Friday, July 21, 2023

Mitigating Economic Uncertainty through Planning and Diversification

The movements in the financial markets reflect the confidence, or lack thereof, within the economy right now; how far will interest rates climb? What fiscal policy will be implemented and by whom? How quickly will supply side issues resolve? Will the 1.1 million job vacancies in the UK continue to drag company performance?

The FTSE-100 Index below illustrates how this investor sentiment has affected the prices of UK stocks and shares over the last year.

FTSE100 Index as at 14th July 2023

With people’s life savings, goals in life and retirement plans reliant on the value of the assets they hold, this sort of unpredictability can be a cause of real anxiety.

But the shape of this graph and the wider ‘boom and bust’ nature of the economic cycle mean that key principles of patience and planning reward the investor. Each modern-era financial crash – recession in the 80s, ‘Black Wednesday’, the ‘Dot-com Bubble’, the ‘Credit Crunch’ and the COVID-19 slump – has been absorbed by the organic growth of the UK economy over the full cycle. Those able to ‘ride-out’ the volatility saw capital appreciation over the longer-term, at the expense of suppressed values on paper only in the short term. Conversely, those that encashed their investments during such times did so at a reduced value and exposed the cash generated to the continual cost of inflation. Furthermore, investment inflows increase as confidence is restored and many will buy back into the markets once values have recovered – essentially selling low and buying high. In fact, for those fortunate enough to hold excess cash during periods of downturn, the buying opportunities can be very attractive. Of course, no one knows where the bottom of the market will be, and this generates concerns over timing.

Planning is an important part of the investor’s tool kit and diversification is a key component in de-risking and seeking capital growth. Choosing complementary assets and conducting regular review [ideally with your IFA] can reduce timing risk, mitigate inflation risk, and maximise your wealth position.

By way of an example, an investor with a diversified portfolio that required monies at the peak of the COVID-19 slump could use cash sums or bonds – these assets were largely unaffected by the pandemic, whereas the value of UK equities fell by circa 30%. A year on (April 2021), UK equity values had largely recovered, and many global stocks had seen substantial growth. In this scenario, holding non-correlated assets enabled an investor to sit tight during the downturn and benefit from the recovery/growth of equities over the cycle.

At present, cash sums are being eroded by the spiralling inflationary pressures (the “cost of living crisis”) and global equity markets are on the back foot. Again, diversification supports investors in this climate; for instance, the private sector is providing infrastructure and renewable energy investment which is crucial to the strategic, economic, and political outlook of the UK. This alignment of society’s preferences and ‘UK PLC’ has generated ‘tail winds’ in this market segment and the forecasts for performance are encouraging. In addition, property funds have averaged over 5% per annum throughout the uncertainty and those with privately held property have historically benefitted from the house price boom.  

It is also worth mentioning the income that many equities will produce by way of dividend, this further value add is often overlooked when people review stock market performance.

In summary, accessing a range of underlying assets and therefore a breadth of risk and return profiles can reduce the risk of investment and boost your wealth position over the longer term. Tax incentivised investment can also be a useful feature in a portfolio and I would recommend a plan which incorporates a mix of the following; ISA/LISA/JISA, pension, Venture Capital Trust, Enterprise Investment Scheme and Business Relief qualifying assets.

If you would like to talk to an IFA about your investments, please feel free to contact me at the office – enquiries@swlaw.co.uk or 01752 205205. Alternatively, SWLaw host a free financial and legal clinic at the Watermark Centre in Ivybridge between 2pm and 4pm on the last Tuesday of each month.

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