It has been quite a year for stock markets. In the past 12 months shares have soared to record highs; higher than the tech boom and higher than the credit bubble of 2008, and then subsequently shot down again.
But let’s not get carried away. Being disciplined with an investment strategy is important when times are both good and bad, but in some ways the excitement of a rising market makes it harder to do. Here are three things that investors should remember when markets are rising or falling.
Maintain the right balance of investments.
- Every investor should have a carefully considered mix of assets with the appropriate proportions of cash, bonds, shares, property and so on. However, as the value of each asset class rises and falls at different rates, these proportions drift. Maintaining the intended balance is important because your allocation of assets is one of the bedrocks of the strategy that will help you reach your goals. So we rebalance your investment portfolios regularly by trimming the things that have performed well and adding to the things that have lagged. This might seem counter-intuitive, but it helps keep your investment portfolio in the best shape to achieve your long-term goals.
Avoid getting swept along with the market.
- When the market is rising it is easy to be tempted to take more risk to increase your returns and the opposite is the case if they are falling. The pain and uncertainty of a falling market can quickly be forgotten when shares are on an unbroken year-long rally and vice versa. But sticking to your guns and remembering your original goals and strategy are essential – chopping and changing your approach when the market shifts can detract from returns rather than enhance them. Our investment philosophy is not influenced by the cyclical nature of the market; rather it evolves over time as the science of investing evolves.
Guard your gains.
- When money is tight, people tend to watch their expenses more closely than when they are feeling flush. In the same way, some investors can neglect to monitor their fees and transaction costs when markets are rising. Letting expenses slip is like trying to fill a bath with the plug out. This is why we keep portfolio expenses low in good and bad markets.
Sometimes the key to successful investing is simply to remain disciplined; to remember to stick to your well-considered decisions; and to keep your head when everyone around appear to be losing theirs. It’s as important to remember this simple philosophy when markets are rising as it is when they are falling.
The Chancellor of the Exchequer recently announced the biggest shake-up to dividends since Gordon Brown removed the ability for pensions to reclaim the tax credit.
From 2016/17, the 10 per cent dividend tax credit will disappear and the taxable dividend will be the actual dividend paid, rather than a grossed-up amount, which never seemed to make a lot of sense to most investors anyway.
The majority of people will continue to pay no tax on their dividend income because a dividend allowance will be introduced – starting at £5,000 per person.
For dividends above the allowance, new tax rates will apply:
- 7.5 per cent for basic rate taxpayers,
- 32.5 per cent for higher rate taxpayers, and
- 38.1 per cent for additional rate taxpayers.
The net effect of these changes is that:
- Basic rate taxpayers will pay more tax on their dividend income over and above their £5,000 dividend allowance.
- Higher-rate taxpayers save £1,250 on their first £5,000 of dividends and will only be worse off if their total dividends exceed £21,667.
- Additional rate taxpayers save £1,528 on their first £5,000 of dividends and are worse off to the extent that their dividends are more than £25,250.
It is expected that a lot of dividends will be brought forward to this tax year in order to keep the current, more favourable rules, then we will see a lull in dividends next year and a return to normality the following tax year (2018/19).
The main target of this change is not ordinary shareholders or investors, but rather private company directors who draw a minimal salary and large dividends in order to avoid paying National Insurance contributions (NICs) – a situation HMRC has been steadily attacking over the last 10 years, and is likely to continue in the future.
It should be noted that where a company has sufficient retained profits, drawing dividends instead of salary remains more tax-efficient (due to the lower tax rates applied, the dividend allowance and the lack of NICs), although individuals will see their tax bills rise.
The changes present some points for consideration:
- Accelerating the dividend payments from your company into the current tax year could potentially credit your directors loan account for the next tax year.
- Adjusting how income is drawn could be tax advantageous for you
- Dividends will become more valuable for most higher and additional higher rate taxpayers.
- The new allowance will create opportunities for independent tax planning, as have the revised starting rate band and next year’s personal savings allowance.
If you would like to discuss this in more detail, please do not hesitate to contact us.
Whilst Pimco is not a household name in Europe, it is one of the biggest investment managers in the world. The departure of two high-profile members of the investment and executive team in 2014, resulted in investors pulling money from Pimco’s funds.
In one month alone, investors withdrew $23.5 billion from Pimco’s flagship bond fund! Yes, you read that right – $23.5bn, from one fund, in one month.
Something similar happened in the UK when Neil Woodford, manager of one of the country’s largest funds – the Invesco Perpetual Income Fund – announced that he was stepping down, prompting investors to pull £2 billion out.
Both cases illustrate the faith that investors are prepared to put in the individuals who look after their money when performance is good. However, that special ingredient can evaporate overnight, leaving many investors with little choice but to switch to other funds.
The approach we have to managing money doesn’t rely on any one individual, but on a system.
That system begins with the idea that markets will reward all patient investors over time – especially if they concentrate on the things they can control, like keeping costs low and only taking risks that are rewarded. It runs right through to the people we select to manage your money who, in the nicest possible way ….. are interchangeable!