The New Year’s Resolution…
It’s the New Year; the time to start afresh… “I will … finally get fit… or, learn a musical instrument… or, reduce the red wine intake [a bit] … or, review my financial affairs”.
…Perhaps all four if you’re sitting at this office desk with a box of overpriced chocolate truffles!
To see results from your resolution(s), you need to set goals and employ patience; plus remember, each “success” is unique to the individual - I’m not interested in/capable of being a body-builder or a billionaire, but good health and a comfortable standard of living would be great.
Knowing how to achieve certain goals is “easy” – just stop buying cru Beaujolais, Rob! -, but financial stability and wealth accumulation is an area that many really struggle with. Afterall, mortgages, pensions and insurance were never taught to me at school! Instead, learning how to solder a deafening buzzer on a circuit board and how to forward-roll took priority; well, there’s finite time in education I suppose. Thankfully, university and the Chartered Institute to Insurance (CII) filled in my knowledge gap.
So where do you start your saving and investment journey?
A review of your current position and your key worries and principal goals is a logical initial step. This process highlights any problems that may exist, any opportunities and the suite of options available to meet your aims. An individual’s attitude to risk – “investment shouldn’t cause you a sleepless night” – and time horizon are paramount when considering financial plans.
For instance, monies with a known requirement in the shorter term are best in a low volatility area which preserves capital – this provides certainty and peace of mind. Whereas inflation erodes the value of cash and bonds - £100 last October has the spending power of £95.60 today –, so the cost of holding such assets can be costly/inefficient over the longer-term.
In contrast, the FTSE All-share is up over 10% and the Nasdaq Composite is up c. 105% over a 5-year period which includes a series of economic shocks (most notably, the Covid-19 pandemic and the Russian invasion of Ukraine).
Understanding the wide range of wrappers/proposals (ISAs, Pensions, SIPPs, GIAs, EIS, SEIS and VCT) and the main asset classes (equities, fixed income, cash and property) is important when building a financial strategy. Each wrapper can hold a valuable incentive and each asset class provides a different return profile. These elements may be complementary and help to maximise returns and/or mitigate risk.
In the current economic environment, we have witnessed global inflation and subsequent tightening by central banks; the Bank of England base rate is sitting at 5.25% (as at 7th December) following a series of hikes. These rises have provided better returns to savers and at a very low risk threshold; cash rates of 4% plus are available on the High Street and via National Savings and Investments (NS&I).
Prior to the inflationary pressure exerted by input costs and to a lesser extent, quantitative easing, we saw interest rates at record lows – 0.1% in December 2021. This modest rate presented little opportunity to savers without putting capital at risk and subsequently money rushed into equities and property.
With inflation targets of 2%, interest rates are forecast to fall, with cuts anticipated to begin in Summer ’24 if current economic conditions prevail. This dynamic will again ‘force’ investors to put monies at risk, with the purpose of mitigating inflation and growing their wealth position. It means that cash has a short ‘shelf-life’ and that a wider plan is likely to be best practice – we have already witnessed a return to the equities markets this autumn as people shift away from fixed income.
With global asset values as they are, often some way from their peak, there’s opportunity to review your financial plan; it’s about the future opportunities and not historic behaviour. Besides, time and discipline provide the best results.
Happy New Year! I hope 2024’s resolutions are a success!
Rob Cowsill – IFA @ SW Financial Planning
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