Client Update
Rocky time.
Without wanting to cause panic or being overly cynical, I am talking to many people who have been in the industry a similar amount of time and after decades of seeing markets bounce around and seeing world economic challenges, now is starting to feel like one of the worst of times.
Now that’s a feeling not reality and that’s our problem as advisers and investors, to stay dispassionate during the down times.
This feeling I believe is born from the series of financial right hooks we are getting. Pandemic, inflation, interest rates, war, fuel crisis, supply and demand issues. To name a few.
Normally we have one or two, but the cascade of effects now means we have many. That’s why we feel so beaten up by it all.
But is it really so bad?
Well yes and no. The reality is that the Spector of over 10% inflation is not great, as in itself that will destroy our deposits. I have clients who have on paper made market losses and we all await recovery of those, but £100,000 in the bank worth £90,000 next year (because of inflation at 10%) are losses that are never coming back. So, we need better interest rates. Having said that, what will increased interest rates bring? Will the house market crash? Potentially if interest rates become too painful for Mortgage borrowers this could hit builders and developers share prices and unemployment. Will this also cause recessionary pressure as people stop spending? Will it stop companies borrowing to grow or stop them spending as they keep a bigger reserve to defend growing debt payments?
Doom and gloom but this is what we see every day – this eb and flow of opportunity and negative pressures, that creates the movements in the markets, but that ultimately create the opportunity to invest.
So do we feel like Rocky on the ropes after each financial right hook causes further volatility and much of it negative at the moment? I think that’s a resounding yes.
So, what do we do?
Well obviously, panic is one option. We are seeing in the wider market out flows from some sound funds that have not done anything wrong, but just for now have not performed in line with their peers. This is understandable and if you look at where they invest and why they invest as they do, it’s really not time to panic and sell over a short-term blip. In fact, after each time, they have suffered this before they have then provided stellar returns in the following years. Part of this big rally is that the people who panic and ask for money back allow the fund manager to get rid of any bad news in the fund as far as holdings they would like to sell, so effectively the ones who leave help the ones who stay…
The opposite to panic is an unemotional review of the position we are in. Do we want to crystalise a loss and run to cash when inflation is so high? That’s an easy no. Do we want to crystallise a loss and run to cash or down risk, missing the recovery when it comes? Another no.
When it comes to the markets what have we seen? Well if we look at the DOW, its 57% up over 5 years, but in March 2020 it was below the starting point in 2017. It’s the same with the FTSE 100, which has provided 24% over 5 years at this depressed point, and it equally was below 2017 prices in 2020. So, we know that if we are patient we have always won over the medium to long term. We know investments have outperformed cash and inflation over the medium to long term and we know that many of the challenges now offer advantage in the future. So unemotionally its nothing to worry about, but we do appreciate and empathise that you are all suffering Rocky times and want to see some positive news, so do we.
So, the answer to what should you do? Patience is a virtue in investment terms, so for what you have just sit tight. It might be time to move some cash to Investments if it’s not going to be required for say 5 to 10 years. There are opportunities in investments and some from time-to-time opportunities are available in structured products at the moment. Take advice and consider the options unemotionally. If you need your adviser to support you through this reach out to them.
Tax planning, depressed values can be a good thing.
For those with big pension funds crystalising benefits now might help with lifetime allowance problems or for income planning taking out pension and popping it into ISA might mean less tax paid. If you have a reasonably large pension fund this could be a big win for you. The caveat is it needs to benefit in tax as time out of the market to create this opportunity might cost you.
Gifting assets now might mean less Inheritance tax potentially paid.
Moving cash funds to business property relief schemes could reduce tax to pay in either income capital gains and inheritance tax or in some cases all.
These are a few ways that depressed values can help.
So, in summery sit tight or take advantage of where we are and don’t panic. Do reach out to your adviser if you want to plan a more or you need reassurance. We are most certainly at your service.
Best of times, worst of times or just times? Time will tell.
Take care all and we are here when you need us.
Regards Andy.
Andy Brooks
Brooks Wealth
May 6th, 2022