirement, then you may need those higher returns!

It can also help to discuss your “safe withdrawal rate” with your financial adviser when the cost of living goes up (i.e. the amount you can regularly take from your pension savings without high risk of depleting them). Taking less each month, in the short term, may help your pension keep growing over the long-term as the remaining funds stay invested. Generally, a safe withdrawal rate of 4% from pension savings is sustainable in the UK. During high inflation periods, however, this may need to be temporarily lowered – e.g. to 3% or even less.

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

Sep 21
0

Why holding too much cash can inhibit your goals

By | Financial Planning

During times of uncertainty, it can be tempting to move more of your wealth into cash. It seems “safer” due to its ability to shield from stock market volatility, and there is the security of knowing the Financial Services Compensation Scheme (FSCS) guarantees up to £85,000 of savings if your bank should fail. Yet, perhaps counter-intuitively, holding too much cash can be detrimental for your financial goals. Below, our team at WMM explain why cash should form a relatively small portion of most people’s longer-term wealth compared to their other assets.

 

Cash is not risk-free

On your bank statements, cash savings may seem to be earning you money. However, inflation is usually eroding their real value. In 2022, inflation currently stands at 10.1%, meaning it may now cost you £1.10 to buy an item that cost you £1 twelve months ago. If your cash savings offered you a 10.1% interest rate, then they would be closer in keeping up with this rising living cost. However, interest rates remain low, with the “best” deals currently offering 1.85% easy access and 3.61% fixed.

Cash, therefore, is not risk-free. In fact, you are certain to lose value over the long term due to inflation. This makes it a poor asset class for building long-term wealth. Cash can certainly help provide an easy-access emergency fund (e.g. 3-6 months’ worth of living costs) if you come across hard times, such as losing your job. It can also be useful when building towards a short-term financial goal (e.g. putting down a mortgage deposit within the next three years). However, if you want to build a retirement fund and stand a chance of beating inflation, other assets need to be considered for your portfolio.

 

Alternatives to cash for building long-term wealth

Non-cash assets such as bonds, equities and property can intimidate people. After all, they often involve more volatility. Stock prices can go dramatically up and down within a day, and the housing market is also subject to fluctuation. Yet it is worth pointing out that nobody can completely escape risk. Even the value of cash changes due to currency exchange movements. If the pound (GBP) devalues, then it can result in higher prices for UK consumers. A 20% fall, for instance, can lead to prices of imported goods rising by 25%.

One key aspect to building wealth, therefore, is to try to balance the risk associated with each asset class – helping you to also benefit from their opportunities. You can build a portfolio that reflects your unique “risk appetite” too, with the help of a financial planner. If you are a “cautious” investor, then leaning your portfolio towards investment-grade bonds may be appropriate. Those with a longer investment horizon and higher risk tolerance, conversely, are likely to do better by including a higher proportion of equities within their asset mix. The FTSE 100, for instance, has averaged a 7.75% annual return since its inception in 1984 – despite numerous economic crises and market falls along the way. Property has also historically shown itself to be a strong investment over the long–term. UK house prices in 2022 are 65 times higher than they were in 1970.

With this said, building an effective and diversified portfolio is no simple task. There are 1,000s of funds available in the UK market alone. Getting help from an experienced financial planner can help you narrow down on a shortlist of appropriate investment candidates in light of your goals, risk tolerance, investment horizon and sound principles (e.g. the fundamentals of a prospective investment). Over time, your planner can also help keep your portfolio on track and aligned with your chosen investment strategy. 

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).