Staying true to financial planning fundamentals
Given the shockwaves that hit the markets and media since last week’s mini-budget, it is easy to feel worried about your financial position. At Holden & Partners we are keeping in mind the fundamentals of financial planning and staying disciplined, with the focus on helping you achieve your longer- term objectives.
Control what can be controlled
Although investment returns cannot be controlled, there are simple steps you can take to improve your financial position and give yourself the best chance of meeting your financial goals. By investing with Holden & Partners you already hold a well-diversified portfolio that is appropriate for your objectives and risk preferences.
It is also worth ensuring that you use your savings allowances and maximise the amount you contribute to a pension and/or ISA each year. These investments grow tax free, and, in the case of pensions, there is attractive income tax relief on the initial amount saved. A higher rate taxpayer, for example, can contribute £100 to a pension at a cost of only £60. Using all available allowances maximises your returns.
Resist the urge to react
We would encourage anyone to avoid making impulsive decisions and remember the old adage of ‘time in the market, not timing the market’. Recent history shows that reacting rashly to a market shock can be costly. When Russia invaded Ukraine on 24 February, the FTSE All Share fell by 3.5% only to completely reverse that loss and rally the next day. Similarly, when the market reacted to the Brexit referendum on 23rd June 2016 the FTSE 100 fell roughly 5.5% yet it had recovered its losses by the 29th June. For a long-term investor, the best response to volatility is usually to sit tight.
At the time of writing, dividend income is being maintained, whether this continues will depend on the sector, length of any recession and cash position of the businesses themselves. Interest and income from bond and infrastructure holdings also continue to be paid into portfolios.
Check your emergency fund
Whatever the financial climate as part of our financial planning, we always stress the importance of keeping an emergency fund readily available. This should be equivalent to at least three months’ outgoings and held in an instant-access account so that it can be accessed straightaway to meet any unforeseen expenses or in case something more serious happens, such as being out of work for a period. Given the current levels of price inflation and the effect this will have on your regular spending, you should review your emergency fund and consider if it should be topped up.
Focus on your long-term objectives
Although the market reaction to last week’s measures is alarming and the volatility in some areas has been extreme, ups and downs are a normal part of investing. We advocate a long-term view, for example: the S&P 500 – one of the world’s leading equity indices – has delivered positive returns in 32 of the last 42 years despite an average intra-year decline of 14%1.For those saving over multiple decades either to fund their retirement or while they live off their invested capital, the benefit of a well-diversified portfolio is that a fall in any one market will only have a small impact on their overall pot.
What actions have we taken?
As always, at Holden & Partners’ we continue to follow the news flow and market happenings very closely. At the start of the year, we made some key decisions and we believe that they remain the best ones for our portfolios at this stage. We moved to:
- Reduce duration in our bond holdings (the sensitivity of bond prices to interest rate hikes),
- Continue to be underweight to the UK compared to benchmarks and peers and invest more globally
- Reduce exposure to growth stocks and increase exposure to value stocks where possible
- Keep our weighting to alternative asset classes
We will maintain our ongoing review and take decisions accordingly, informing you along the way.
More from the investment team
Our investment team is headed by Investment Director, Paul Dennis, here is his assessment of the latest developments:
Last Friday saw the new chancellor Kwasi Kwarteng give what may go down in history as one of the most destructive non-budgets we will have seen in recent times. Dressed up as an agenda to spur and propagate growth it had the opposite effect on currency, equity, and bond markets.
Whilst announcing the much-needed energy support (which is not an energy price cap) the chancellor went multiple steps further and handed out income tax cuts for all, although those who pay the additional 45% rate will be the real winners. Alongside this, stamp duty land tax had the 0% threshold doubled from £125,000 to £250,000 helping those that are looking to move and can afford a mortgage.
Say what you want about the former chancellor Rishi Sunak however he predicted what would happen if the government ploughed ahead with tax cuts funded by more borrowing. ‘There will be a run-on sterling. The gilt market will be in freefall. And the FTSE will tumble as global investors take fright and sell off every form of British asset.’ Before the chancellor had even finished his speech, sterling had dropped against every currency globally, 10-year gilt yields moved up 10% making it 10% more expensive for the U.K. to borrow the money it needs to function than a few days earlier. In addition, the IMF has questioned the government’s policy, making comparisons to emerging markets. In poker this would be called a full house. The move in gilts and the fall in sterling will unfortunately not help the inflation outlook.
As gilt yields continued to rise (yields move inversely to price, highlighting extensive selling of gilts) through Monday and into Tuesday issues began to rise in the U.K. Liability-driven investment pension market. Early on Tuesday morning there were several very large pension funds unable to raise liquidity to pay liabilities which lead to the Bank of England making their emergency announcement and commenced bond buying to support the market.
Much of this has been caused by global investors’ belief that the U.K. is losing its fiscal responsibility and is therefore a riskier market to invest in and support.
As we continue to find synonyms for the word unprecedented it is important that we try and reassure you that as always, we have been following the news flow and market happenings very closely and we continue to look for opportunities whilst having conviction in our favoured long-term themes. Areas such as efficiency-related technologies, renewable energy, plastic alternatives, recycling, resource efficiency and improved use of technology and food production should offer growth potential. Only last month, for example, the US Congress announced a $369bn spending package to be focused on climate change and clean energy production.