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Adviser and client sat discussing the current volatile market

How to manage risk in a volatile market

 560 315 Jess Easby
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With the current volatile market we are seeing for the first time in many years, now may be the time to review your investment goals and timescales.

Whether you’re investing with a goal in mind, or simply saving for retirement, it’s important to understand risk, particularly in todays volatile market. Specifically, you should understand your own attitude to risk. If you understand the risks associated with investing and you know how much risk you are comfortable taking, you can make informed decisions and improve your chances of achieving your goals.

Risk is the possibility of losing some or all of your original investment. Often, higher-risk investments offer the chance of greater returns, but there’s also more chance of losing money. Risk means different things to different people.

How you feel about it depends on your individual circumstances and even your personality. Your investment goals and timescales will also influence how much risk you’re willing to take. What you come out with is your ‘risk profile’.

You can invest directly in investments, like shares, but a more popular way to invest in them is indirectly through an investment fund. This is where your money is pooled with other investors and spread across a variety of different investments, helping to reduce risk.

Different types of investment

None of us likes to take risks with our savings, but the reality is there’s no such thing as a ‘no-risk’ investment. You’re always taking on some risk when you invest, but the amount varies between different types of investment.

As a general rule, the more risk you’re prepared to take, the greater returns or losses you could stand to make. Risk varies among the different types of investments. There are many different ways to access investment funds, such as through Individual Savings Accounts (ISAs) and workplace pensions.

Losing value in real terms

Money you place in secure deposits (such as savings accounts) risks losing value in real terms (buying power) over time. This is because the interest rate paid won’t always keep up with rising prices (inflation).

On the other hand, index-linked investments that follow the rate of inflation don’t always follow market interest rates. This means that if inflation falls, you could earn less in interest than you expected.

Inflation and interest rates over time

Stock market investments might beat inflation and interest rates over time, but you run the risk that prices might be low at the time you need to sell. This could result in a poor return or, if prices are lower than when you bought, losing money. With the current volatile market and unprecedented levels of inflation, these considerations are now more important than ever.

You can’t escape risk completely, but you can manage it by investing for the long term in a range of different things, which is called ‘diversification’. You can also look at paying money into your investments regularly, rather than all in one go. This can help smooth out the highs and lows and cut the risk of making big losses.

When you invest, you’re exposed to different types of risk

Capital risk

Your investments can go down in value, and you may not get back what you invested. Investing in the stock market is normally through shares (equities), either directly or via a fund. The stock market will fluctuate in value every day, sometimes by large amounts. You could lose some or all of your money depending on the company or companies you have bought. Other assets such as property and bonds can also fall in value.

Inflation risk

The purchasing power of your savings declines. Even if your investment increases in value, you may not be making money in ‘real’ terms if the things that you want to buy with the money have increased in price faster than your investment. Cash deposits with low returns may expose you to inflation risk.

Credit risk

Credit risk is the risk of not achieving a financial reward due to a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Credit risk is closely tied to the potential return of an investment, with the most notable being that the yields on bonds correlate strongly to their perceived credit risk.

Liquidity risk

You are unable to access your money when you want to. Liquidity can be a real risk if you hold assets such as property directly, and also in the ‘bond’ market, where the pool of people who want to buy and sell bonds can ‘dry up’.

Currency risk

You lose money due to fluctuating exchange rates.

Interest rate risk

Changes to interest rates affect your returns on savings and investments. Even with a fixed rate, the interest rates in the market may fall below or rise above the fixed rate, affecting your returns relative to rates available elsewhere. Interest rate risk is a particular risk for bondholders.

For more information on considering risk, download our brochure.

Invest your way out of inflation

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invest your way out of inflationWhy now is the time to make sure you protect your wealth.

The word ‘inflation’ had barely featured in the market’s vocabulary in the last three decades until it suddenly started to come back with a vengeance in 2021. As higher inflation looks set to persist in 2022, finding ways to generate a return on investments greater than inflation will be a key investment theme – otherwise your wealth falls in real terms.

Spending spree

There are two basic reasons why inflation has been increasing: supply and demand.

Starting with the latter, consumers have been on a spending spree after having spent a large proportion of time during 2020 and 2021 at home bingeing on Netflix.

The main reason for the current rise is due to the global price of energy. This has meant higher energy and transport bills for businesses, many of whom pass on the extra costs to their customers. Supply problems and higher shipping costs are also continuing to have an impact on businesses.

Healthy economy

Central banks kept saying that inflation was ‘transitory’, but this now seems to have been replaced by the word ‘persistent’. The result is that inflation will remain high on the economic agenda in 2022.

Inflation is a measure of how much prices have gone up over time. It’s the rate at which cash becomes less valuable – £1 this year will get you further than £1 next year. It tends to be a good sign in a healthy economy, but too much of it can be hard to reel in and control.

Boe forecast

The Bank of England (BoE)[1] expects inflation to reach over 7% by spring 2022 and then start to come down after that. That’s because most of the causes of the current high rate of inflation won’t last. It’s unlikely that the prices of energy and imported goods will continue to rise as rapidly as they have done recently. And this means that inflation will eventually decline.

The BoE forecasts the rate to be much closer to their 2% target in two years’ time. But even though the rate of inflation will slow down, the prices of some things may stay at a high level compared with the past.

Purchasing power

Beating inflation means earning higher returns from an investment than the inflation rate in the economy. If your return on investment is less than the inflation rate, this could basically nullify the returns you have earned. Due to various reasons, the purchasing power of money decreases significantly every year.

Investing with inflation in mind is essential for protecting your current and future wealth and involves choosing assets that naturally keep pace with rising prices. These mostly include either real, tangible assets, or investments that pay a variable rate and appreciate or increase over time.

Looking for a better chance of beating inflation over the long term?

If you’ve already got an emergency fund, or have excess cash in the bank, it may be time to consider investing some of it to protect your wealth from inflation. Investing some of your money may give you a better chance of beating inflation over the long term. To discuss your options, please contact us.

For more information on considering risk, download our brochure.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. The value of investments and income from them may go down. You may not get back the original amount invested. Past performance is not a reliable indicator of future performance.

Source data: [1] https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-keep-rising

Improving your financial health

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Staying on track to achieving specific financial goals

All of your financial decisions and activities have an effect on your financial health. To help improve your financial health during this period of rising inflation rates and household costs, we look at three areas that could help keep you on track to achieving your specific financial goals.

Beat the national insurance rise

The National Insurance rise from April this year has gone ahead for workers and employers despite pressure to reverse the decision to increase this by 1.25%, which is aimed at raising £39 billion for the Treasury. From April 2023, it is set to revert back to its current rate, and a 1.25% health and social care levy will be applied to raise funds for further improvements to care services.

One way to beat the National Insurance increase is by taking advantage of salary sacrifice, which means you and your employer pay less National Insurance contributions. Some employers may decide to maximise the amount of pension contributions by adding the savings they make in lower employer National Insurance contributions (NICs) to the total pension contribution amount they pay. This is also a way to make your pension savings more tax-efficient. If you choose to take up a salary sacrifice scheme option, you and your employer will agree to reduce your salary, and your employer will then pay the difference into your pension, along with their contributions to the scheme. As you are effectively earning a lower salary, both you and your employer pay lower NICs, which could mean your take-home pay will be higher. Better still, your employer might pay part or all of their NICs saving into your pension too (although they don’t have to do this).

Review your savings

Accounts and rates

Money held in savings accounts hasn’t grown much in recent years due to historically low interest rates. But with inflation running higher, your savings are now at risk of losing value in ‘real’ terms as you will be able to buy less with your money.

In some respects, inflation can be seen as a positive. It’s a sign of strong economic recovery post-COVID, increasing salaries and higher consumer spending. But it’s bad news for your cash savings. Relying solely or overly on cash might prevent you from achieving your long-term financial goals, which may only be possible if you accept some level of investment risk.

In an environment where the cost of living is rising faster than the interest rates received on cash, there is a danger that your savings will slowly become worth less and less, leaving you in a worse position later on. If you have money in savings, it is important to keep an eye on interest rates and where your money is saved. Rates are low and you will lose money in real terms if inflation is higher than the interest rate offered on your savings account or Cash ISA.

Shift longer term savings into equities

During times of high inflation, it’s important to keep your goals in mind. For example, if your investment goals are short term, you may not need to worry much about how inflation is impacting your money. But if you’re investing for the long term, inflation can have a larger impact on your portfolio if it’s sustained – although high inflation that only lasts for a short period may end up just being a blip on your investment journey.

If you have large amounts of money sitting in cash accounts one way to beat inflation is to invest some of your money in a long-term asset that will appreciate with time, thus increasing your buying power over time. There are many ways to invest your money, but most strategies revolve around one of two categories: growth investments and income investments.

Historically, equities have offered an effective way to outperform inflation. Cyclical stocks – like financials, energy and resources companies – are especially well-suited to benefit from rising prices. These sectors typically perform better when the economy is doing well, or recovering from a crisis. Depositing funds into your investment portfolio on a regular basis (such as monthly from salary) can help you invest at different prices, averaging out the overall price at which you get into the market. Known as pound-cost averaging, this can help you smooth out any fluctuations caused by market volatility over the long term. While volatility will always exist, it can be managed and reduced by taking this approach.

Would you like advice on how to improve your financial health? Speak to us to find out how we can help.

Market Update – January 2022

 560 315 Jess Easby
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We are now in the midst of another volatile period in investment markets and the inevitable questions are starting to come through from clients as to what is going on. Global stock markets have undergone a correction in recent weeks, while the FTSE 100, which consists of the UK’s largest companies, is moving higher and is back to pre-pandemic levels. What is causing this divergence?

The answer behind this behaviour is two-fold: (1) inflation and interest rate expectations, and (2) the way in which global stock markets are constructed.

Looking at point (1) first. Coming into 2021, inflation in the UK was running close to zero, driven down by lower levels of spending during the third Covid lockdown. However, an increase in consumer spending following the easing of lockdown restrictions in summer, rising wholesale energy prices, global supply chain issues (and, specific to home, increased trade friction between the UK and EU due to Brexit) has pushed up prices, such that inflation is now at its highest levels for many years. This spike (not just in the UK but also in the US, Europe and elsewhere) has caused concerns that central banks worldwide will have to step in and raise interest rates to bring it under control.

Now onto point (2). No two markets are constructed in the same way in terms of the sectors within them, meaning each one moves differently depending on market conditions.

Simplistically, sectors within a stock market can be split into two buckets: ‘value’ and ‘growth’. Value stocks typically operate in ‘old economy’ industries (e.g. miners, oil & gas companies), that consequently tend to pay out more of their earnings to investors as dividends, rather than reinvesting back into the business. On the other hand, ‘growth’ stocks are those in rapidly expanding industries with strong future earnings potential (e.g. technology) – to generate these returns and stay ahead of their competitors, they tend to reinvest their profits into the business and pay less in the way of a dividend (if at all), and some may have borrowed money for future expansion.

Increases in interest rates (and expectations thereof) are a catalyst supporting a positive outlook for value stocks, as investors place more emphasis on the earnings they generate today (i.e. the dividend), so they are relatively immune from higher interest rates. Conversely, growth stocks traditionally underperform in these conditions as more emphasis is placed on their long-term prospects, which could be eroded by inflation (and, if they have borrowed money, higher borrowing costs).

Notably, the UK’s FTSE 100 predominantly has more ‘value’ businesses, with Materials (e.g. miners Rio Tinto and BHP Group), Energy (e.g. BP and Royal Dutch Shell) and Financials (particularly high street banks) making up a large chunk of the index. On the other hand, the S&P 500 in the US is more of a ‘growth’ market, with technology (e.g. Facebook, Apple, Netflix) representing about a quarter of the index.

The table below shows the breakdowns of the FTSE 100 and the S&P 500 indices in percentage terms, and the differences between them in the right-hand column. The subsequent performance chart shows how the Materials, Energy, Financials and Technology sectors have performed over the past five years.

Sector FTSE 100 S&P 500 Difference
Consumer Staples 18.4 6.7 11.7
Materials 13.4 2.3 11.1
Energy 11.0 3.3 7.7
Financials 17.0 13.6 3.4
Utilities 3.5 2.6 0.9
Industrials 8.8 8.4 0.4
Real Estate 1.3 2.7 -1.4
Healthcare 11.9 13.3 -1.4
Communication Services 6.6 10 -3.4
Consumer Discretionary 7.3 11.7 -4.4
Information Technology 0.1 25.4 -25.3

Importantly, though, our portfolios are not – and never have been – the FTSE 100. Rather, they are diversified geographically, by sector, asset class, investment style, company size, fund house and other considerations, in order to reduce the amount of risk that our clients are exposed to, while aiming to provide them with optimum long-term investment returns. This means that our portfolios have exposure to the UK, as well as the likes of the US, Asia and Emerging Markets (all of which are more ‘growth’ oriented areas).

Following on from this, it is worth noting that it was the US/technology, Asia and Emerging Markets that powered the returns of 2020. While they have had a more difficult time of late, and there is likely to be heightened volatility in the months ahead (primarily linked to expectations around inflation and interest rates), we remain positive on the outlook from current levels. Firstly, the growth of technology companies over the past decade or so has been incredible, and the digital transformation of many sectors (e.g. electronic payments, online shopping, cybersecurity, among many others) seems to be far from over. We have also identified Asian and Emerging Markets (where the middle/consumer class continues to increase considerably in size) for strong potential returns over the next 5+ years. More generally, the funds within our portfolios are invested in high-quality companies with strong brands and pricing power, which puts them in strong positions to pass on price rises to consumers/their suppliers, thus providing a degree of inflation protection over the long term.

All in all, we therefore believe that our portfolios are well-positioned to benefit from these longer-term trends.

Make your money work harder

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Has lockdown lifted your savings?

A lot of people have shifted the way they think about life due to Covid-19. Families have focused on staying healthy and having a healthier work/life balance. These are now top of their priorities to protect themselves and their loved ones.

Some have saved that little bit extra during lockdown by not going out or on holiday. Investing your money wisely could be an option for you to consider. Investments could grow your capital and income and generate another income stream.

There is a lot of nervousness around finance and investments as a result of Covid-19. Key questions you may be considering are:

  • How will the markets perform with interest rate fluctuations?
  • How will I gain a good return?
  • How will we protect ourselves and our families against an uncertain future?

A regulated Financial Adviser can help answer these questions and guide you on a suitable investment strategy, based on your individual situation.

You work hard for your money and your money should work hard for you. 

Ellis Bates has a holistic view of financial planning. We understand that no two people have identical financial circumstances. We create a tailored plan that meets your individual needs and investment objectives. Your goal could be to make your cash work harder, fund education fees, contribute to a wedding, buy a new property or save for retirement.

If you like the idea of investing but are unsure where to start, get in touch for a free initial consultation today.

Six Principles of Investing

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Putting aside money for your future and getting it to work for you! Whatever stage of life you’ve reached and whatever plans you may have for the future, you want your money to earn the best return possible without taking undue risk. That’s why it’s important to invest in a way that’s right for you and that will meet your goals.

Creating and maintaining the right investment strategy plays a vital role in securing your financial future. How much control do you want over your investments? Investing can seem daunting but you don’t have to do it all on your own.

So what do you need to consider?

1 Have a plan and stick to it

Your wealth should work in all the ways you want it to. Whatever your goals are in life, careful planning and successful investing of your wealth can help you get there. The first thing to consider is to establish your investment objectives based on your future goals. It is one thing to have a target, but a sound financial plan can make the difference between simply hoping for the best and actually achieving your investment goals. You need to review your investments regularly to ensure they remain on track, stay focused on your plan and make sure you don’t get distracted by short-term market uncertainty.

2 Cash isn’t always king

Putting your money in cash can seem appealing as a safe and secure option – but inflation is likely to eat away at your savings. For most people with longer-term investment plans, cash needs to be supplemented with investment in other asset classes that can beat the perils of inflation and offer better capital growth potential. If you’re investing – especially for major goals years away, such as retirement – you can’t afford to ignore the corrosive effect rising prices can have on the value of your assets. Different asset classes provide varying degrees of protection against inflation.

3 Diversify and always consider your investments as a whole

If we could see into the future, there would be no need to diversify our investments. We could merely choose a date when we needed our money back, then select the investment that would provide the highest return to that date. One of the easiest ways to manage investment risk and improve your probability of success is to have a variety of investments. You can diversify your portfolio across different asset classes, geographical markets and industries. A diversified portfolio, including a range of different assets, will help to iron out the ups and downs and avoid exposing your portfolio to undue risk.

4 Start investing early if you can

Starting early is one of the best ways to build wealth. Investing for a longer period of time is widely considered more effective than waiting until you have a large amount of savings or cash flow to invest. This is due to the power of compounding. Compounding is the snowball effect that occurs when the money you earn investing generates even more earnings. Essentially, you grow not only the original amount you invested, but also any accumulated interest, dividends and capital gains. The longer you are invested, the more time there is for your investment returns to compound.

5 Don’t abandon your plans

Some investors suffer from what behaviourists call ‘activity bias’: the urge to ‘just do something’ in a crisis, whether the action will be helpful or not. When investments are falling in value, it can be
tempting to abandon your plans and sell them – but this can be damaging because you won’t be able to benefit from any recovery in asset prices. Markets go through cycles, and it’s important to  accept that there will be good and bad years. Short-term dips in the market tend to be smoothed out over the long term, increasing the potential for healthy returns.

6 Tailored investment advice

Every single investor’s needs are different and, while the points above are good general tips, there’s no substitute for an investment approach that’s tailored specifically for you. Once we know an investor’s risk tolerance and their investment goals, we can put in place a global portfolio of equities, fixed income, cash, and, when appropriate, alternative investments. The goal is to invest with a long-term view and maximise after-tax returns. It may just be the best investment you ever make.

7 Make informed decisions

Making the right choices to invest for your future can seem complex. But with the right investment strategy in place you can ensure you are able to make informed decisions to secure the financial
future you want. Life doesn’t stand still, so your investment approach shouldn’t either. Although people may have very different goals depending on what life stage they are at, their goals can be broadly categorised into essential needs, lifestyle wants and legacy aspirations. Getting investment advice can be one of the most beneficial things you can do for your personal finances and long-term financial wellbeing.

Looking to invest for growth, income of both?

If you’re not sure which investments are right for your needs, we can help. Whether you are looking to invest for growth, income or both, we can provide the expert advice to ensure you achieve your financial goals. To identify which investment options are right for your individual circumstances or to find out more, please contact us – we look forward to hearing from you.

The value of your investment can go down as well as up and you may get back less than you paid in. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK also have an impact on tax treatment.