Financial Planning Archives - Page 2 of 2

The start of a new year is the perfect time to get your finances in order.

A few simple changes could improve your finances in 2021 and beyond, setting you up for a healthier financial future.

So, whether your finances are in a muddle or you just want to ‘do better’, here are five new year’s resolutions worth sticking to.

1. Create a spending budget

If your bank balance has been getting worryingly low, it’s probably time to take a thorough look at your spending habits.

Creating a budget is a useful exercise whatever stage you’re at in life. And you may be surprised at how easily you’re able to save extra money each month.

The following simple steps can help you create a successful budget:

Work out how much money you take home each month
Add up your monthly outgoings
Calculate the difference

If your expenses are greater than your income, check if there’s anything you could cut back on. We’re not suggesting you scrap all of your little luxuries. However, there may be lots of things you’re spending money on that you don’t actually need, such as unused magazine subscriptions or gym memberships.

If your income is higher than your outgoings, consider adopting the ’50-30-20’ budgeting philosophy. This is where essential expenses comprise half your budget, other expenses make up 30%, and the remaining 20% goes towards savings or paying off debt.

2. Pay off expensive debt

If you’ve racked up a lot of debt, the new year could be a great time to start tackling it.

The higher the interest rate, the more the debt will cost you, so it’s usually a good idea to pay off expensive debts first. These could include credit card and store card debts, unauthorised overdrafts, and payday loans.

Paying off your debts could enable you to save more money for your future, improve your credit score, and reduce any anxieties you’re feeling about your finances.

Some loans come with high early repayment penalties, so make sure you read the terms and conditions before paying them off.

3. Increase your pension contributions

If you’ve got extra money sitting around or recently received a pay rise, it could be worth increasing your pension contributions.

Each time you pay into a pension the government tops it up with 20% tax relief, making it a great way to save for your future.

The chart below shows how quickly monthly pension contributions can add up over time. It shows two £20,000 pensions growing by 5% a year over 30 years. One has £100 paid into it each month, and the other has £300.

Source: Bestinvest

It’s never too late to start preparing for your future. However, the earlier you start investing, the better your chances are of living the retirement you desire.

Research by Which? suggests couples need £27,000 a year to live a comfortable retirement, or £42,000 a year to live a luxury retirement that includes a holiday every year and a new car every five years.

Couples would need a pension pot of around £215,450 to produce enough income for a comfortable retirement via income drawdown, or £298,000 through a joint-life annuity. For a luxury retirement, these figures rise to £502,775 and £695,000, respectively.

4. Invest in a Stocks and Shares ISA

Investing in a Stocks and Shares ISA has several benefits. Your money grows free of Income Tax and Capital Gains Tax, and you can withdraw money whenever you like without paying tax.

This makes ISAs a useful vehicle for holding money that you might need to withdraw before retirement. Money inside a pension can’t be accessed until you’re at least 55-years-old, rising to 57 in 2028.

Additionally, because ISA withdrawals are tax-free, they can be a tax-efficient way of taking income in retirement. With a pension, you can withdraw up to 25% tax-free and the rest is taxed at your marginal Income Tax rate.

You can pay up to £20,000 into ISAs in the 2020/21 tax year. Keep in mind that when investing, your capital is at risk. You should invest with a minimum five-year timeframe in mind.

5. Make a will

Making a will is an essential financial exercise, yet research by Royal London suggests 57% of UK adults don’t have a will in place.

If you die without a will, it could cause immense stress and financial hardship for your family. In a worst-case scenario, your loved ones could inherit nothing and become embroiled in bitter disputes.

By making a will, you can ensure:

Your money and assets end up in the right hands
Your children are cared for by people you know and trust
Your unmarried partner and stepchildren are provided for
Your family can continue living in their home
Your estate doesn’t attract unnecessary Inheritance Tax

Writing a will can give you the peace of mind that your loved ones will be protected long after you’ve gone.

Get in touch

If you want advice on getting your finances in order, we can help. From helping you create a financial plan to organising your pensions and other assets, we’ll ensure your new year is off to a flying start. Please contact us to arrange a meeting.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

The Financial Conduct Authority does not regulate will writing or estate and tax planning.

Hello out there. It’s the weekend again. Where did that go?! I hope you’re all well and safe, spirits up and eager to learn of your next investment opportunity. This week I’m going to take a look at tax and more importantly saving it. It’s topical this week thanks to dear old President Trump and what seems like a great team of advisers he has. $750 income tax for a man of his wealth. Wow! Firstly though, I have a confession to make. The title of this post may be a little misleading. I am no magician and I’m not prepared to be ‘creative’ with the truth – that would be illegal. So, if you are a billionaire expecting me to get you a £750 tax bill this year, you will be sorely disappointed.

For most people out there however, spanning from those with a modest nest egg to those with millions, there is hope. Plenty of ways exist in which you can very legally keep your hard earned cash away from the dreaded tax man. This isn’t dodgy. This is just about making use of the allowances available to each and every one of us.

This list certainly isn’t exhaustive and should not be taken as individual advice, but here are a few of the main ways that you could get a little bit closer to paying tax like Trump…

1. Use your ISA allowance

OK, cash ISA’s offer very little return at the moment. I know. In fact, in some cases if all you can do is cash, you may be better off without the ISA – but only if you have relatively modest savings and don’t invest outside of cash at all. Otherwise, you should consider making use of your full allowance if you can do so. Why? Two reasons.

Firstly, because it’s a use it or lose it situation. You may not think the ISA is worth it now, but the returns will always be tax free (subject to no rule changes). That’s a very valuable benefit for those that have managed to, or are likely to, build more substantial sums.

Secondly, ISA’s can make use of many more investments than just cash. Most offer you a much better potential for return if you are prepared to accept even a cautious amount of risk and invest for a little bit longer. This can substantially increase tax free income.

2. Use your pension allowances and tax reliefs

By using a pension to save for retirement, you’ll also avoid paying some tax. That’s because your pension contributions qualify for tax relief. So if you’re a basic rate taxpayer, you’ll qualify for tax relief at a rate of 20%. Meanwhile, higher rate taxpayers qualify for tax relief at a rate of 40%.

Do you own your own private company? Great news, pension contributions in most cases will count as a business expense, therefore a saving of 19% corporation tax can be made.

You should note that the amount you can contribute to your pension is now limited to £40,000 a year, but your allowance for a limited number of previous years can be carried forward, so where funds exist this can be a substantial win. But this again could be classed as a use it or lose it situation.

Pensions grow tax free too, so they are are a great way to build up a tax-free nest egg for your retirement. That said, once you start to claim your pension income, you will have to pay income tax. Don’t worry! You do get the first 25% of your pot to withdraw tax free and you can structure your income appropriately – more later.

3. Use your personal income tax allowance.

Every one of us currently has a personal tax allowance, a nil rate tax band if you like, of £12,500. If you are part of a couple (that is in a good place I should add!) this presents you with a couple of opportunities to use it!

Firstly, just taking the pension issue a little further, it may be useful to structure some of your contributions to reflect that this allowance can be used by you both when you start to draw retirement income, but only if you’ve got sufficient funds to draw. This could be a useful tool for example if you are both directors of a family company or have excess income.

Secondly, if you are married or if tax and personal circumstances allow, you could transfer any income producing assets to his/her name and receive a nil or lower tax rate by using his/her personal allowance.

This means that for a couple, with the right investments and structuring of contributions to pensions, in retirement you could bag yourself an income of £25,000 before you start paying any tax and this could be drastically increase by also having a properly structured investment portfolio.

You can find info about personal tax allowances here.

4. Use your other allowances – all of which most people have!

Savings Allowance

Since April 2016, savers have been able to grow their money tax free, thanks to the ‘personal savings allowance’. This allows you to earn interest up to £1,000 interest tax-free if you’re a basic-rate (20%) taxpayer, or £500 if you’re a higher-rate (40%) taxpayer. Additional-rate taxpayers don’t receive a personal savings allowance, so if you earn more than £150,000 each year, you’ll need to pay tax on all your savings.

All interest from savings is now paid gross, which means tax will no longer be deducted by your bank or building society. At today’s rates you could have a fair amount invested in cash before you start paying tax on the returns. I would of course suggest that this is a terrible idea given inflation would eat away at your capital quite readily. All is not lost however, as some investment funds offering higher potential returns (with some risk) are also ‘interest’ producing. This means you can structure your investment portfolio accordingly to make use of this allowance.

Dividend Allowance

Everyone has a tax free dividend allowance of £2000 per year. This means that for owners of private limited companies taking company profits as dividend, or investors in public shares receiving dividends this is a valuable allowance.

Taking regular dividends over time from an income producing share portfolio or share based fund portfolio can add a healthy amount onto your retirement income. These could be phased into ISA’s over time, further reducing tax and giving you a slice of the profit from the great companies of the world. For the well informed investor this strategy is a must.

Capital Gains Tax Allowance

You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount). The Capital Gains tax-free allowance is £12,300. This gives you the opportunity to purchase investments with readily available capital at any time and then phase them, as detailed above, into more tax efficient environments such as ISA’s.

This also gives you the ability to realise amounts of capital for one off expenditure, such as those kitchens, cars and cruises!

So what now?

OK so that’s it. Nothing hard there at all?! But even with some of the more experienced savers and investors out there, in most client meetings I can usually manage to save some tax. It’s all about structure and it’s all better off in your pocket than with the tax man.

If however what you’ve just read means nothing to you, but you have pensions and other assets that you’ve worked hard to build over time, you could probably use some advice. Structuring your future wealth and income properly could quite literally save you thousands and I always find it is well worth it.

I appreciate some of you may like to see this in practice, so at the end of this post I’ve added a case study example. It’s an easy one I know and I fully appreciate that everyone is different and the world is not ideal. So why not drop me a line? I am always on hand to answer any questions you may have – just email advice@agileifa.co.uk or use our contact form and we will gladly contact you.

Thanks for reading . Until next week.

Chris @ Agile

Case Study David & Rachel, both 66. Target after tax income – £30,000.

David and Rachael are ready to retire, they have just celebrated their 66th birthdays. They each have money purchase pension pots, David has a sum £200,000 whilst Rachael has £150,000. Their children left home a while ago and since then they have done a great job at saving. They also inherited a small amount from parents. Having managed to fund ISA’s to some extent for a number of years they recently decided these should be invested rather than held in cash given terrible cash rates. They are currently worth £75K each. They like to keep a cash buffer too, so have £50,000 in a savings account paying 1%.

Knowing that their spending habits will change now that they are no longer working, Rachel set out to create a budget that would fit their lifestyle in retirement. They no longer have a mortgage so it’s really as simple as day to day spending, the occasional holiday and social. This comfortably comes within £2500 per month.

The zero tax solution…

	David	Rachael	Tax	Notes
State Pension	£9,110	£9,110	£0	Within Tax Free allowance
Pension Drawdown Income	£4,520	£4,520	£0	Uses remainder of personal allowance as taxable income and includes the tax free cash available on the payment.
ISA 3% Withdrawal	£2,250	£2,250	£0	Income and capital gains both tax free
Savings Interest	£250	£250	£0	Within personal savings allowance.
Total Income & Tax	£32,260		£0

This allows them to live comfortably to their lifestyle and have money left in pensions and investments for the ‘big things’. Of course, if you are younger than state pension age great – just replace it with private pension withdrawals. They’ve even got a little Brucie Bonus on top of their desired 30K. Happy days!

Hello again readers! I hope you are all well and getting to grips with the second new normal. Over the last few months we have been trying to ‘control the virus’ and I have been trying, probably with more success, to ensure that this temporary blip in the road doesn’t lead to irrational investor behaviour. What I’m failing at is the urge to link these posts to coronavirus. I’ll stop soon I’m sure, but for now, here’s another insight that could help you to use the impending further lock down to take positive steps for your financial future. This week the topic is inflation, the silent killer of your nest egg.

What’s your number?

Everyone should have a number. For everyone it’s different. What number? Your number. The one that represents the amount of money you’re going to need for retirement. The one that let’s you answer ‘yes’ to the question ‘am I going to be OK’? The number is the answer to the sum of your life. It’s based on the lifestyle you want in the future and have become accustomed to after your years of toil. So what if slowly and silently the value of the money it represents was siphoned off? So sneakily and slowly that you never realised, until all of a sudden you hit 70 and find that your three weeks in the Caribbean have turned into a caravan in Cleethorpes?

There are a few predators that can deviously devour your retirement nest egg if they aren’t kept in check. Some of these you can control, such as the charges on your investment portfolio. There are others such as tax, which you can control to a certain extent, by making use of your tax efficient allowances such as ISA’s and pensions. Don’t worry, I intend to delve deep into these topics on future blog posts so sit tight! For today however, I will concentrate on one killer that you unfortunately have absolutely no control over – and that’s inflation.

Headline returns

Every investor hopefully wants to generate real returns after charges and tax and should do everything in their power to keep these as low as possible. This is just a no brainer. But what else? The media spends much of it’s time giving us headlines and never more than over the last few months. I’ll give you two examples of this.

Savings rates

We are always aware of changes in the Bank of England rate and the subsequent change in savings rates. During the first few weeks of recent government support for firms and individuals, some of the best rates around could be found at National Savings. I never thought I would be saying to clients that for funds held in instant cash (and this should only be your emergency funds people!) they should use premium bonds. Alas, the amazing return of 1.4% has now come to an end and has reduced to a mere 1%. It was only kept high because the government needed your money. Now it appears they want it less and last week has seen commentators jump all over this.

The markets

For the investors out there (and even if your only asset is a workplace pension you are an investor) you may have been paying more attention to the level of the stock market. We have recently had daily headlines of ups and downs, sometimes in the region of 9%. You always hear about the downs more than the ups! Of course you shouldn’t have been giving this more than a passing glance. These are temporary falls. If this ever isn’t temporary, capitalism will have failed. We will have much more to worry about.

For the financially informed, the stock market (and by this I mean global businesses) represent the best long term return available. You just have to be well behaved and accept the ups and downs, but I invite you to look around you right now. You are surrounded by everyday products that represent your support for global businesses. Do you plan to stop buying things? Do you think anyone else does? Why wouldn’t you want your share in the profit of all of our spending, magically compounded over time? I’ll leave that thought with you.

Inflation should be much more of a worry for you now, but we don’t tend to spend a lot of time talking about inflation rates. BBC and Sky news don’t show us a lovely inflation graph every day, but they should. Why don’t they? Because it’s not a headline, it’s just there every day, slowly and sneakily stealing the buying power from your wealth.

Inflation isn’t like it used to be

The 1970s to the 1990s were a time of high inflation, but by and large this has been off the table as an issue for investors since then. Just have a think back to this time though. In 1990 the rate of inflation was a whopping 9.46%, but if you were savvy you could get interest on a bank account of 14%. That is a real return. From cash. Who would believe that now! Let’s take a look at today. We have an RPI inflation rate of 1.5% and the most you can get from a bank account (if you are lucky) is 1% and that’s for premium bonds or locking your money away for a lengthy amount of time. The majority of cash accounts now pay next to nothing.

I refer to RPI specifically, because this is the rate of inflation more related to the things we spend on a day to day basis. You may also hear the term CPI also used. Why is this important? CPI usually measures lower, but RPI is your main concern! Confused? Check out this handy ONS explainer.

Why you should be concerned

A lot of savers these days are holding large cash balances in the hope of riding out current market volatility. The problem is, with the return on cash hovering around 0% in nominal terms and -1.5% in real terms, this puts investors in a pretty deep hole. If you believe the inflation predictions this will only get worse.

The reality is unless you are getting over 1.5% net (current rate of RPI) then you are guaranteed to lose money. So, if you’ve got your maximum £50K in premium bonds this means a real loss per year from now of at least £250. This may not seem so bad to you. But if your remaining 50K is paying no interest at all, in total you are losing £750 a year in real terms. £100K in a normal savings account paying nothing? You’ve lost £1500.

Inflation is by far the biggest investment risk over your lifetime

Take a step back and say to yourself. “I put my money in the safest place I thought I could and I’ve lost a grand.”

Does this sound mad? Are you hearing yourself right? Yes, you damn well are.

This is money that would and should have been spent on you. It was part of ‘your number’ and was for whatever makes you happy. It’s been stolen. It hasn’t been taken away from your balance on paper, but ‘your number’, that amount you need for a great life, just went up. Same difference. This is the wrong kind of compounding, the reverse of what you have become accustomed to.

The answer

So, what can you do about it? This is very simple in principle. You can have a proper financial plan. A plan which carefully considers your current and future lifestyle. One with a carefully selected set of investments designed to provide you with access to capital and income exactly when you need it. A plan which includes a long term investment strategy that can allow your nest egg to create real returns. It should pin down and focus on what you want out of life and make certain that you’ll have ‘your number’.

It doesn’t matter where you are in your financial life or where your capital is invested at present. A plan is a mandatory, crucial and responsible thing to do if you want to ensure the continued prosperity of your family isn’t pilfered by inflation. If you’re thinking about getting something together you can find some things to think about in our retirement blog post.

The best time to make your plan was 20 years ago. The second best time is now.

Thanks for reading.

Until next week…

Chris @ Agile

I’ve been trying to think of things you might associate with the number six. Six eggs. Six pack – ha I wish! Six geese a laying. Six of one and half a dozen of the other. Some readers, I’m sure, will remember spending a sixpence in their younger years, otherwise known as a ‘tanner’. Given that’s the number of the now, we should all try and remember it somehow.

I wouldn’t want any readers to inadvertently breach the new rule of six and bag a £100 fine. That would be a terrible move for the health of your finances and the nation. Even if you think that’s a price worth paying to visit grandma with the kids, or the local rave if that’s your thing, I wouldn’t recommend it. So, in order to keep the number firmly on your mind, here are six things to (potentially) avoid if you want to maintain healthy finances for a lifetime…

1. Slacking on saving

Most people tell me that they have managed to save more recently, perhaps more than ever. We obviously haven’t had as much to spend our money on! Holidays are a risk, there was no point in new summer clothes and getting out and about to shop or socialise has been much more of a chore. But as the new normal starts to materialise, we are all going to be compelled to loosen the purse strings a little.

It doesn’t matter how rich you are, your fear of missing out on the best phone, best car, best clothes and other important (?) luxuries can have a serious affect on financial planning for the future. You may have heard the wise Chinese proverb that says “The best time to plant a tree was 20 years ago. The second-best time is now.” Well that pretty much applies to saving too. While the best time to start saving may have been 20 years ago, don’t panic. There’s plenty of time to control the FOMO and direct some of your cash into a long term savings plan.

I’m all for having a great lifestyle now, but as humans we are compelled to black out the future. Thinking of today and putting off until tomorrow creates one thing – uncertainty. It’s my job to remove it. So read on…

2. Prioritising other people

Only you are responsible for your financial future. That’s it. Fact. There are fewer final salary pension schemes these days. The state pension gets further into the future by the year, and if you haven’t already, I advise you to check when you will get yours here. To top it all off, your company pension usually needs to be invested with care and diligence in order for it to provide you with the retirement you deserve. That’s because it’s got risk attached to it and guess what? The risk is yours.

Why then do people often set priorities that are the total opposite of good financial planning? I often see people paying tens of thousands for children’s education, weddings, house deposits, cars and so on. Are you creating a future problem?! Yes, if you are forced to move in with those kids to survive in later life or if your holidays move from Barbados to Blackpool!

I’m not saying that you shouldn’t help out the kids, far from it, but the ‘bank of mum and dad’ needs a prudent manager. One that can put the outlay into the context of your wider financial planning, make sure it’s affordable and won’t affect your future. There are ways to fund education, such as student loans. There are government incentives to fund housing, such as help to buy. Then there are of course the more traditional ways to fund this stuff like good old fashioned responsible saving… theirs I mean. These options can all be exhausted before your nest egg is.

3. Declining to defend

“It will never happen to me.” Well maybe it won’t, but as we are all too aware these days, it can and will. No-one knows how or when. That’s why you need to consider two key things that can soften the blow when disaster strikes.

Firstly, you need an emergency fund. A few months expenditure in a relatively accessible place that can help you deal with a disaster. If you lose your job this will give you some breathing space. If your boiler packs in, you need the money to sort it.

Secondly, you should consider insurance to cover anything that can’t be paid for with your emergency funds. If you will eat into your retirement savings to fund a disaster, such as loss of income or in the worst case due to a death in the family, then it should be covered with insurance. Why? Because if it isn’t covered and the worst happens your retirement could end up looking much less rosy.

Yes you will pay a monthly premium and it’s a cost. Put that cost into the bigger picture and in the majority of cases, if something does go wrong, it will be a much lower cost. You don’t want to affect your retirement through spending your nest egg. You shouldn’t be forced to damage your health further by the need to work to pay the mortgage. Cover it.

4. Selling not staying

What is a ‘paper loss’? Let me explain. Let’s say you buy a house for £300K and then 6 months later it’s valued at £250K. Have you lost £50K? No. You still have the house and the loss is on paper. You’ve only made a loss if you sell the house!

This also applies to investments. Often when investments fall in value people panic, their gut instinct tells them to sell and without someone (like me) to steady their nerves their paper loss turns into a real one. What’s more, they typically then try to time the markets, miss out on gains and are left in a much worse position. Do this a few times in your investing life and your financial plan will catch more than a cold! You can read more in my post on timing the investments markets here.

The main thing to remember is that you should only be selling investments to create cash that you will absolutely need in the short term. Otherwise sit tight and do absolutely nothing!

5. Living too much life

We all become accustomed to a lifestyle. It’s inevitable that as we hopefully increase our income we will use some of that to enjoy the finer things in life. However, once you’ve got this lifestyle you are going to want it to continue, for life.

The problem is that one day you are going to want (or need) to slow down a bit. Less work means a loss in income and that needs to be replaced. That’s going to have to come from savings or pensions, both of which need to be contributed to now.

Some of you may have heard of a famous investor, the one and only Mr Warren Buffet. His quotes get banded about quite often but always aid good financial planning! I make no apologies for highlighting the following two…

“Do not save what is left after spending; instead spend what is left after saving.”

“Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date.”

Thanks Warren. Enough said.

6. Passing on the professionals

This can be a big problem. There’s a reason why we use professionals to do jobs we think we might be able to do ourselves. My oven recently decided to start indiscriminately burning everything to a crisp – so I bought a new one. It was lockdown, it could not be fitted by the well known appliance firm for health reasons and to top it all off they would only leave it at the bottom of the drive. “OK Chris” I said to myself, with the oven up the drive and steps, two coffees down and much head scratching later, “you can do this.”

I enthusiastically began work removing the old oven. Three hours and many expletives later I had finished the whole task. Along the way there was an argument with my other half re positioning, the unnecessary removing and then refitting of the cabinet housing and the dislodging of the gas pipe to the hob. After the final screw had been turned and the oven was proudly in place, I found the protective plate, to be fitted to the electrics at the back, right there on the kitchen side. This was as well as all the other minor issues, you know the ones, “where is that screw?”. You get my point. I’m a great financial planner but I’m terrible at fitting ovens. This would have been a safer and shorter job with a pro.

A less stressful alternative…

Many people go it alone when it comes to financial planning, but often they don’t know what they don’t know. As a result, they can’t fix what they don’t see. Like the oven debacle, it could cause much stress, mistakes and in the case of financial planning , retirement doom. Luckily I could hear and smell the gas. You can’t hear and smell lost investment returns.

In client conversations I often uncover blind spots in estate planning, tax and investment strategies that were hiding in plain view. That’s as well as acting as a great sounding board for all of the financial decisions that get thrown at me, whilst always making very clear the effects of these on the longer term plan.

A good financial planner can serve as a guide to help you see your blind spots and help you avoid sabotaging your financial future. It’s about helping you make the right decisions and avoid costly mistakes. If you’re thinking that’s a great idea, I know a good one.

Thanks for reading.

Until next time…

Chris @ Agile

A common saying in financial planning is “it’s about time in the markets, not timing the markets.” But why is this?

When investments start to fall I often take calls from clients who are rightly worried and want to try and time the market. Some reassurance on how markets operate can often put their mind at rest. In this post I’ll take a look at why timing the market is something I would rarely recommend.

The ups and downs

Markets carry a lot of unknowns.

While steep falls can be unnerving, it’s important to bear in mind that ups and downs are actually a good thing. Short-term volatility is the price you must pay for the chance of higher long-term returns. Extremely low volatility is worrying – it often suggests investors are being complacent.

Short-term market movements are often the result of changes in sentiment – how investors feel about the stock market. You need a crystal ball to predict this! Particularly recently, we’ve seen volatility on a daily basis.

This is in contrast to long-term market movements, which are the result of changes to companies’ fundamental worth. This is more predictable.

What is timing the market?

Nobody I’ve ever met wants to lose money, so it’s natural to feel uneasy when markets move significantly. This is why some people suggest trying to time the market.

Timing the markets involves trying to second-guess the ups and downs in the hope that you will buy when prices are low and sell when they are high. This can be lucrative if you get it right consistently, but this is very difficult to do. Getting it wrong means locking in losses and missing out on gains and I rarely find this strategy goes well.

Selling out of volatile markets

Some people prefer to sit out during periods of volatility, waiting for conditions to improve. This could be by selling all of your investments or holding back from investing new money. I’ve had more requests for this, particularly political issues such as Brexit or the Covid-19 pandemic causing stock market volatility. I don’t believe this is a good idea for most people. Here’s why…

Missing the best days when timing the market

Not only is timing the market difficult to get right, it also poses the risk of missing the ‘good’ days when share prices increase significantly. Historically, many of the best days for stock markets have occurred during periods of extreme volatility and straight after falls.

Anybody who pulls money out in the early stages of a volatile period and particularly after a fall could miss these good days and will be locking in losses. For instance, between May 2008 and February 2009 in the depths of the global financial crisis the MSCI World index dropped by -30.4%. By the end of 2009 it had bounced back +40.8%.

The risk of inflation when timing the market

Inflation is a risk when keeping your money out of the stock market. It’s power can be seen in the steady increase in the price of goods – from a pint of milk to a brand new car.

When your money is kept in cash, it will not keep pace with inflation. You won’t lose money on paper, but you’ll actually be losing in ‘real’ terms via a loss of spending power. Investing money outside of cash has the potential to outpace inflation and give you a ‘real’ return over the long term.

‘Time in’ the market is important

“The best time to plant a tree was 20 years ago. The second best time is now.” Chinese Proverb

The quote above also rings true for investments. Instead of trying to time the market, spending more ‘time in’ the market is likely to give you better returns over the long term. At Agile, our investment decisions are based on what works long-term, rather than short-term market noise.

This does mean experiencing the ‘rough with the smooth’, but markets and wider economies have a tendency to go up over time. This applies to everything from share prices to the price of goods.

The following chart shows the long term performance of the FTSE World Index, FTSE All Share Index (UK), UK Retail Prices Index and money market cash. Look around you right now, I guarantee that you are surrounded by products of companies who’s shares will be found in some of your pensions and investments. It might not be surprising, therefore, that global shares have been the better performer. This of course cannot be guaranteed to happen again in the future.

The chance of losses reduces over long periods of time

Although the past can’t be taken as a reliable indicator of the future, investing for longer periods of time decreases the chance of overall losses. On top of this, it suggests that short-term stock market volatility tends to cancel itself out over longer periods of time. This gives the possibility of more consistent long-term returns.

Compounding is your friend!

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Albert Einstein

One of the reasons that long-term investing has the potential to deliver such great returns is the power of compounding. It’s essentially the snowballing effect of your returns generating more returns over time.

It is mainly seen through the reinvestment of dividend payments into more shares – to subsequently receive more dividend payments and buy even more shares. However, you can also see its effect when companies reinvest their profits in advertising, more staff or better services and subsequently see their profits increase.

How we invest at Agile…

I believe in the power of investing for the long term, and the key aspects of the investment philosophy are that we…

Take the long view, analysing the long term fundamentals. Timing the market is something we refuse to get involved in!
Use our investment committee to set asset allocations aligned to our clients view on risk.
Independently research the market to find the leading fund managers and review these constantly.
Look to find our investors real returns, bearing in mind effects of inflation, fees and tax.
Don’t let emotions, cognitive bias or short term noise cloud our judgments.
Believe in designing portfolios that have the highest potential returns for a given level of risk.
Find the level of risk that clients are comfortable with, we will never encourage more than is necessary.

If you would like to understand more about how we manage our investments and how we may be able to help you create a long term investment strategy then please get in touch. Alternatively, I’m always happy to give an opinion on how you have things set up. Our initial discussions are completely free, but may just result in a strategy that can stand the test of time!

Thanks for reading!

Chris @ Agile