July 2016 - Your Financial Wealth in times of Political & Economic Chaos

“Good news we’ve voted to leave the EU” – I received this message mid-day on Friday 24th June from an IFA marketing group. The second part of their sentence said: “your clients have never needed your advice more than they will now”. Unfortunately this attempt at being upbeat has not been reciprocated by the investment companies and financial institutions. Over the last 14 days the only companies that have been excited about Brexit have been companies which sell high risk investments which are totally unsuitable for my typical clients. These companies see the coming relaxation in regulations from Brussels as an opportunity to sell more of their products so that they can make more profit. I remember the bad old days of ‘flog for a profit and sod the client’ only too well and personally I dread any return. So why have I taken two weeks to communicate to my clients since the referendum result? The answer is in two parts: Firstly the shock and disbelief that people would ignore the experts and vote for economic uncertainty. Secondly because I knew that my clients’ portfolios were already well placed to stand the uncertainty and volatility. For example over the last few days several property funds have suspended activity where investors could not withdraw their money. Property funds hold a certain amount of cash to allow for investors withdrawals and so many investors have withdrawn cash that they have had no cash left. The only way to generate more cash is to sell property and selling a commercial property such as an office block or Retail Park does not happen overnight. Several years ago when our investment service proposition was put together we did not include property funds. Illiquidity was one reason among many for them not to be included and hence my clients are not affected. There has been a lot of talk about the FTSE 100 and you will hear a lot more over coming months. It started by going down but has since recovered and gone well above where it was before the 23rd June. This is not (I repeat not) a good indicator. The FTSE 100 is made up of the largest 100 by capitalisation of companies listed on the London Stock Exchange. Almost no one holds a portfolio made up of these companies and it would not be a good investment strategy if they did. Most of these top 100 companies are by their nature global in scope and there are several reasons why they have currently increased in value. Bizarrely the weakness of the UK economy as a result of Brexit may be one of the reasons why the FTSE has increased. My clients’ portfolios are typically highly diverse and they may have of the order of 8000 companies in their portfolios. This diversification includes global diversification which in turn means that you are less exposed to the fluctuations in the UK market. So hold tight because you are in the best place that you can be. And what about Bonds? It seems that interest rates are likely to fall with the suggestion of 0.25% being floated. What does this mean for your cash in the bank? Well for every £10,000 in the bank if inflation is 2% that means that at the end of every year your money needs to grow to £10,200 just to stand still. Anything less and it will actually be falling in value. If you are getting 0.25% this will only give you £10,025 and you have lost £175 by keeping your money in an account where it only earns 0.25%. Holding money in the bank gives you a guarantee – a guarantee that you will lose money every year for as long as this situation continues. If you think that is bad then spare a thought for other countries such as Japan or Sweden which have negative interest rates. These mean that you are actually charged for leaving your money in the bank – a negative interest rate of 1% could make your £10,000 become £9,900 by the end of a year. Bond prices usually correlate with bank lending rates so we will be considering the potential of tilting the portfolio balance in favour of equities but there will definitely be no hurry to do so and nothing will happen until we have a clearer view of direction. I am taking a well-earned break to the Costa del Sol for 10 days in the middle of the month. I am so pleased that I have my Euro account because I will be unaffected by fluctuations in the value of the pound. Being a financial planner and being prepared has its advantages. Hopefully matters will be less chaotic by next month but I’m not holding my breath this side of Christmas. As usual if you have any questions or need any help please get in touch.