Here We Go Again! (Again!)

I have written many times before about the seemingly never ending Brexit process and all of the political firsts that have occurred as a result.

The last time I used the headline of this article, I was speaking of the second General Election we had experienced in just 18 months when Theresa May decided it was a good idea to try and strengthen her majority (we all know how that worked out!).

After more than 2 years of negotiation and pontification, we now arrive at yet another delay to the Brexit process – this time until 31st October 2019 – Halloween – as if the media needed any more martial to work with when coming up with headlines about the shambolic handling of the Brexit process.

Strangely, the politicians are arguing over which of the ‘middle’ options should be chosen with Theresa May’s deal looking too hard for some and too soft for others. When you speak to the general public however, they tend to prefer one of the two extremes – leave without a deal or don’t leave at all.

How this political and societal divide will resolve itself will no doubt make for some fascinating reading and watching over the coming months. It feels as if BBC News is like an episode of House of Cards or The West Wing. While it is mighty entertaining – I just wish it wasn’t the fate of our country being dramatised.

Questions will now turn to what impact this will have on markets and the economy. Given the mute response this week when the delay was announced, it seems that markets had largely priced in the continuation of the current ‘stalemate’ position for some time to come.

What is starting to be felt though is the impact of uncertainty and there is a palpable feeling of frustration when you talk to business owners. While we all knew that the Brexit process would take some time, now that we seem to be in a never ending cycle of delay, the uncertainty seems to be taking its toll on the decision making ability of businesses and with good reason.

At this point almost all of the options remain on the table. A no-deal Brexit, a second referendum, no Brexit at all, a general election – it would take a very brave man indeed to rule any of these options out. In fact, I think we have a bigger range of outcomes now than we did before the referendum and that is not good for business or the economy.

At this stage, I do hope that a solution can be found quickly (as I’m sure the rest of the voting public do too). It seems reasonable to assume that Theresa May will have to go at some point in the near future and rumours abound that this moment could come shortly after the Easter break.

The big question is whether the resulting leadership contest will also then trigger a new General Election which really would make for fascinating watching. On the other hand, perhaps the Conservatives now know better than to try and secure a mandate for a new leader!

However things pan out – rest assured – we will be watching developments closely, keeping you informed of our views (and those of the markets) along the way. You better get comfy – I feel we have a way to go on this ride yet!

 

The Importance Of Financial Education

A couple of weeks ago, I attended the latest Personal Finance Society (PFS) Regional Conference, and as the Professional Qualifications Officer for Kent, I presented some slides to other financial professionals on the initiative by the PFS for members to provide pro bono financial education sessions within local secondary schools.

The content is in the form of a board game and looks to provide students with tips on understanding investment risk and financial budgeting, but for me the most important objective is helping young people to avoid financial scams. It reminded me of an article that I’d read on the BBC website a couple of days earlier about London Capital & Finance which went into administration after taking £236 million from investors.

Their marketing campaign targeted first-time investors with promises of fixed interest returns of 8% from secure ISA’s and would spread investment risk over hundreds of companies. The reality was that 25% of the investments made were paid as commission to the marketing agent, and then funds were lent to a total of 12 companies – four of which had never filed accounts and nine were less than three years old!

The financial crisis of 2008 showed that even well-known and reputable financial firms are not immune from the perils of administration, but in the current low interest rate environment, a guaranteed investment offering a return of four times the best Cash ISA rate on the market would be treated with scepticism by the majority of experienced investors.

The government have introduced incentives such as Junior ISA’s and automatic enrolment to encourage younger people to start saving earlier in life, but it is important that we educate them on managing money responsibly. For those children fortunate enough to have parents and/or grandparents funding Junior ISA contributions, they will take over sole responsibility for the management of the account on their 18thbirthday. What’s to stop them investing in the scheme they saw on social media promising double digit returns, and looks so much more interesting than their existing investment?

I’ve done a number of surgeries to talk to people about the pension benefits offered by their employer, and some of the people I speak to are just out of school or university. For the majority this is probably the first conversation they have ever had about pension provision, and while there are those who are lucky enough to have parents who they can turn to for help, I’ve met young people who struggle to understand how deductions from payroll such as Income Tax and National Insurance operate.

Matt wrote a blog a couple of months ago about our intention to host workshops to provide the tools the next generation needs to be successful financially, and while the goal of any investment is to make some money, it is probably more important to teach the lesson of how not to lose it all.

Finally … Some Good News

I have watched with fascination over the past few days as the Space X Crew Dragon Capsule has successfully been launched, made it into orbit and docked with the International Space Station, marking the first time a US built space craft capable of carrying humans has been launched since the space shuttle programme was retired in 2011.

I remember the day they announced that they were retiring the shuttles and it was a sad day in my mind. It felt like a backwards step – like we were undoing many years of human progress. Like we were giving up, just when space was starting to become accessible.

If nothing else, the Space X story has provided a break from the constant Brexit related news and political infighting which I must say was very welcome. But I think it represents more than that. I think what we are seeing here is the birth of a brand new industry and a new chapter in human space exploration.

Elon Musk one day plans to host a ‘base’ of some kind on the moon. As implausible as that might sound, it would take a very brave man indeed to bet against him achieving that objective. He has, after all, accomplished almost everything that he said he wanted to do (albeit very often over time and over budget). You can say what you will about the man, but you can’t take away from his acheivements.

Can you imagine back in 2002 when Elon Musk founded Space X and he sat down round the dinner table and told his friends and family that he was going to send a rocket into space. This ‘normal’ guy, not affiliated with NASA or any international space agency, was going to build a rocket and send it into space. The people in the room must have thought that he was genuinely insane! I am surprised he wasn’t committed there and then.

But yet, here we are, 17 years later and that crazy, ludicrous, impossible dream has become a reality and that is what I find so exciting about this week’s launch.

Yes – it means we are one step closer to commercial space travel, which I dearly hope is something I can partake in during my lifetime. As soon as tickets into space fall to some sort of affordable level, you can sign me up!

Yes – it means that the US space program is back in businesses, which is incredibly exciting.

Yes – it means that we could see a base on the moon one day.

But, more than that, it represents the power of human ingenuity and determination. It shows what is possible when people believe in something, no matter how crazy it might seem. If that doesn’t give you confidence in the human race, in the markets, in the world, I don’t know what will.

I will watch with intrigue later this week as the Capsule makes it’s decent to earth. I dearly hope it all goes to plan, but, even if it doesn’t, I am pretty confident of one thing. Elon Musk will not give up!

Although Space X remains a private company, I think it is only a matter of time before it, or a company like it, goes public and it will be very interesting to see what the market makes of mankind’s space adventures!

The Next Generation

I have been speaking with my clients a lot over the past few months about ‘the next generation’ in anticipation of our first ever next gen workshop later this year.

The conversations have been fascinating and have highlighted a huge knowledge gap when it comes to personal finance.

The financial world is more complex and faster paced than ever before and yet we seem to be giving young people less and less education to help them prepare for their financial journey through life.

The majority of young people now are entering the ‘real world’ without any knowledge of pensions, mortgages, credit card or interest rates. Knowledge that many of our clients will take for granted.

Although personal finance is supposedly on the national curriculum to be taught at schools, it is thought that only 40% or so of schools are actually delivering these lessons. I might also be to forward as to suggest that teachers might not be the best placed people to be delivering personal finance lessons (an assertion that teachers themselves agree with).

Although sometimes the media can create a self fulfilling prophesy, it has been well reported how a lack of financial education in schools is creating a real challenge for young people as they emerge into a somewhat harsher financial environment than previous generations.

It is well known that the young of today will face higher property prices, a lack of ‘gold plated’ final salary pensions and perhaps lower investment market growth to boot.

Although these issues present challenges, they are here to stay. Moaning about them will do nothing to prevent them and so we must take action to try and overcome these hurdles.

In my view, the first step is education. That is why we will be doing more over the coming years to educate the next generation. Our mission starts in earnest later this year when we host our very first ‘next generation’ workshop.

Our aim is to instil some of the basic financial knowledge that has helped our clients be so successful financially.

Although it is just a scratch on the surface, we have to start somewhere. Watch this space for more news later this year.

 

The Art Of The Possible

It occurs to me that as a Financial Planner, a large part of our job is to help people see what is possible.

We are often confronted with goals and desires that people believe are ‘impossible’.

“I want to retire at the age of 47 and go travelling”

“I want to quit my day job and start a new business that I love”

“I want to go on a 5 year round-the-world trip and write a travel book”

“I want to work just 3 days a week so that I can spend more time with my grandchildren”

“I want to gift my son and daughter £300,000 so they can finally buy a home of their own”

There are all real-life examples of ‘impossible’ objectives that Financial Planning has made possible.

Very often, the biggest barrier to making these things happen is us.

We get trapped in our own mis-conceptions about what might or might not be possible:

“People just don’t retire at the age of 47 – its not the done thing”

“If I work just 3 days a week surely I am just being lazy”

“If I make a big gift to my children, I might not be able to afford to retire”

We are often also terrified by what everyone else will think:

“What will my children say if I quit my job at the age of 47?”

“Will my friends think I am mad if I go travelling for 5 years?”

“My wife will think I am crazy if I walk away from my regular pay check to start a business that might not work out”

The truth of the matter is that other people are either; A – not that bothered by what you wish to do or B – more supportive than you might imagine.

Our own misconceptions are often just that – misconceptions.

With some creative thinking and planning almost any dream can be made a reality. I was reminded at our seminar last night of all the people we have helped to make the impossible possible!

New Year, New Markets?

The last quarter of 2018 was indeed challenging for markets with various factors combining to generate significant volatility over the quarter and some softening of market performance.

The biggest contributors to recent market performance have been the US / China trade war and resulting stop-start trade talks. In addition an unprecedented guidance adjustment from Apple, citing weakness in China, caused the company to lose both its much hyped $1 trillion dollar market cap and its crown as the worlds largest company.

The market clearly sees Apple’s performance as a proxy for other companies as the announcement cased a general stock market sell-off.

In the following weeks other companies have cited some weakness in trading, especially in China and many UK retailers are struggling with a weaker Christmas sales period as has been widely expected.

As we approached the end of our investment review for quarter 4, we saw a spike in volatility and as such delayed our review work by approximately 2 weeks to allow for a like-for-like comparison.

Over the holiday period volatility persisted and between Christmas and New Year, we saw some of the most significant moves ever recorded in US stock market history. Over the 3 months to the end of December the US Market was down by around 11.9% and the UK fell by around 9.5%. Given their diverse, global nature, the Buckingham Gate portfolios are behaving as expected and are significantly softening some of these losses.

As we have entered 2019, relative calm seems to have returned for the time being and markets are showing tentative signs of recovery, although it remains to be seen if this will persist.

Ironically, despite the near constant media attention, Brexit (or the potential lack of) does not seem to have caused too much concern for markets, although the weakness in the UK market compared to others over the past 12 months suggests that much of the current uncertainty is now priced in.

It remains to be seen if any further clarity will be delivered by the parliamentary vote over the coming weeks or if (as is expected) a ‘no’ vote takes us back to square one in the Brexit process.

The Buckingham Gate investment committee will continue to monitor events carefully, however we don’t see that the events of the past 3 months are particularly unusual or unexpected.

The past decade has seen record breaking growth in most major global markets and so some easing off is to be expected. In addition, despite much media commentary about high volatility, the level of volatility we are now seeing is almost exactly the average. 2016 and 2017 are actually the exceptions to the rule given the extraordinarily low levels of volatility seen over these 2 years.

The largest indicator of a more permanent downturn in markets is a recession and although there has been some softening of data in some markets, recession would seem to be a way off at present.

There are some potential upsides to bear in mind. Brexit might not be as damaging as some people expect, the US and China could quickly rectify their troubles and retailers could quickly turn things around.

We will be managing the portfolios with our investment partners cautiously, taking into account the market environment we find ourselves in.

We would like to wish all of our clients and contacts a very happy and healthy 2019!

Reflections on 2018

As 2018 draws to a close, there is a lot to reflect on and consider.

First of all we have the seemingly never ending Brexit discussions and negotiations with the final date for the vote now set for the week of January 11th.

If the vote is ‘no’ as seems to be widely expected, then this opens up another can of worms about the possible options. The BBC produced a very useful decision tree highlighting the possible paths that could be followed after a ‘no’ vote and I think I counted over 20 different combinations when I looked.

On the other hand, if Theresa May is to pull out a surprise ‘yes’ vote, then at least we will have some clarity over the future direction of travel, regardless of your views on the ‘deal’ itself.

It is important to bear in mind that Brexit is very much a UK issue. Markets elsewhere in the world do not seem phased by Brexit or the surrounding game of politics. They have other things on their minds. Talking to an Austrian chap at a recent business coaching event, it was interesting to hear how they see Brexit. Most Austrians, he informed me, simply think we are mad for having initiated the whole process in the first place. Given the resulting chaos – perhaps they are right!

Elsewhere there have been plenty of goings on to keep people occupied and despite the fact that we can’t get away from it here in the UK, Brexit is barely mentioned (nor does it need to be) in some of the other global markets such as the US and China.

Although we have seen some market volatility in the latter part of 2018, this is simply a return to ‘normal’ levels which are in contrast to the unusually calm 2017.

We have started to see some minor interest rate hikes across the major western economies. As I have written about before, although this could be a bit painful for markets in the short term, it is a very necessary part of our recovery from the decade-old financial crisis and is (at last) a small sign that things are returning to ‘normal’.

Although I will never try to predict what the following year holds (the last 2 or 3 years have taught us to expect surprises, both political and financial if nothing else) it can often be helpful to review the fundamentals of the global economy. I would encourage you to read this article from 7IM which provides some useful insight on the state of play and a calm, rational analysis of things potentially to come in the future.

Regardless of what is happening out there in the world, we remain long term investors. We don’t try to time the markets and we don’t panic when things seem tough.

As I wish you a very Merry Christmas and a happy 2019, I shall leave you with the words of Warren Buffet – a calming influence when the world seems to be going mad:

‘The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It is optimism that is the enemy of the rational investor.’

 

Reflecting On Brexit

The past few weeks have certainly been interesting not just from an investment perspective, but also politically as well.

As I pen this note, the Brexit deal would seem to be getting ever closer to a conclusion, however, Theresa May still has one almighty hurdle to jump in the form of getting the deal agreed by parliament back in the UK.

Ironically, this could well be the toughest part of the whole process for our embattled Prime Minister. Regardless of your opinions on Theresa May in general, I think we can all agree that her job at the moment is near impossible. I certainly don’t envy her!

As I have spoken about before, I believe that the next few years could be punctuated by things which are good news in the long term causing short term market volatility.

If this does come to pass, it will be the opposite of the rather strange environment we have found ourselves in over the past couple of years since the Brexit vote, where things that have been perceived as ‘bad news’ have been very positive for the markets.

The Brexit vote itself is one such example.

Of course, before the event, there were prophecies of doom and destruction in the event of a leave vote and indeed we did get some serious market sell offs … for all of 2 days.

After this, something unexpected happened. The de-valuation of sterling actually turned out to be positive for markets and indeed, this factor has probably been the biggest contributor to UK market performance over the past few years.

This is one example of bad news being good news for markets. The election of Trump could well be another.

As we move into 2019, I expect this trend to reverse.

If we do (ever) agree a Brexit deal, I would imagine that we might see sterling strengthen somewhat. This is good news in general for UK PLC, but could be bad for UK markets in the short term.

In a similar vein, increasing interest rates and the unwinding of quantitative easing (both good things in the long term – signalling that we are finally getting back to ‘normal’ economic health), could drag on markets in the short term.

These things, despite the short term pain they might cause, are totally necessary for the economy to build a solid foundation on which to grow into the future.

The past decade of growth has been partially fuelled by artificial stimulus and this process has to come to an end at some point.

The ending of the artificial stimulus programmes around the world could well be the best thing to happen to markets in a long time, creating a solid and stable base for the next period of growth which will inevitably be to follow.

While unsettling, the volatility we have seen over the past few weeks does not concern the Buckingham Gate Investment Committee greatly. This type of market ‘wobble’ is fairly usual as we start to approach the end of the market cycle.

That’s not to say that the cycle is over at this point, but we should be prepared for a slightly more volatile ride ahead.

The main predictor of a significant market correction or a ‘bear market‘ is a recession and although global economic indicators (job numbers, GDP growth etc) are not the best we have ever seen, they are not bad either.

There is certainly nothing in the figures to indicate a recession at the moment, although things can and do change quickly.

As usual, we must insert that caveat that the past is no guide to the future and things can be unpredictable in the wonderful world of investments.

I shall keep the blog updated with my views. All eyes now are on the 11th December and the deciding vote.

The Generational Divide

I have been speaking recently to clients about the so called ‘generational divide’ – the seemingly vast wealth of the baby boomer generation with their burgeoning property and investment portfolios when contrasted with the apparently hopeless state of the millennials finances.

I have long argued that these types of generalisations are very unhelpful and don’t really serve to achieve anything.

In fact, I think media narratives like this have the potential to become self fulfilling prophecies if we are not careful.

If millennials are bought into the fact that they are ‘doomed’ to rent for their entire lives and they they will never retire, then this is probably what will happen.

I have a bit of a bee in my bonnet about this issue and, in our own small way, we are committed to doing something about it.

Next year we will be launching the first Buckingham Gate ‘next generation’ workshop to hopefully teach our client’s children some of the lessons that have made them so wealthy.

This is the subject matter that really should be being taught in schools but definitely isn’t (and if anyone thinks a 30 minute ‘general studies’ session on personal finance qualifies as sufficient financial education to prepare young people for a lifetime of financial decisions they are sorely mistaken).

We will also be covering some of the slightly more advanced wealth building strategies that have served our clients so well.

I will keep the blog updated as we finalise the plans for the workshop next year and we will be announcing the date early in 2019.

We hope to see as many of your children there as possible.

Trust Tax Consultation – Nothing To See Here (Yet)

Please forgive the unusually technical nature of my blog today, but this is an issue that impacts on many of our clients and potential clients – trust taxation.

Many people would have seen the media reports about the consultation that HMRC has launched on the taxation of trusts (among other issues I might add).

The consultation is focusing on the taxation of trusts, their operation and administration and also checking that the treatment of trusts is fair and equitable when taken together with the other possible methods of estate planning.

In principle, none of this is a bad thing.

My Good Friends – The Media

Now as you might expect, the media have vastly over-done the potential impact of this consultation. Some headlines have declared that ‘IHT trusts will be stripped of their tax advantages’.

This makes for a good headline (and no doubt draws readers and traffic to websites to drive ad revenue), but is it actually true?

Well, as with any consultation, the strict answer is – we don’t know.

A consultation is just that, a consultation.

HMRC are seeking input and ideas on some of the questions posed by the consultation.

What we can glean from the questions though is the direction of travel and nothing in the consultation document itself (unlike some of the media commentators, I actually saw fit to read the whole document before making prophecies of doom) has given me major cause for concern at this time.

First of all, many consultations result in no change at all. Either the consultation does not deliver a viable alternative to the status quo, or the whole things just loses steam and falls off the radar. This has happened countless times before.

But, even if we do see action, I think much of it could be positive.

The consultation document first talks about simplifying the taxation of trusts (nothing about the rates here, just the operation). This would be incredibly welcome given the current complexities of accounting for income tax, capital gains tax and inheritance tax across the settlors, the trustees and the beneficiaries of a trust.

Three different taxes accounted for across three different groups of people can and does get messy sometimes and any simplification to this system will do nothing to harm the appeal of trusts.

The document also talks about the fact that the 20% entry charge on gifts into trusts could be perceived as unfair when compared to the unlimited potential gifts we can make to other people.

Although nothing is certain, the language here hints to me that HMRC could be playing with the idea of removing this charge which would again be most welcome.

The only potential downside is that there is hints of an increase to the 6% periodic charge. While this would be unwelcome, it would also be relatively un-important for the majority of our clients on the basis that we usually manage trusts to be below the nil rate band allowance, meaning that no tax is due in any case, regardless of the rate.

The consultation document recognises the benefits of trusts in financial planning and in society and so I don’t see any prospects of trusts being ‘outlawed’ (again, contrary to some headlines you may stumble across).

As with many things, ‘wait and see’ will be the best approach here.

Firstly, the consultation may come to nothing, in which case, no action will be required.

Second, the consultation could provide benefits to trust planning, in which case we will look at how we can take advantage.

And, if we do see any negative changes, we will analyse them and plan around them, just like we have planned around numerous negative tax changes before and no doubt will again in the future.

Despite the headlines, I don’t believe that the consultation (in its current form) is particularly dangerous.

Taking action based on sensationalist headlines on the other hand – well that could prove very dangerous indeed.