Saturday, 10 October 2009

ISA's make the sun shine in October!

A little ray of sunshine in the Chancellor’s Budget of 2009 was the proposal to increase personal investment limits to ISA plans. With no significant increases since Individual Savings Accounts were launched almost ten years ago, this was crying out for attention.

The new rules mean that:

• For the over-50’s it became possible earlier this week to invest £10,200 in total into your ISA per tax year.

• For the rest of us we shall have to wait till the new tax year next April for the enhanced limits.

• In addition it became possible earlier this year to transfer your accumulated Cash-ISA investments into Stocks & Shares ISA plans without compromising your current year’s allowances – attractive given the poor deposit rates currently available.

This is broadly excellent news, as investors have been able over recent years with the old £7,200 annual Stocks & Shares allowance to build portfolios that become increasingly tax-efficient over the years as their ISA allowance absorbs more and more of their potentially taxable investments.

A couple over 50 can now invest £20,400 per year into ISAs. For those of us with that amount of ready funds to invest this makes an extremely attractive proposition but in fact it should have far wider appeal than that. For investors with historic investments into Unit Trusts, Open Ended Investment Companies (OEICs) and even Investment Bonds there has always been the prospect of perhaps morphing these less tax-efficient holdings into their ISAs over a period of years. The recent changes simply allow us to increase the rate of travel in the direction of ultimate tax-efficiency by a factor of 50%. The next tax year will see this freedom extended to all investors.

Most decent providers are allowing existing investors who might have made maximum use of the ‘old’ allowance to take advantage of the increase, but even if this is not the case there is the prospect of an ISA Transfer to a provider who is more flexible, followed by a further contribution to the new limit for those who are not so blessed.

The ISA is here to stay and now offers even greater scope to invest in a highly efficient tax environment. You should speak to your Financial Adviser to be sure that the funds you utilise make best use of these tax advantages and are appropriate to your risk philosophy.

Thursday, 3 September 2009

Is now a good time to invest?

I often attend presentations by Fund Managers and other Investment Professionals, usually in the hope that I shall find some ‘inside track’ of knowledge and insight that is going to make a difference. Most times I come away wondering what I have learnt that I didn’t already know!

The Specialist takes great pains to explain all the positives that underlie the current situation and just as you are beginning to think that the overall message to take away must be a positive one, he goes on to list an equal number of reasons why we should all be gloomy.

All this bet-hedging used to be a great irritation to me until I cottoned on to the bigger picture – Nobody knows what is going to happen and there is in fact no inside track. All we can ever do is weigh up the relative pros and cons and draw our own conclusions.

There are many soothsayers who would have you believe that the recent spectacular rally seen in most developed markets is about to end in tears, matched, funnily enough by as many who would have you believe that the recovery is here and markets will not look back till they regain the highs of a couple of years ago.

My own feeling is that while there is still much to fear, things do look undoubtedly better than they did six months ago. There will, I am sure be more bad news to come, particularly from the Banking and Financial Services sector, but the fact is that an awful lot of the ‘toxic’ assets that we all feared so much have simply been written off already, and cannot be so again.

From the point of view of making investments, the old rules remain as true as ever they were:

• Above all, time will be the investor’s friend. A short term view encourages investors into more risk than they should be taking.

• Diversification is everything – across asset classes, geographical boundaries and fund management groups. Your eggs are invariably better spread across a number of baskets than addling in just the one.

• Last year’s wonder fund or sector could be next year’s dog. Track record can tell you a lot about how things might be in the future, but only if you look over a long enough period. If you can see evidence of how a manager or fund has coped well with hard times in the past then you have a decent hope that he might do so again in the future. A manager who has never had to cope with trouble may not recognise it or know how to deal with it when it arrives.

• Know where your risk lies and make sure that you have it balanced by sufficient low or no risk assets elsewhere – bank deposits, premium bonds and the like are perfect for this. A well considered mix of black and white is usually better than ‘Vanilla Grey’.

• Stay on top of the changes to your portfolio that time brings. Your higher risk holdings will ultimately deliver more growth than the lower risk ones. As a result if you don’t occasionally ‘rebalance’ back toward your original philosophy then it is likely that the aggregate risk profile of your holdings will steadily rise over time.

Markets may now be considerably higher than they were in March of this year. However, even allowing for over-valued banks and financials at the peaks seen in 2007, their levels are still way below where their genuine highs should be, so for the long term, now should still be a good time to pick up decent assets a reasonable prices.

So – Is now a good time to invest? On balance, Yes I think it is, but always make sure you diversify well and keep risk under control. The age-old warning that assets can fall as well as rise in value has taken on a resonance all of its own in recent months. Taking note of the rules above should help in managing those ups and downs.

Friday, 14 August 2009

Where now for the UK Economy?

Where now for the UK Economy?

With France and Germany now officially ‘out of recession’, at least technically, where does that leave the UK? “Better placed to weather a recession than any of our rivals” was the proud claim that Mr Brown felt appropriate some time ago. While there might have been a degree of reason for making such a statement at that time, the passage of the intervening months has not been so kind to us.

* In the second quarter of 2009 the French & German economies both grew by 0.3%.
* During the same period, that of the UK shrank by a further 0.8%.

It is likely that this is in large part a result of the reliance in our economy and particularly London’s on Financial Services as a significant driver of the growth that we experienced during those ‘good times’. With the ever more exotic means that were employed to make money in Banking and its associated areas, the growth curve became ever steeper, leading to the inevitable reversal being steeper and deeper than it otherwise might have been. Indeed, it was one of our banks who rushed to take on the ailing ABN Ambro, thus importing the risk of their failure to the UK. Thus, our European friends can now be seen to be leading us by more than a short head in the crawl back to prosperity.

So is this the way it is going to be?

Well, for the short term I would say probably yes. In the longer term there are some positive signs within the generally depressed mess that we call a home economy. Mortgage Approvals rose for the fifth consecutive month in June. This is a measure of the new lending that has been approved in the retail housing market. If we care to look back over previous economic cycles, it is this measure that nearly always falls as a precursor to a down-turn and equally clearly the one that signals a positive direction change on the way out of the doldrums. Typically we could expect the upturn in mortgage approvals to precede any recovery by six to twelve months, as has been the case in the past.


However, that is not the whole story. Sadly we will still have the unhappy tail of rising unemployment to contend with for some months to come. Again, it invariably happens that the capacity that is being shed within the economy continues to be lost even past the point where technically things are beginning to improve, and as a result I believe we can expect unemployment to continue rising, probably past the end of 2009 and into 2010. Of course the numbers we see published are just data, but beneath each job lost lies a personal tragedy, with fall-out that has implications far beyond that poor person’s immediate financial situation – the holiday that they were going to book but now can’t afford, the new car they now won’t be ordering or the home improvement plans that are now on hold – all of which means money that is effectively being taken out of the pockets of all of the professionals with whom they could be doing business. This is why the true financial cost of unemployment is so difficult to assess, and that is before we even attempt to put a value on the ‘tried and failed’ state of mind it can so often engender. Unemployment is therefore going to be a continuing theme going forward.

Flogging a dead horse?

Another uncomfortable theme will be the effects of taxation. In its blind panic to right the Banking sector, the UK Government has signed us all up for more borrowing than we have ever embarked upon before. Whether or not that was the right thing to do is almost not the issue. What is far more pertinent is that the borrowing has to be both serviced and repaid, something which requires a significant amount of cash on an ongoing basis. The Government is pretty limited as to where this can come from, with the main and most obvious target being revenue it can extract from the general economy. Whether we call it Insurance Premium Taxation, Airport Tax, Parking Charges, Speed Camera Fines or indeed if we are honest and call it good old fashioned Income Tax, we still need a lot of it in order to come anywhere close to that which is needed to service this increased borrowing. As a result there is a very real danger that we might snuff out whatever spark of recovery does exist within the economy currently and prolong the pain. Don’t forget, recessions are not a good time to be putting up the cost of employing staff, the cost of using Public Services, the cost of working, and yet that is the very real situation faced by our leaders as a result of the massive debts we have run up.

This I think is the most destructive influence into the medium term – the fact that the almost insatiable need for cash to service our borrowing may fix us in the rut that we currently trudge for far longer than would have been the case if we were just in a ‘normal’ recession. Time will tell.

Why are Bank profits actually a good thing?

I will end my first blog on a contrary but positive note. There has been much vilification of Banks and Mortgage Lenders recently, and I am not about to spring to their defence. It is true that with still very limited amounts of money being lent relative to the excesses of the past and even that which is available, lenders are making significantly higher margins than they were before. All of this is indeed a rather unpleasant truth when so many people are struggling to pay their mortgages each month. However, ironically it may turn out to be our best hope of a faster exit from the problem I have highlighted above. The Chancellor’s Budget was based upon economic projections that I think will come to be seen at best as naively optimistic, but I suspect that his predictions for the Banking sector might have been overly subdued, in line with the ‘Meltdown & Armageddon’ generally being pushed by our various media. If, as I suspect, the Banks turn out to be making far more money out of us currently than was predicted, then there is a chance that we might actually be able to see returned some of the borrowed Public Money that we advanced them, sooner and in larger amounts than we had expected. This might in turn relieve the pressure on the Public Purse, since it would mean that we were able to repay some of our borrowings without the potentially crippling taxation that would normally be required to do so. Again, time will tell on this one too.

Sam Lever is an Independent Financial Adviser. His blogs are an expression of personal views and nothing more. For Independent Financial Advice in Buckingham and the surrounding area give Sam a call. Please see the website link (top right) for contact details.