With Compliments to Marie Kondo …

This blog is based on one that I read recently from a US blog site Sightings Over 60 which is always an interesting read.

The Netflix show “Tidying Up with Marie Kondo” has become a phenomenon. Kondo has been around for a while. Her book The Life Changing Magic of Tidying Up was released in 2014 and climbed the bestseller lists. She followed that book with Spark Joy, which tells us, according to the New York Times, that “you can own as much or as little as you like, as long as every possession brings you true joy.”

To be honest, I have not read her books, nor have I seen her show, but having had the opportunity to declutter when moving to a new house, one thing I do know is that decluttering is not a one-time event; it’s an ongoing process.

If you are retired and the kids have left home it is highly likely that you no longer need all that stuff filling up the garage, loft and wardrobes.  Yet decluttering can be a big job with one rule of thumb suggesting that you allow an eight-hour day of decluttering for each year you’ve lived in your house!  But unless you want a bad back and sore knees, you probably shouldn’t try to do it all at once.

So, here are some steps you can take to declutter … with a nod to Marie Kondo for making cleaning up cool.

  1. Warn your children. If the children have left home, invite them to look through your house and take what they want. Then insist that they remove any and all of their own materials – the boxes of old school items, the stuffed animals, trophies from sports tournaments, souvenirs from holidays, etc..
  2. Have a heart-to-heart with your spouse. Most relationships, it seems, consist of one hoarder and one simplifier. To avoid working at cross purposes, you need to sit down and talk things through – so one person isn’t throwing something away while the other is retrieving things out of the bin. The hoarder must realise that many things — VHS tapes, a record player, old sports equipment — are outdated or can be easily replaced. The simplifier must admit that some things have sentimental value and can’t be replaced. So, let’s not be like the dysfunctional politicians. We need to realise that there can be emotional issues involved in the process … and be ready to compromise
  3. Sort one space at a time. It’s easy to get bogged down if you do a little of this, and a little of that. So start small. Clean out a wardrobe, then a bathroom, then one of the kid’s bedrooms. The hardest jobs will be your own bedroom, the loft, and the kitchen.
  4. Touch something once; make a decision. As you go through your old clothes, old books, or old furniture, for each item decide whether you need to keep it or get rid of it. The key to making progress is to make the decision. If you need one suit, then decide which one to keep and get rid of the others. Try not to hmm and ah, change your mind, or postpone the decision – or that one day per year could turn out to be two or three days per year. Or, the decluttering may never get done.
  5. Make five piles. Keep. Sell. Gift. Recycle. Bin. Decide what you want to keep and put that in one pile. The rest goes into one of the other four piles. But try to decide right away – you can give it to someone; you can sell it, recycle it or throw it away. But don’t waste too much time deciding – just choose a pile. If you make a “mistake” and throw away something that maybe you could sell or give to charity – be realistic, you probably wouldn’t have sold it for much money anyway, and the charity wouldn’t have either.
  6. Take pictures. The hardest decision are the emotional ones. But if you can’t bear to get rid of something you need to get rid of, then take a picture. The special dress? Put it on, take a picture, then give it away. The shelf of trophies, the wonderful old oriental rug that will never fit into your new place – take a picture and keep it with you always.  Then make sure to send copies of those photos to your kids.
  7. Books. Marie Kondo has caught some flak for suggesting we keep no more than 30 books in our homes. My own opinion is that books are like albums and CDs, or tapes and DVDs. Keep them around, if they bring you “joy.” But it’s not the books themselves that are important. It’s what’s inside — the information, the characters, the stories and those are all readily available from the library or the internet.
  8. Hire a professional. For most people, decluttering is a do-it-yourself project – and they would have it no other way – perhaps with some help from kids or a best friend. But sometimes the job might just be too big; or you’re too overwhelmed by the prospect. There are professionals who will help you.

So, here’s to many ‘happy hours’ decluttering … or at least planning to.

Markets fell in 2018 – but keep this in perspective

This latest blog is brought to you by our Investment Consultant – Tim Hale of Albion Consulting.

2018 may have been a disappointing year for equities, but this shouldn’t have been a surprise.

December 2018 dished up a rather distasteful present for the holiday period.  Many lines were written in the broadsheets about the global equity market falls, but were they really anything out of the ordinary?

‘Stock market slide in 2018 leaves investors bruised and wary’ The Financial Times’ (31st December 2018)

Since 2009 (the bottom of the market during the Credit Crisis) global markets have delivered positive returns in eight out of the ten calendar years. The last negative year for equities was back in 2011, when the markets were down around 7%. Over the history we have available to us – on average – one in three years deliver negative returns. Investors have, of late, been extremely lucky.
Since 2008, in every single year, investors have suffered a fall from a previous market high and many of these falls were larger than 10%. However, even investing at the start of 2008 and suffering the 35% peak-to-trough fall in 2008, an equity investor would have turned £100 into £230, i.e. 8% compounded over 11 years, if they had been disciplined and patient (two known areas of human weakness!).

As humans, we tend to have a strange view of what invested wealth represents and how we feel about it at any point in time. We tend to be happy as wealth – at least on paper – goes up to some value at a specific point in time and unhappy when we reach that value again, if it is achieved after a market correction.

Remember, the true meaning of wealth is having the appropriate level of assets that you require, when you require them, to meet your financial and lifestyle goals. In the interim, movements in value are noise, somewhat meaningless and part and parcel of investing. When you invest in equities, you should try to avoid mentally banking the money you (appear to) make on the undulating, and sometimes precipitous, road you are on. Remember too that the headline equity market numbers are unlikely to be your portfolio outcome, as most investors own some sort of a balance between bonds and equities.

Keeping things in perspective

Investing in equities is always going to be a game of two steps forward and one step back. What equities deliver from one year to another is of little consequence to the long-term investor, who does not need all of their money back today.

As far as 2019 is concerned, no one who is honest knows what will happen in the markets. The global economy is still set to grow by 3.5% above inflation this year, according to the IMF, which is not that bad. Today market prices reflect the aggregate view of all investors based on the information to hand. If new information comes out tomorrow, prices will adjust to reflect the impact this has on company valuations. As the release of new information is – by definition – random, so too must price movements be random, at least in the short-term. Over the longer-term they reflect the real growth in earnings that companies deliver through their hard work, executing the delivery of their business strategies. In the longer-term, investing in the stock market is a game worth playing, at least with part of your portfolio.

As Benjamin Graham – a legendary investor in the early 20th Century once said:

“In the short run, the market is a voting machine but in the long run it is a weighing machine”
We could not agree more.

notes and risk warnings

This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.

This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Errors and omissions excepted.

 

Is there a better alternative to Inheritance Tax?

Inheritance Tax is enormously unpopular to say the least. A YouGov poll found that 59% of the public deemed it unfair, making it the least popular of Britain’s 11 major taxes. What’s more, the tax has a limited revenue raising ability, with the ‘well advised’ often using gifts, trusts, business property relief and agricultural relief to avoid paying so much.

As it stands, the tax affects just 4% of British estates and contributes only 77p of every £100 of total taxation. This puts the tax in the awkward position of being both highly unpopular and raising very little revenue. Currently the inheritance tax threshold stands at £325,000 per person. Anything above this is subject to a 40% tax (unless you leave everything above the threshold to your spouse, civil partner or charity).

If you own your own home and are leaving it your children (including adopted, foster or stepchildren) or grandchildren and your estate is worth less than £2 million, this can lift the threshold by an additional £125,000 in the 2018-19 tax year (the nil-rate band), to £450,000.

Inheritance Tax is seen as unfair for several reasons, the main one being because it is a tax on giving (while normal taxes apply to earnings) and it is a ‘double tax’ on people who have already earned – and been taxed on – their wealth.

In its report¹ dated May 2018 , The Resolution Foundation; a prominent independent think tank, set out an alternative. They proposed abolishing Inheritance Tax and replacing it with a Lifetime Receipts Tax.

This would see individuals given a Lifetime Receipts Allowance which would allow them to receive tax free gifts through their lifetime up to a set threshold. They would then have to pay tax on any gifts they received that exceeded this threshold. The thinktank suggests that by setting a lifetime limit of £125,000 and then applying tax at 20% up to £500,000 and 30% after that, this would be both a fairer system and harder to avoid. It would also encourage individuals to spread their wealth wider.

They predict that a lifetime receipts tax would raise an extra £5 billion by 2021, bringing in £11 billion rather than the £6 billion inheritance tax currently raises. In a time of mounting pressure on public services like the NHS, this additional revenue would be welcomed by many.

The Lifetime Receipts Allowance would also remove many of the current ways of managing the amount of assets an individual is taxed on upon death. For instance, people would not be able to reduce the size of their taxable estate by giving away liquid assets seven years prior to their death.

The Resolution Foundation also suggests tightening up on existing reliefs such as Business Property Relief, Agricultural Relief, the treatment of inherited pensions and the forgiveness of Capital Gains Tax at death to reduce the scope for tax avoidance.

The Lifetime Receipts Tax is only a think tank recommendation and is not being considered by the government but for the reasons stated … it could have legs.

¹https://www.resolutionfoundation.org/app/uploads/2018/05/IC-inheritance-tax.pdf 

Warning
The information provided is based upon the authors understanding of taxation and legislation at the time of writing.  Any level and bases of, and reliefs from taxation are subject to change.

Gifting to Charity

Charities greatly appreciate people’s generosity, as it is vital to the continuance of their works.

During your lifetime you can support your chosen Charities through volunteering your time, donating items for them to sell or, gifting them money. Any gift of money is usually eligible for gift aid in the hands of the charity (essentially the Government adds 20p for every 80p you donate) and income tax relief for the donor at their highest marginal tax rate.

Gifts on death tend to be of a more substantial nature. These gifts, known as a ‘legacy’ are not counted in your estate for inheritance tax (IHT) –reducing the amount of IHT due. If the amount left to Charities is at least 10% of the net estate at the date of death, the IHT rate applying to the residual estate also reduces from 40% to 36%.

This all sounds simple doesn’t it; but in leaving a legacy to Charity, you should be aware that a Charity has a different legal status to a private individual, thus is subject to stringent legislation.

Each charity is the responsibility of its Trustees who have duties to the Charity’s work. In addition to complying with numerous rules and regulations, trustee duties also include ensuring that any funds left are used for the purpose for which they have been given (if applicable) and ensuring that the charity receives full benefit from the donor (i.e. maximum value for estate assets). However, if the legacies have not been carefully thought out, these two responsibilities can cause distress for executors at a difficult emotional time.

Below are two example scenarios that on the face of it seem reasonable, but could cause some distress to executors:

Scenario 1 – “I leave an amount equal to 10% of my net estate to ABC Charity”
Scenario 2 – “I leave £10,000 to DEF Charity to perform XYZ purpose”

Scenario 1 Issue – The Charity Trustees, upon reviewing the Will and estate account feel that certain assets have been undervalued and as such the Charity has not received the full amount as dictated in the Will. This could result in having to obtain further valuations of major assets and distribute further money to the charity instead of the other beneficiaries.

Scenario 2 Issue – DEF Charity do not perform XYZ purpose. In this instance they may not be able to accept the legacy and additional guidance may be required from their regulator, or even the courts – this could be time consuming and / or costly.

When updating your Will, your solicitor should be able to help with solutions to any potential issues like those highlighted above (for example, gifting a set amount and not stating a particular purpose for the money) – thereby allowing your chosen charities to receive the legacies you wish, whilst not causing your executors any additional issues.

Simplicity is the key here.

Warning
This material is provided for information purposes only and does not constitute advice. The information is based upon the authors understanding of the taxation, legislation and regulations at the time of writing. Any level and bases of, and reliefs from taxation are subject to change.

 

 

Looking at the big retirement picture

Considering making pension contributions ahead of the tax year end?

Investing for the future is vital if you want to enjoy a financially secure retirement, and it requires you to look at the big picture. Although pensions can be complicated, we will help you get to grips with the rules if you are considering making contributions ahead of the tax year end. Here are our top pension tax tips.

Annual and lifetime limits

Getting tax relief on pensions means some of your money that would have gone to the Government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you receive on your pension contributions. Please note that if you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

Provided that you stay within your pension allowances, all pensions give you tax relief at the rate that you have paid on your contributions. For personal pensions, you receive tax relief at the basic rate of 20% inside the pension. That means for every £800 you pay in, HM Revenue & Customs (HMRC) will top it up to £1,000. If you’re a higher or additional rate taxpayer, you can claim back up to an additional 20% or 25% on top of the 20% basic rate tax relief through your self-assessment tax return.

Benefit from tax relief

For workplace pensions, your employer normally takes your pension contribution direct from your salary before Income Tax so that the contribution is not taxed at source like the rest of your employment income, and therefore the full benefit is received inside your pension immediately. If your employer does not handle your contributions before tax, then these would benefit from tax relief in the same way as for a personal pension contribution.

You’re still entitled to receive basic rate tax relief on pension contributions even if you don’t pay tax. The maximum you can pay into your pension as a non-taxpayer is £2,880 a year, which is equivalent to a £3,600 contribution once you factor in tax relief.

Total amount of contributions

The annual allowance is a limit to the total amount of contributions that can be paid in to defined contribution pension schemes and the total amount of benefits that you can build up in a defined

10 Things That are Good for Us

I read various blogs and articles over the weekend and one grabbed my attention, so I thought I would share some of the content with you … and add a little of my own.

Most days (and particularly at this time of year) the media can confuse us with information about activities, foods, drinks, supplements and other things that are supposedly good or bad for us.  The article I read focused on the following things that are good for us – 

  1. Breakfast. Many people skip breakfast (I am not one of them as Nicky, my partner, will testify). A good breakfast gives you energy and keeps you away from the mid-morning biscuit(s). Eating breakfast is associated with maintain a healthy weight, reducing the risk of heart disease and diabetes, and better concentration and memory. 
  1. Saunas and hot tubs. I have often toyed with the idea of having a sauna installed at home as they can make you feel good and apparently there are health benefits as well. According to the Mayo Clinic, they can improve cardiovascular function and lower blood pressure and relieve symptoms of arthritis, headache and flu.
  1. Organic foods. I know that many of us are sceptical about the benefits of organic food, (especially me as a short-armed Yorkshireman) and particularly because they are more expensive. Science says that organic food, despite the price, are better for you as have more nutrients, less toxins and fewer pesticides.
  1. A sceptical attitude. Now I thought I would score high here, but I maybe verging on being more cynical than sceptical. However, as part of the ‘me’ going forwards I will look at the facts and evidence before believing in something. Sceptics are less likely to fall for the next best thing be it a fad diet, trendy quick fix or cure all. They are also less likely to believe that everything will work out fine and so they take measures to improve their outlook for the future by exercising, eating properly, driving safely and avoiding health risks.
  1. Physical contact. Being physically close, holding hands and giving backrubs all tend to reduce physical pain and this is not something the ladies have simply dreamt up. It was in fact the conclusion from research undertaken by the University of Colorado Boulder whereby 22 couples took part. The women were subjected to mild pain (I guess this would have been equivalent to extreme pain for a man), first when they were holding hands and then when they were sitting together but not touching. The women reported significantly less pain when they were holding hands but not when they were sitting together.  Maybe we could give that a try at the Manchester United matches ….
  1. Herbs and spices. This is definitely something I firmly agree with – any excuse to eat a good curry. Herbs and spices are full of healthy compounds that reduce inflammation and additional flavours that lead us to use less sugar salt and fat in our foods. There is a long list of benefits but here are a few of my favourites (note the curry theme again). Chilli’s boost metabolism and keep blood vessels healthy. Cumin can help weight loss, Cinnamon can help reduce inflammation. Garlic reduces cholesterol and blood pressure. Turmeric may improve memory and help ease pain.
  1. Move. I heard a doctor use the phrase “motion is the best lotion”. It is important to exercise and I’m sure we all know the benefits, so no need for to expand on this one.
  1. Passion and purpose. It is hugely beneficial to have an interest and a passion for things such as a pastime, voluntary work or even continuing to work. We have found that those who fill their time with their passions tend to lead a more fulfilling and healthy life.
  1. Coffee… and tea. Coffee perks you up and tea helps you relax according to WebMD. Coffee may help stave off Alzheimer’s and Parkinson’s, diabetes and liver disease and the recurrence of colon cancer and tea boosts the immune system, lowers blood pressure and cholesterol.
  1. Sleep. According to a study from Northwestern University, people who are night owls are at risk of developing health problems, including diabetes and neurological disorders. But it seems the crux of the issue is sleep deprivation, which affects not just your physical well-being, but cognitive performance as well. But don’t be complacent if you sleep a lot; sleeping too much is associated with the same health risks as sleeping too little. So how much is the right amount? Apparently somewhere between 7 – 9 hours is about right.

So, if you agree with the experts on things that are good for us, here we have an ‘ideal’ healthy day: –

Wake up with a sceptical attitude, have a healthy organic breakfast with a coffee then off to work or to follow your passion.  Return home, enjoy a cuddle or go for a walk holding hands, followed by a sauna or sit in a hot tub with a cup of tea. Then feast on an organic curry, spend time doing something you enjoy before retiring to bed at a reasonable time.

 

 

Merry Christmas

We would like to wish you all a very Merry Christmas and a Happy New Year and also thank you for your support over the last 12 months.

The office will close at 5pm on  Friday 21st December 2018 and will re-open at 9am on Wednesday 3rd January 2019.

As in previous years, in lieu of sending Christmas cards, this year we have donated to Shelter UK and Alzheimer’s Society

 

The Return of the Rise in Probate Fees

Back in 2017 we covered the proposed rise in probate fees which was subsequently abandoned when the general election was called.  The current probate fee is a flat fee of £215 or £155 if the probate application is made via a solicitor.

In November 2018, the Government brought before Parliament proposed legislation which if approved, will introduce a new banded structure of fees, tiered according to the size of the deceased’s estate as set out below: –

·         Up to £50,000:                        no charge

·         £50,000- £300,000:                  £250

·         £300,000- £500,000:               £750

·         £500,000 to £1m:                    £2,500

·         £1m to £1.6m:                         £4,000

·         £1.6m- £2m:                             £5,000

·         Above £2m:                              £6,000.

Whilst there are significant increases for the larger estates, (although not up to as much as the £20,000 previously proposed), it is estimated that 80% of estates will not pay more than £750 and fewer estates will be liable because the probate fee threshold will rise from £5,000 to £50,000 which should exempt about 25,000 estates every year. The additional income raised, estimated to be £145m, is to be invested in the Courts and Tribunal Service and will be used to fund improvements to the Probate Service. This includes the ability to apply for a grant of probate online. Interestingly, a separate statutory instrument has been issued to introduce this online application process and will lead to an administrative cost per application of only £9.30.

However, as the probate process is broadly similar regardless of the size of the estate, it could be argued that the new fees represent a stealth tax on property as property is normally the main constituent of the estate. Indeed, a House of Lords committee has reiterated this and is concerned that the proposals will lead to a move away from ‘the principle that fees for a public service should recover the cost of providing it and no more’. Executors may find themselves having to find the required fees themselves where estates are relatively illiquid, while professional executors may raise their fees to cover this.

Charities will also be adversely affected as they are not exempt from probate fees. It is estimated that they could lose about £10m a year of legacy income and so there will be lobbying for a relevant exemption to be introduced.

The Government are hoping to have the legislation through Parliament by April next year and if it is agreed, it will clearly be important to ensure that funds are available to your executors to pay the fees.  This can be easier said than done and particularly as these have to be paid before any of the assets can be distributed.  This is something that we can discuss during our meetings and incorporate into your financial plan.

 

 

 

 

Financial Decision Making in Later Life

Financial Decision Making in Later Life

The World Health Organization reports that by 2050, 2 billion people (22% of the World’s population) will be age 60 and older, up from 605 million (11% of the population) in 2000. Older adults must make important, and often irreversible, decisions that impact the rest of their lives.

Examples include when to take pension benefits, whether to buy long-term care insurance, how to most efficiently draw down savings and whether to annuitize assets.

Unfortunately, while advances in wealth and medical science have led to rising life expectancies, longer lives create the risks of running out of financial assets sufficient to support a minimally acceptable life style. The longer we keep going then the risk of cognitive impairment increases, which, amongst other things makes us more susceptible to becoming the victim of financial abuse.

Thoughts of retirement can be dreams of being free of job responsibilities and enjoying travel, leisure activity and having fun. We look forward to having time to do the things we didn’t have time to do. Our thoughts usually do not include fear that someone is going to rip us off. Unfortunately, financial abuse does happen, even to the smartest people.

Most of us do not want to face the fact that, over time, we may lose our mental acuity. However, declining mental sharpness is inevitable for many. That makes us more vulnerable. Even if you do not suffer any decline in mental sharpness, there is no guarantee you will be untouched by those seeking to exploit you.

Determined, professional thieves know that many older people have nest eggs that can be stolen. Educated and powerful people can be taken advantage of and manipulated right along with those who lack these advantages. No one is immune.

Carolyn Rosenblatt, who is a well-known American expert and author with extensive experience working with both healthcare and legal issues offers the following checklist of warning signs of cognitive impairment (which can increase the risk of financial abuse):

  • It appears to others you trust that you are no longer able to process simple concepts.
  • You appear to be forgetful, with short-term memory loss.
  • You appear unable to recognise or appreciate the consequences of financial decisions.
  • You make decisions that are inconsistent with your long-held goals, investment philosophy or commitments.
  • You demonstrate erratic behaviour.
  • You refuse to follow appropriate investment advice, which you have generally accepted in the past.
  • You seem to others to be paranoid about someone taking your money or missing funds that are not missing.
  • You lose the ability to understand recently completed financial transactions.
  • You appear in any way to be disoriented, get lost in familiar places, such as finding your way home, or you forget where you are.
  • You forget to groom, bathe or take basic care of your physical needs.

If you (or a loved one) are experiencing these signs, it’s time to seek help. You do not want to wait until after the damage is done.

Rosenblatt also offers the following 10-point smart retirees’ checklist that generally covers many of the bases of how to help your family and you be best prepared for things you need to manage in this phase of life and avoid abuse. The bottom line here is transparency and open communication.

1. Decide with whom you want to communicate about your future. Set a date and get together.
2. Have a signed and registered lasting power of attorney in place to cover finances.
3. Have a signed and registered lasting power of attorney to cover health and care decisions.
4. Make a list of all bank accounts, investment records and financial planning you have done, and provide contact information.
5. Provide written permission to your loved ones to talk with your solicitor, accountant and financial planner.
6. Make a list of all insurance policies, including life, disability, health, property and anything else you own that will protect your heirs.
7. Make a copy of your mortgage statement, any other loans, financial statements and bank statements. Keep them in one place. Update when changes are made.
8. List your doctors, care providers and medications. Give written permission for your loved ones to speak with your doctors.
9. Put in writing your wishes for burial or disposition of your remains.
10. Update your will and/or trust with a local solicitor. Laws change and documents need to be up-to-date.

Have a family meeting to share and explain items 2 to 10 to your loved ones.  Carpenter Rees can provide a list as to what should be included here to enable you to prepare a folder of relevant documents and contact details.

If you or your family don’t have such a plan already in place, maybe treat this as a timely reminder to act.

 

Brexit and your Portfolio

This week I thought I’d hand over the floor to a guest writer. So, if like me you are becoming a bit of a BOB (Bored of Brexit), here are some words of wisdom from our Investment Analyst – Tim Hale of Albion Consulting.

Whichever way one voted, it is hard not to be dismayed by the shambles that is Brexit, concocted by all sides. In the event that the current deal agreed gets voted down in Parliament, or there is no deal, there is a material chance that the government could fall. One or both of these events would come with great uncertainty.

We set out three key investment risks relating to Brexit and how sensible portfolio structures can mitigate them.

Risk 1: Greater volatility in the UK and possibly other equity markets
In the event of a poorly received deal or no deal, it is certainly possible that the UK equity market could suffer a market fall as it tries to come to terms with what this means for the UK economy and the impact on the wider global economy. A collapse of the Conservative government and a Labour victory would add further uncertainty.

Risk 2: A fall in Sterling against other currencies
In 2016, after the referendum, Sterling fell against the major currencies including the US dollar and the Euro. There is certainly a risk that Sterling could fall further in the event of a poor/no deal.

Risk 3: A rise in UK bond yields (and thus a fall in bond prices)
The economic impact of a poor/no deal and/or a high-spending socialist government could put pressure on the cost of borrowing, with investors in bonds issued by the UK Government (and UK corporations) demanding higher yields on these bonds in compensation for the greater perceived risks. Bond yield rises mean bond price falls, which will take time to recoup through the higher yields.

Mitigant 1: Global diversification of equity exposure
Although it is the World’s sixth largest economy (depending on how you measure it), the UK produces only 3% to 4% of global GDP, and its equity market is around 6% of global market capitalisation. Well-structured portfolios hold diversified exposure to many markets and companies. Changing your mix between bonds and equities would be ill-advised. Timing when to get in and out of markets is notoriously difficult. Provided you do not need the money today, you should hold your nerve and stick with your strategy.

Mitigant 2: Owning non-Sterling currencies in the growth assets
In the event that Sterling is hit hard, it is worth remembering that the overseas equities that you own come with the currency exposure linked to those assets. Remember too that a fall in Sterling has a positive effect on non-UK assets that are unhedged. The bond element of your portfolio should generally be hedged to avoid mixing the higher volatility of currency movements with the lower volatility of shorter-dated bonds.

Mitigant 3: Owning short-dated, high quality and globally diversified bonds
Any bonds you own should be predominantly high quality to act as a strong defensive position against falls in equity markets. Avoiding over-exposure to lower quality (e.g. high yield, sub-investment grade) bonds makes sense as they tend to act more like equities at times of economic and equity market crisis.

Some thoughts to leave you with ..

Even if you cannot avoid watching, hearing or reading the news, it is important to keep things in perspective. The UK is a strong economy with a strong democracy. It will survive Brexit, whatever the short-term consequences that we will have to bear, and so will your portfolio. Keeping faith with both global capitalism and the structure of your portfolio and holding your nerve, accompanied by periodic rebalancing is key. Lean on your adviser if you need support.

‘This too shall pass’ as the investment legend Jack Bogle likes to say.

If you would like to chat to us further about Tim’s words of wisdom or indeed our model portfolio’s, please do contact us.

Warnings – This article is distributed for educational purposes only and should not be considered to be investment advice.  The article contains the opinions of the author but not necessarily the firm and does not represent a recommendation of any security, strategy or investment product.  Past performance is not indicative of future results.  The value of investment can fall or rise.