Investment Planning

While the reduction to National Insurance rates captured the headlines, another measure announced in the Spring 2024 Budget was the introduction of a British ISA. This will offer an additional £5,000 ISA allowance for anyone wishing to invest in British assets.

The intention is to stimulate growth in the British economy while rewarding investors for buying local.

Full details are still to be announced, and the proposals are still at the consultation stage. Below, we outline what we know so far.

The Current ISA Rules

The current ISA regime has been around since 1999, with allowances remaining unchanged since 2017. The main rules are as follows:

• You can contribute up to £20,000 to an ISA.
• You can use your ISA to hold cash, stocks and shares, or a mix of both.
• All income and growth generated by an ISA is tax-free, and you can usually withdraw your money without restriction or penalty (unless you have specifically bought a product with a fixed term).
• If you take money out of your ISA, you can replace it in the same tax year without using up any of your allowance.
• ISAs can be transferred between managers, and you can switch between cash and stocks & shares.
• ISAs can be transferred to a spouse on death via an Additional Permitted Subscription.

ISAs are highly tax-efficient, and along with pensions, form an essential building block in a sensible investment an efficient financial plan.

How Will the British ISA Work?

Details are still light on how the scheme will actually work. What we know, is that investors will have an additional allowance of £5,000 to invest only in British assets. This effectively increases the ISA allowance to £25,000.

The likelihood is that the British ISA will not be incorporated into existing stocks and shares ISAs, but will be introduced as a new, separate wrapper. This means that an investor could theoretically have up to four different ISAs – cash, stocks & shares, a Lifetime ISA, and a British ISA.

A consultation is underway to nail down the specifics. This is expected to be completed by 6th June 2024.

Details Still to Be Confirmed

Firstly, between the consultation period and the upcoming election, nothing is certain. The British ISA is simply an idea at this point, with no certainty over if, or when it will come to fruition.

If it does pass into legislation, it is likely to be April 2025 at the earliest before it becomes available. This is on the basis that investment providers can offer it. Some may choose not to, and others might not enter the market right away.

There is also some uncertainty over what the scheme can invest in. Shares in listed British companies are likely to be on the list, and it has also been indicated that shares listed on the AIM market could also qualify.

It is possible that collective funds such as OEICs, corporate bonds, gilts and possibly even cash in British institutions should also qualify. There is some uncertainty over investment trusts, as these are technically listed British companies, but can invest in a wide range of global assets – it is likely that some controls will be put in place to limit the underlying investments that can be accessed.

Transfer rules are also yet to be announced. Transferring an existing ISA to a British ISA is likely to be counterproductive, as you could buy the same assets within a standard ISA. However, if it is possible to transfer out of a British ISA, investors could take advantage of the increased allowance before moving their money elsewhere to access more investment options. This might be good for investors, but defeats the purpose of encouraging investment into the British economy.

Should You Invest in a British ISA?

In theory, an additional ISA allowance offers the chance to save more and reduce your tax bill.

But not everyone uses their full ISA allowance every year. Research by Sanlam indicates that as of the 2020/2021 tax year, only 33% of investors with between £50,000 and £100,000 of investable capital used their full ISA allowance. The figure increased to 48% for those with under £50,000 and to 71% for investors with over £1 million.

For some investors, prioritising a pension is likely to offer a better return over the longer term. Pensions have more limitations, but ultimately offer a higher level of tax relief. Of course, many people have other demands on their money, including getting on the property ladder, saving for children, or simply dealing with the cost of living.

It is likely that the British ISA will benefit a relatively small segment of the investing population. Whether or not it boosts British growth remains to be seen. However, surveys indicate that around 48% of adults would consider investing in a British ISA, with this figure rising to 63% amongst existing stocks & shares ISA investors.

One of the risks of investing in a British ISA is concentration risk. The UK makes up around 4.1% of the global economy by market share, behind the US (58.4%) and Japan (6.3%). However, if you use your British ISA allowance every year in addition to the standard allowance, this could mean holding at least 20% in the UK. Home bias is already an issue for investors, and British ISAs could be seen to be encouraging this.

It’s important to make sure that your portfolio is well-diversified and invested at a suitable risk level. So, if you do choose to invest in a British ISA, you might want to make some adjustments to your other investments to ensure they are well-balanced.

An investment plan should not be based around new products or gimmicks. However, if a new product or tax break allows you to do what you were planning to do anyway, but with additional benefits, then it is worth considering.

Please don’t hesitate to contact a member of the team to find out more about your investment options.

With a new year underway and the cost of living continuing to increase at a pace, and the knock-on effect of this to most services and products, investors are understandably looking for ways to ensure they capture the best investment returns where possible. But where should you start with this?

Can you use historic performance to predict future performance?

Many investors still attempt to chase the best performing countries, sectors and funds, selling assets that have fallen out of favour and buying the newly touted ‘best buys’, often based on historic performance.

Many professional investors and fund managers believe they have the ‘skill’ to do this.

However, whilst there are lessons that can and should be learned from historic data, many decades of academic research show that the manager’s ‘skill’ is more often likely to be ‘luck’, and that repeat ‘luck’ is almost unheard of.

Dimensional Fund Advisors have compiled the following chart, showing the Randomness of Returns. The chart focuses on the performance of global markets, by country, since 2001.

Randomness of Global Stock Market Returns

Source: Dimensional Fund Advisors, Randomness of Global Stock Market Returns

This chart demonstrates, clearly and colourfully, that it is very hard to predict which country will outperform from one year to the next, taking Austria as an example – they produced the highest developed market return in 2017, but the lowest in 2018.

Similarly, markets have returned on average about 10% a year, although almost never that amount in any given year. So, like trying to pick the winning country, asset or company, we don’t advocate trying to predict or outsmart (i.e. time) the market.

So, how should investors deal with this?

Our investment philosophy is based on buying the whole market, with a diversified global portfolio.

Whilst you would have still seen the losses in your Austria assets in 2018, you would also have had the positive returns from the Finnish market (the top performers in that year). Holding all (or almost all) of the market can help to provide more reliable outcomes over time.

Dimensional’s research shows that ‘buying the market’ and holding over the longer-term has provided better outcomes for investors, than trying to pick the winners and losers individually.

Our message to our clients is clear – “don’t try to time the market, and don’t try to pick the winners and losers”. A solid, long-term financial plan, taking no more risk than you are comfortable with, will stand you in very good stead, allowing you to concentrate on the people and goals that really matter to you.

Dimensional say that “the market is a great information processing machine. It runs on human ingenuity, which is why returns tend to grow over time as people work to innovate and improve the value of the companies they work for. So start the new year off with a clean slate—just like markets do every day.”

Invitation

Interested in discussing the chart in more context to your own financial planning? Get in touch today to arrange a free, no-commitment consultation with our team here at WMM.

You can call us on 01869 331469.

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).

How can you best put your money to work? Choosing assets to invest in is crucial when crafting an effective portfolio which moves you towards your financial goals. Yet discerning the unique traits of different assets (e.g. equities and bonds) can be challenging, and the precise mixture you should adopt may not be clear. Below, our financial planning team at WMM outlines some of the key principles to consider when putting the building blocks of your portfolio together.

What is asset allocation?

Asset allocation is the process of choosing various assets for your portfolio – in accordance with your risk tolerance, investment strategy and financial goals. The two primary assets in most portfolios are fixed-income (bonds) and equities (i.e. stocks and shares). However, some people might also invest in commodities like gold, or real estate such as Buy To Lets.

What are some example asset allocations?

Broadly speaking, asset allocation involves identifying what portion of your portfolio will be set apart for different asset types. Your risk tolerance will play a big role here. For instance, a more “cautious” investor may opt for an asset allocation of 80% fixed-income and 20% equities. This prioritises the preservation of capital overgrowth, typically involving less risk. However, a more “adventurous” investor may choose the opposite: 80% equities and 20% fixed-income, or even 100% equities. This opens up more growth potential but involves greater investment risk.

What is internal asset allocation?

Allocating assets is not simply about equity-bond ratios within a portfolio. You also need to find out how to choose assets within these various classes. Investing in equities, for instance, may involve spreading out across a range of companies, sectors, industries, countries and regions. For instance, if you want a portfolio of 80% equities, how should this 80% be apportioned? The greater your diversification across countries and sectors, the less your portfolio will be affected if one market ‘crashes’.

How do I choose assets in line with my values?

Increasingly, investors want to choose assets which also align with their values. Perhaps you want to prioritise businesses in your portfolio if they are engaged in environmental protection, also avoiding those engaged in unethical activities (e.g. sweatshop labour). Here, your financial adviser can help you apply ESG (Environmental, Social and Governance) criteria to your list of possible assets. This helps you identify companies which facilitate good causes such as gender boardroom equality, fair pay, safe working conditions for workers, carbon neutrality and/or conservation efforts.

How do I build an effective asset allocation?

Your investment horizon is important when building a portfolio. How long until you will need the money? Generally speaking, the shorter your investment horizon, the more cautious your asset allocation should be. Your goals and values also should be taken into account. However, it is also wise to consider cost efficiency and performance.

Various fees are involved when investing in most asset classes – such as investment platform fees, trading fees, spread fees, exit fees and account inactivity fees. Regardless of your asset allocation, make sure you find a platform that keeps your costs low (without compromising on performance). Also, make sure your assets are contained within a tax-efficient portfolio. Your ISA, for instance, allows you to generate capital gains and dividends without tax. Investments within a pension are also tax-free until you retire.

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).

You may hear a lot of talk in the media about where you should and shouldn’t be investing your money. But what if you haven’t established any kind of savings or investment pot yet? Where do you start?

Some useful points to remember when judging options is that any ‘investment’ should have an expected positive outcome, and anything less is ‘speculation’. Successful investing relies on taking a longer-term view, as markets change quickly and often with magnitude, so short-term ‘offers’ when analysed are ‘little more than gambling’.

In this article, we explore tips and strategies for helping you get started on your financial planning journey. 

Step 1 – Working out how much you can afford to save each month

Unless you’ve been fortunate to be gifted a lump sum, it’s likely you’ll want to start saving monthly to establish your ‘portfolio’.

We usually recommend that at least 3-6 months’ worth of expenditure is retained in ‘ready cash’, before you think about committing any of your savings to investment. This pot of money provides a safety margin, as it can cover unforeseen demands for cash without having to disturb your longer-term savings goal or having to sell any investments at a loss.

Step 1, will therefore be to work out your monthly outgoings, versus your net income (after tax etc). The difference is your monthly surplus income and is, in theory, the amount you can afford to save. We would recommend saving this initially into an instant access savings account, as this will be your ‘emergency fund’. Once you have accrued the recommended minimum level of cash, then you can move on to Step 2.

If the difference between your income and spending is negative then it’s likely you’re getting into debt before the end of the month or dipping into any savings you do have. In this case, you’ll need to reassess your outgoings and identify any areas where you can lower your spending. If not, over time the monthly shortfall could mean you accumulate potentially large debts, which can be a vicious spiral to try to get out of. 

Step 2 – Deciding what you are saving for

If you have a specific savings goal in mind, you will have a target amount and target date to aim for. The target date is an important factor in deciding how you will save towards it. 

If you are saving more generally ‘for the future’ this might give you a little more flexibility. 

Shorter-term – For example, if you want to save, say, £25,000 towards a house deposit in 3 years’ time, you will need to commit to saving around £695 per month for every month of those 3 years. Given the short timescale, you are unlikely to want to invest very much, if any, of it into any stock market investments, such as shares. The value of these investments can go up and down sharply in a short space of time and a dip in value near your target date could ruin your plans.

You might want to set up different pots for your short-term savings, and label the accounts, such as “Holiday”, “House Deposit”, “New Car”, and “Spends”. This could help you stay on track with more of your individual goals, rather than one pot that you might delve into occasionally. 

Medium Term – These would be your savings goals for in, say, 4 to 10 years’ time. Your new car fund or house deposit fund could fall into this bracket, which might allow an element of stock market investing to be suitable, or perhaps childcare and school fees if you’re planning a family. 

Longer-term – If you are thinking much longer term, say your retirement fund, you could have more than 30 or 40 years to your target date. In this case, you could afford to invest highly into equities, for the potential long-term growth, in the knowledge that the upwards trend of stock markets over the longer term will usually compensate for any short-term volatility. 

Step 3 – Deciding where to save

You’ve decided on your budget and your goals, and now you just need to decide where to save. 

For your cash savings, this is easier to choose. Most people will have at least one savings account with their main bank, and you can also shop around fairly easily by using the online comparison tools. 

For your more medium and longer-term investments, where you might be considering some element of stock market investing, we would recommend seeking the advice of a qualified financial planner, rather than relying on the current “sweetheart” recommendations in the media. 

Different investments offer different incentives too. For example, for your retirement planning, you could look at a personal pension, where the Government “top up” the amount you invest by giving you tax relief. A basic rate taxpayer investing £80 per month will receive an extra £20 (based on current tax legislation), equivalent to the 20% basic rate tax they may have paid on the income. This also applies to non-taxpayers and so can be a very efficient way of saving for them in particular.

ISA accounts, whilst new accounts don’t offer an initial incentive, allow your cash to grow tax-free, and the withdrawals are all tax-free too. You can have a cash ISA and an investment ISA, and which one, or combination, you go for will likely be dictated by the time frame you’re investing for.

Again, a financial planner will be able to guide you on the right path for you. 

Invitation

Interested in finding out how we can help you establish your financial plan and investment strategy? Perhaps you already have a plan in place and you’re interested in getting your children into the savings habit. 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).

Nobody knows if the UK will enter a recession in 2022. Yet if it does, how can you ensure that your investments are protected? Some argue that the best safeguard is to invest in “actively managed” funds; i.e. those which employ a professional manager to “time the market” for you (aiming to sell shares before a crash, and buying others before they rise). However, this approach to investing rarely works. Over the last 10 years, for instance, only 17% of actively managed funds have beaten the S&P 500 benchmark. So, how can you invest in a possible recession (which usually, but not always, accompanies a “bear market”)?

#1 Continue contributing

There are two main ways to view a stock market crash. Firstly, you could see it as a disaster to avoid at all costs. Alternatively, you could see it as an opportunity to buy more investments “on the cheap” (due to falling share prices). This latter approach is helpful to show why continuing your contributions – e.g. to your pension – on a monthly basis is usually the best approach for individual investors. By drip-feeding your money, you limit the temptation to try and time the market and increase the likelihood that, over the long term, your portfolio will follow the market in its upward trajectory.

#2 Keep calm

During volatile markets, one of the worst things you can do is panic and sell investments out of knee-jerk reaction to bad news. Almost inevitably this only serves to crystallise your losses and potentially miss out on the (eventual) market recovery. Stay focused on your long-term goals and remember that you expected volatility along the journey when you originally crafted your strategy with your financial planner.

#3 Ensure diversification

One of the difficulties of staying true to your investment strategy during a volatile market is that your mixture of assets can veer off course. For instance, suppose you started a portfolio one year ago with a 60:40 split of equities to bonds. 12 months later, the market crashes and leads your equities (shares) to comprise a smaller part of your portfolio – such as 45:55. Eventually, it may be necessary to rebalance everything (e.g. by selling bonds and buying more shares) so you stay on track. However, when should you do this and which assets should you sell? Here, a financial planner can help ensure that you choose the right approach and avoid concentrating too much of your portfolio in a single asset, market or company.

#4 Remember your plan

Before you built your portfolio with your financial adviser, you should have addressed a set of crucial questions that would help you know how to navigate a possible future recession or bear market. One of these is: when will you need the money? If you were looking to use the money within the next 5 years, for instance, then you likely will have “de-risked” your portfolio by moving more of it into “safer” assets – e.g. dividend-paying stocks and bonds – in case a crash occurred before your withdrawal date. However, if you knew that you had 30+ years to invest before needing to withdraw it, then you could decide to take more risks. After all, if a crash does occur in that timeframe (and history strongly suggests that at least one will), then you have plenty of time for your portfolio to recover. Remembering your original investment plan, therefore, can help bring clarity regarding the best way forwards if the UK enters a recession.

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).

Most of us intuitively know that the wider UK economy affects investment returns. Interest rates, for instance, are set by the Bank of England (BoE) and can affect the stock market – providing downward pressure if rates go up (as ‘less- risk’ is perceived for higher short-term returns) and providing buoyancy when rates are lowered. One interesting relationship between investment returns and the economy concerns unemployment. For instance, does it help – or hinder – the stock market if more people are in stable, paid work? Below, our financial planning team at WMM offers some reflections.

How unemployment affects the economy

It is, firstly, important to define what unemployment is and how it is measured. Broadly speaking, unemployment refers to the percentage of a workforce that is actively looking for paid work – but unable to find it. Already, this raises questions. In particular, how do you determine whether someone without a job is looking for one? After all, many people are highly employable but might want a “career break” (e.g. 1-2 years) before trying something new.

The UK government defines unemployment as “The number of unemployed people divided by the economically active population”. This is based on the Labour Force Survey which asks 40,000 households every month about their employment status. To count as an “unemployed” person, a jobless interviewee must state that either:

• They have found a new job which they plan to start within the next 2 weeks. Or;
• They have looked for work in the last 4 weeks and can start work in the next 2 weeks.

Generally, the UK government seeks to keep unemployment as low as possible. This is partly for political reasons, so they can boast about their record (particularly in the run-up to elections). However, it is also for economic reasons. For instance, more people in paid work means more wages that can be taxed – providing more revenue for the treasury.

Unemployment and investments

Fewer people in work means less money coming to the government, and perhaps more going out (in the form of state benefits). Yet unemployment also means less money for people to go out and spend on products/services offered by businesses. This means less sales and lower profits, which applies downward pressure to growth and, by extension, company valuations (unwelcome news for shareholders).

In an economy with high unemployment, even those with jobs are often less likely to spend money. After all, job security seems less certain in such an environment – so people tend to save more in case they come upon hard times. This is partly the reason why the UK national savings rate rose so much higher after COVID-19 hit the UK, since many people feared that their job might not be there when lockdown was lifted (although lockdown, itself, prevented spending in the wider economy – e.g. on the high street).

At this point, investors may rightly ask: “What is the state of UK employment right now, and where could things go in the near future?” Currently, employment is standing very high (in historical terms) at 75.6%. This is not quite the high of March 2020 (when it was 76.6%), but figures are not far off. This is good news for the stock market, although other forces – such as rising UK inflation – are pulling equities in other directions. 

The future, of course, is uncertain. Whilst the UK appears to be on a journey of economic recovery from COVID-19, events could undermine efforts to build on this. A new variant may arrive – bringing a return to lockdown. Wars can also disrupt the global economy and unsettle markets. Here at WMM, we are here to help guide your financial decisions and build in greater security when events – such as a job loss or damage in the wider economy – might affect your financial plan. 

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).

Have you wondered what it might be like to “be the bank”, when lending money? With bonds, you can do just that. In effect, when you buy a bond, you lend to a Government (or business) on the understanding that they will repay you at the maturity date (e.g. in 10 years’ time). In the meantime, you receive interest payments (“coupons”) periodically – say, once every 6 months. 

For many investors, this asset class is an attractive option when building a portfolio. Yet what are the different types of bonds, and how do they work? How can bonds feature within a wider investment strategy? Let’s turn to these questions below.

Types of bonds

Bonds can be divided into various different categories. First of all, there is, of course, a lending risk for the investor which may be lower/greater depending on who is asking for the money. This is where credit agencies come in – such as Standard & Poor’s (S&P), Moody’s Investor Services (Moody’s), and Fitch IBCA (Fitch). These companies “rate” different bond issuers to indicate the level of risk involved for investors. For instance, a “AAA” rating is considered the best, whilst “C” rated bonds are regarded as higher risk (and so are often called “junk” bonds”).

Secondly, bond issuers can be divided into corporate and governmental. The former are issued by companies and the latter by national governments. Neither is inherently more risky than the other. Indeed, certain companies may have a better bond repayment track record than many governments! The major difference is that Governments can print money or raise taxes to repay debt, whereas Corporates cannot. Bonds can be bought individually by investors or collectively, via bond funds. Most retail investors will purchase the latter when including bonds in a portfolio.

Finally, bonds can be classed either as “normal” or “inflation-linked”. An illustrative example can help show the differences, here. With the former, suppose you bought a 30-year bond in 1998 for £100, with a 5% coupon (paid twice per year). In 2028, when the bond matures, you will get your £100 back and, twice per year in the interim, you get a fixed £5 coupon. However, with an inflation-linked bond, differences would include the coupon rate (i.e. it would be lower) and the semi-annual coupons would rise/fall with the rate of inflation. When you get the principal back in 2028, moreover, this will also rise with inflation so you get your £100 back, in “real value”).

Bonds & investment strategy

These features raise a number of additional questions for investors. What percentage of your portfolio should comprise bonds (versus, say, equities)? Which types of bonds should you put inside? Here, two crucial factors are your risk tolerance and your investment horizon.

Concerning the former, if you feel highly averse to the idea of your investments going up and down a lot in a short period of time, then bonds can hold a lot of appeal. Whilst stock market investments tend to offer better (i.e. higher) long-term returns, they are often volatile in the short term. Bonds tend to be much more stable in the short-term. 

On the latter, you need to consider how long you plan to invest (and how this relates to your goals). For instance, if you are nearing retirement then you likely want to focus more on wealth preservation rather than growth. Moreover, you may also want some of your portfolio to produce a regular income. In which case, bonds can be an attractive option. However, if you are early in your career and want to build wealth over, say, 30+ years then holding lots of your portfolio in bonds may not be a “bold” enough investment strategy. Instead, high-growth-potential equities may be a better route to reach your goals (assuming you are happy with the risk involved).

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).

We have all been through unusual times lately, with COVID-19 since 2020, rising inflation and now conflict in Ukraine. These – and other – events are having knock-on effects onto the wider economy and markets. Under “normal” times, the “invest vs overpay mortgage” debate is an interesting one – but has this new landscape changed things? Below, we address this question in light of recent trends and developments.

Putting excess cash to work

Interest rates on cash savings accounts have been at historic lows for some time now. It is hard to beat 1% on easy-access, for instance. Those with spare cash, therefore, typically have two other options: repay debts or invest. The first is almost always worth prioritising if the debt has a high interest rate, such as personal loans and credit cards. However, with a mortgage, it is not always clear whether the savings you’d make from overpaying would beat the returns you could get from investing. Here, you need to factor in the prevailing economic environment.

Overpaying vs. investing in 2022

The main incentive to overpaying your mortgage is that you repay the debt faster, meaning that you can own your home outright, faster. If this is your primary goal (rather than building wealth), then this is understandable. For those whose main objective is to grow their wealth, however, the question of overpaying vs investing relies heavily on interest rates and inflation.

In recent years, mortgage rates have been historically very low. In fact, in 2021 some lenders were even offering sub-1% deals to certain customers. This means less interest for borrowers to repay over the mortgage lifetime. Overpaying on such a deal would likely be far less optimal compared to investing, where annual average real returns of 5% – or more – should be realistic.

Lately however, mortgage deals have been getting more expensive. This is mainly due to the Bank of England (BoE) raising its base rate, twice (from 0.10% to 0.25% in late 2021, then up to 0.5% in early 2022 and more recently up to 0.75%). Since lenders set their rates above the base rate, this has already led to several deals getting pulled from the market. 

The average 2-year fixed loan now sits at 2.65%. For a 5-year deal, the interest sits closer to 2.88%. For many investors, it may now be more of a toss-up between overpaying the mortgage and investing – especially for those with a more cautious risk appetite (leading to a preference for assets with a relatively safe, but low, level of return – like bonds).

Wider questions to consider

Here, it is important to remember that you do not necessarily have to choose between investing and overpaying a mortgage. It is often possible to do both. Yet it helps to ask yourself: “Why do I want to invest?”, and “Why should I overpay my mortgage?” This can help you shed light on the right course for your financial plan.

First of all, check whether you can overpay your mortgage. Some lenders may not let you, and most put a cap (e.g. 10%) on how much you can overpay. Those on a standard variable rate (SVR) can usually overpay as much as they like, but SVRs are usually more costly than fixed rate deals. Secondly, consider the horizon in front of you. How long do you have to invest until you might need the money (e.g. during retirement)? How many years until your mortgage is paid without making extra payments?

For instance, if you are near your mortgage end, then the advantages of overpaying usually go down. This is because interest forms a lower proportion of your monthly repayments. As a rule, therefore, it is usually better to overpay a mortgage earlier in its lifetime. Moreover, if you only have, say, 5 years to invest, then you may need to focus on lower-risk assets which offer lower potential returns. 

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).