Is It A Good Time To Invest?
In considering the question as to whether now is a good time to invest, I would like to start with a question. Let us suppose that you have bought shares in, say, HSBC, for £10,000. However, next time you look at them, they are worth only £5,000. What do you do? (Let us assume that you have another £10,000).
Do you a) buy more? b) do nothing, or c) sell?
And the correct answer is ...... There isn’t one.
This is a typical question that we use to identify your attitude to investment risk. Whatever you answered is almost certainly the right answer. So, if you would buy more shares because the price is now lower, you are probably an above average risk investor. If you would do nothing, you are probably a medium risk investor, and if you would sell, well you are likely to be a lower risk investor and maybe shouldn’t have gone into this investment in the first place!
Let us apply this to the current market conditions. Obviously, we have seen significant falls in markets in most people’s investments this year, and anyone with an investment will see their money worth less now than it was twelve months ago.
Does this mean that it is a good time to encash? Clearly not, and very few of our clients have even considered such an action.
But is it a good time to invest? Well, to be able to give a good answer to this we need to know what the future will bring, and obviously we do not. An important point, however, is that the stockmarket is a predictor, not a reactor. This means that when you buy a share, you are buying an expectation of future performance of the company. Consequently, the stockmarket tends to take a view six to twelve months in advance of the actual economy.
One conclusion from this is that the stockmarket thinks that the UK will struggle next year in economic terms, a view backed up by many other indicators. However, the stockmarket has already factored this in now, and it is therefore a question of deciding when the economy will recover.
If, for example, you were to think that the first two quarters of next year will be difficult, but towards the end of the year the economy will begin to recover, i.e. a short recession then recovery, then investing into markets now would be a good idea.
Alternatively, if you feel that we are in for a much longer term recession, then stockmarkets are likely to stay low for a longer period.
There is no doubt that markets are currently at a low point. We have already seen some strong recovery, however the full trickle down effect of factors such as the Governments reaction with banks, the election victory of Obama in the US, and reducing interest rates will take some time to permeate.
There is no doubt, however, that the people who make money are those who predict, not those who react. And whatever you do, make sure that your actions are in line with your own attitude to risk. If you’re not actually sure what your attitude to risk is, contact us, and we will help you find out.
All of which gives us a very clear cut and incisive answer to our question, is it a good time to invest? – probably!
Light Amongst The Gloom
There doesn’t seem to have been too much to cheer about recently. Whether it be England’s cricketers, the stockmarket, fear of recession, or the Ryder Cup. Only falling interest rates, the American election and the public humiliation of Russell Brand have given us much to smile about.
So is there anything else that we can take heart form? Well, the falling markets do, ironically, offer us a few opportunities.Use your Tax Allowances
A loss of an investment can be carried forward to offset against future gains indefinitely.
If you have therefore made a significant loss in the current year, such as on a property or personal investments (remembering that ISAs and pensions are not subject to capital gains tax), then crystallising this loss can reduce future tax to be paid on gains.
Useful in itself, but more so if combined with inheritance tax planning. For example, you are able to give £3,000 each tax year as a gift with having no implication to your inheritance tax position. If you had an investment which had reduced to this level, it could be given away, thereby crystallising a loss, which can be used against other gains.
This allowance is per person, and can be carried forward one year. If you had not utilised this last year, then between a married couple you could give a total of £12,000 away, reducing your estate at the same time.
There are other ways of using losses, particularly, for example, on qualifying furnished holiday lettings, which can be offset against all types of other income.
Tax relief on pensions is extremely generous, and is worth reiterating. A contribution of, say, £100 will be grossed up by 20%, thereby £125 would end up in your pension fund.
This gross figure is then used to extend your basic rate tax band, so a higher rate tax payer can then reclaim a further 20%, or £25. This means that, for a higher rate tax payer, for £100 pension contribution, £50 of tax relief is relieved, effectively 50%.
Remembering that pension funds do not pay capital gains tax on growth, investing into the markets through your pension fund may well be the most effective way of tapping into undervalued shares (see separate article on this point).Gifts From Your Estate
A gift our of your estate above the annual allowance (£3,000) is likely to be a potentially exempt transfer (BET), up until they are seven years away from your date of death. However, any such gift above the nil rate band (currently £31,200) is still likely to be caught by a tax bill. If you have an asset, therefore, that has dipped below this threshold, now may well be the time to be undertaking estate planning.Conclusion
This is just scratching the surface of some of the tax ideas that we can help you with in conjunction with our partners and expert associates in some of these areas.
New Ovation Investment Service
As some of our clients know to their chagrin, insurance companies in general are not best known for their efficiency.
At Ovation, we have been battling such inefficiency for many years, and are always looking for ways in which we can complete our activities quicker and more accurately.
We are therefore very excited in a particular area of our investment administration which we are looking to thoroughly revamp. This will involve placing all our clients investments through one provider, a ‘wrap’ platform, which will allow us to take much greater control over certain administrative tasks, such as switching and encashments.
It will also lead to significant cost savings, as we will be able to gain bulk dealing discounts.
We are therefore taking this opportunity to completely review our investment proposition. Full details will soon, however at this early stage it appears that we will be able to:
- Provide real time valuations through a member log in through our website
- Reduce initial charges on investments, down as far as nil in many instances
- Deal with switches and encashments ourselves, rather than having to rely on insurance companies
- Change our charging structure, increasing the annual charge, but eliminating many time cost charges
This overall package will not only make our investment service much more efficient, but also more cost effective.
I will write to you again very shortly with full details.