Financial Review, but also re-balance

At Chapters Financial, we have always noted the benefits of clients reviewing their finances on a regular basis to ensure their existing planning meets with their needs and objectives. Individual circumstances change, markets change and the asset allocation of funds can also change. A review may occur once a year or more regularly, dependent on the needs of the client.

The asset allocation of an investment portfolio is informed by the risk profile of a client and the returns that are sought. Over time, market movements can cause one or more asset classes to drift from their initial targets, resulting in the investor holding a portfolio that may not reflect either their attitude to risk or their investment goals. Rebalancing, as one financial planning solution, is about controlling risk and ensuring that your portfolio is not overly exposed to the success or failure of one particular asset class.

Rebalancing can be an important part of financial planning. Simply put, the process involves periodically buying or selling assets in a portfolio to bring it back to its original asset allocation level. However, there is no accepted industry-wide ‘best practice’ on how and when to rebalance a portfolio. Some providers offer an automatic rebalancing model as part of a passive investment approach. There is much data to suggest that this can work, particularly if fairly wide tolerance bands on both the upside and the downside are in place to avoid excessive trades and associated charges which could erode returns. However, automatic rebalancing is just that – automatic – client portfolios are rebalanced once they drift beyond set tolerance bands. If this is set to occur at pre-determined times over the year, e.g. quarterly, it will take place even if market conditions at the time are not optimal.

Chapters Financial prefers to take a more active approach to investment management and review. Our view is that calendar-based rebalancing alone is not the best approach – at each review, it is important to consider the prevailing market conditions, the specific circumstances of the portfolio in question and to tailor the solution to the needs of the client. We are all different and our investments are likely to mirror this.

At a review, we would anticipate examining the performance of the funds, recommending changes where required to improve the potential to meet the client’s investment objectives and also re-allocating fund balances to meet with a client’s attitude to investment risk. Our active approach means that we can take a view on the ongoing performance of each asset class within a portfolio, rather than just following a set of systematic rules for rebalancing. Given the levels of volatility that all financial markets can experience, we believe that this individual and ‘hands-on’ approach offers the best way to work towards our clients’ investment objectives within agreed risk parameters. This does not mean that at a review you would anticipate a wholesale change of your holdings. However, areas of underperformance can be addressed and areas of good performance may see a ‘profit-take’ situation.

As suggested, each of you is individual and your investments are likely to be the same. No individual advice has been provided during the course of this blog. If you would like financial advice on the allocation of your funds/ investment strategy, then please contact the Chapters Financial team in Woking (01483 330800) or Guildford (01483 578800).

Keith Churchouse BA Hons FPFS
Director, Chapters Financial Limited
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Kicking the US fiscal ‘Can’ down the road

There is a saying of “Kicking the can down the road”, which means to delay a decision in the hope that the problem or issue will go away or that someone else will make the difficult decision easier to swallow, the later it is made. This saying has also recently been applied to the ‘Fiscal Cliff’ of the American fiscal deficit and the ways that it can be brought under control. A hard path to negotiate if ever there was one.

The US ‘Fiscal Cliff’ is the deficit which would have been caused by simultaneous changes in proposed tax rates combined with government expenditure. This was due to occur on 31 December 2012 until the US politicians (Senate and House of Representatives) finally agreed to extend the US Government’s borrowing limit/ debt ceiling. However, they only extended this by a matter of months and effectively “kicked the can down the road”.

You may have noticed in the media recently that the US government has started a partial shutdown after both Houses of Congress failed to agree a new budget. This has meant that the federal government has to save running costs and to achieve this has partially shut down non-essential departments and their related personnel. This could potentially affect more than 800,000 federal employees who will be on unpaid leave until the budget can be agreed. The knock-on effect to America’s GDP could be significant if the situation is sustained for a long period. The shutdown is significant, but is not the ‘main event’. The debt ceiling is.

Effect on the US Economy and Dollar

The planned budget agreement to resolve borrowing limits was meant to be ratified by both Houses of Congress by 30 September 2013. As you may know, this was not achieved. One consequence of the first shutdown in 17 years has seen an initial weakening of the dollar on 01 October 2013. Some commentators in the media are suggesting that these recent events could derail the world’s largest economy. I believe this is somewhat of an extreme view and do not hold this opinion. But the short term impact will be felt by the markets while uncertainty remains.

Outlook for US Economy

I believe that the main thrust of this impasse is partly due to President Obama’s health care bill and this is effectively being seen by some as a game of poker between the Democrat held White House and Senate, and the Republican held House of Representatives. Who will blink or fold first? As is usual in politics, I expect that some hurried negotiations will take place in some corners of Washington which will allow a new budget to be in place with a revised healthcare bill and the proverbial can will be kicked down the road again – possibly until there is a change of occupier in the White House or balance of power in the Houses of Congress.

At Chapters Financial Limited we remain optimistic for the outlook of the US economy and financial markets, although allocations to this area should be invested as part of an overall investment allocation process.

Past performance is not a guarantee of future performance. Fund values and currency values can fall as well as rise and are not guaranteed.

It should be noted that as financial planners, Chapters Financial remain positive about North America as an investment area and of the dollar as a currency.  

Each investment and its allocation/ recommendation is different and individual to the Client. To consider your circumstances with regard to savings and investments, you should take individual financial advice. No individual advice is provided in the content of this Blog. The team at Chapters Financial can help you with your planning and look forward to working with you.

Simon Hewitt

Financial Planner
Chapters Financial Limited

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Where to go next? Investment allocations

There is a very old saying and theory that some investors 'sell in May and go away' ....usually with the plan that they return in early autumn to pick up where they left off and take new investment opportunities for the future period. Investing in real assets though should always be seen as a medium-longer term strategy, usually with the objective of investing for a 5+ year period.

The question however would be where to invest? Chapters Financial has always recommended diversity when investing, usually spreading any proposed investment across a range of funds to diversify risk and to offer the potential for returns based on a client’s attitude to investment risk. More information on our investment risk scale can be found here. Your view is also likely to be swayed by why you are investing, either for income generation, growth or a mix of the two, as an example.

Chapters Financial also maintains 'house views' on investment areas and the purpose of this blog is to share these with our readers as we enter the autumn season of 2013. Obviously, views can change quickly, with no individual advice being provided during the course of these current investment notes. You should take individual advice based on your own circumstances to meet your needs. Some of our current thinking is as follows:

Generic Investment Area	Current View
UK Equity Growth	Positive
UK Equity Income	Positive
Europe	Negative
Corporate Bonds	Neutral
North America	Positive
Japan	Negative
Property (Commercial)	Neutral
Emerging Markets (including BRICs)	Neutral

There are many other investment areas and opportunities and you should seek individual advice on any specific areas you wish to consider. We would however recommend diversity across a range of areas.

The value of investments and pensions and the income they produce can fall as well as rise and is not guaranteed.

However you plan to invest, through pensions, SIPPS, ISAs, Investment Bonds, portfolios, Unit Trusts, OEICS and the like, Chapters  Financial can help you with your asset allocations with the aim of meeting your needs into the future. We recommend that investments and pensions should be regularly kept under review to ensure that your financial planning continues to meet your needs and attitude to investment risk.

No individual advice has been provided in the content of this blog. The team at Chapters Financial would be pleased to help you with your individual or business (SME) financial planning. Please contact us on 01483 578800

Keith Churchouse FPFS

Director

ISO 22222 Certified Financial Planner

Chartered Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899

From capital growth to income. The possible life phases of Investment & Savings

Everybody tends to move through their personal life phases over time. It would be natural for their money to do the same as their needs develop and evolve.

This usually requires some financial planning and I have considered below some of the issues that might need to be considered through the phases of a lifetime.

Starting the savings process 

Capital accumulation usually needs (amongst others) time and money. This might sound a bit obvious, but the sooner you can start saving the better, and the more you can put in at the earliest points usually creates the most capital (not guaranteed ) for the future. This might start with smaller amounts in your early working years and build as the pressures of household and family expenses come under control and household income rises as your career develops.

The desire to save can be fuelled by any number of objectives, from buying a house, to saving for a wedding, to paying for school fees, to name just a few examples. It might be simpler than that, just paying for this year’s summer holiday.

Accumulation phase / Capital Growth 

As you move through your working life, and savings are invested, many will focus on capital growth as the objective. They have no real need for additional income and their investment objective is capital growth, with any income produced being re-invested accordingly.  Savings might be invested in tax efficient plans, such as ISAs and pensions, and also balanced across spouses/ partners to ensure that annual allowances are maximised where possible. This last point also has the potential to help balance income using income tax allowances in later years, such as retirement.

Attitudes to investment risk might be balanced or aggressive in this phase to endeavour to maximise returns, accepting that this is likely to import volatility in returns. More information on investment risk (and notes on volatility) can be found on our website here. The important issues of volatility can be considered further at our Investment Risk Scale here.

Income Phase 

It is possible that at the end of a working life (and usually the end of the accumulation phase), savings and investments would be re-balanced with the emphasis being focussed on income generation (rather than capital growth previously targeted) to boost income in retirement.  Attitudes to investment risk should also be checked at this time to re-test tolerance to risk and capacity for loss (ability to withstand falls in the value of the investment and/or reductions in the amount of income it can generate). Some may want to reduce their previous investment risk ratings, becoming less accepting of significant volatility in the capital they have accumulated.

This income phase may sometimes be deferred if not needed, being initiated when higher costs are incurred in later life, such as Long Term Care. More information on this topical point can be found on our website here.

Summary 

As the notes above indicate, a regular review of the allocation of your investment assets is worthwhile, partly to ensure that they continue to match your attitude to investment risk and partly to ensure that they match the life phase (and its requirements) that you reach. Past performance is not a guarantee of future performance.

No individual advice has been provided in the content of this blog. For individual advice on your pensions, savings and investments needs, please contact the team at Chapters Financial on 01483 578800.

Keith Churchouse FPFS
Director
Chartered Financial Planner, ISO22222 Certified Financial Planner Chapters Financial Limited

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

The importance of regular financial reviews

For some, pension and investment planning are both fascinating and dynamic in the way that various factors can be applied to provide the overall balance required. Others do not find this topic so consuming, although this does not alleviate the need to regularly review existing financial arrangements to ensure that they continue to meet your expectations.

In many cases, this can be viewed from two specific angles, detailed below:

The Tax Wrapper Angle

Like many issues, tax legislation rarely stands still for long, changing with budgets or possibly amended in Autumn Statements.

It will be interesting to see what our Chancellor achieves in this month’s Autumn Statement. Reviewing the tax wrapper being used (or available) in a pension or investment is worthwhile to ensure, where possible and prudent, that tax allowances are being used efficiently. Headline examples might be this year’s ISA allowance (£11,280) or annual gift allowance (£3,000) for IHT purposes, with many focussing on this later note as we approach the festive Christmas season. There are other less well known (or well used) allowances that can be overlooked, but may remain effective for you and your family’s financial planning. An example might be pension funding (usually to a limit of £3,600 gross in a year) for children. This example might seem an unusual idea, but the effects of very early pension funding for an individual can be significant.

Another great example of change in legislation, in this case in the provision of financial advice, is the ending of commission and a move to fee based advice and implementation from January 2013. This may have an effect on the way you take and pay for future advice. We have detailed this change in previous Blogs on this Chapters Financial website.

The Investment Angle

If you hold existing invested assets, you will have made decisions about the level of investment risk you are prepared to accept and confirmed your objectives for growth, income or possibly both, among many other points. The same would apply for new money being added, taking into account existing arrangements, your expectations and the diversity you expect. Investment markets and fund/ asset allocations usually move constantly, and it is possible to see past/ historic decisions of how you want an Investment Bond (as an example) to be balanced changing because of market movements. Your own circumstance and tolerance for investment risk may have changed from previous times and the current allocation may now be different from the preferred choice. You may, an example, have moved from an accumulation phase for your investments to a required income phase. This could usually be referenced at the time of retirement.

Regular Financial Review

A regular review allows the previous decisions to be considered and challenged to ensure that your existing holdings meet with your expectations and anticipated aspirations. If required, fund switches are usually easy and cheap to arrange and this planning can be used to change asset allocations to meet your on-going requirements and to reflect views of future investment opportunities.

Personal needs may have changed where capital or income may need to be released from existing holdings to meet a specified requirement and reviewing diversified holdings to see where best to release gains ( if available, possibly using tax allowances, such as the Capital Gains Tax (CGT) allowance/currently £10,600 2012/2013) is usually worthwhile and recommended.

Summary

Each client is an individual and we will provide financial planning advice on this basis. Therefore, no individual advice has been provided during the course of this Blog. The team at Chapters Financial Limited will be pleased to help you with your own individual requirements and to review and make recommendations for your existing arrangements.

 

Keith G Churchouse, Director
Chartered Financial Planner
ISO 22222 Certified Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.

If I was starting again, would I start from here? / Asset Allocation

I am often asked when I think that we will come out of recession and return to the ‘good old days’ prior to banking crisis’ and alike. Do I think the economic world is better or worse for the recession? My simple answer is ‘neither, it’s just different!’ I think that the current economy and its somewhat marginal growth will continue for some years to come and that this is ‘as good at it gets’ for the foreseeable future. I hope I am wrong, but if not, managing expectations and working within the confines of what we can influence is always a good place to start.

Noting the above, that does not mean that profit from investments cannot be achieved and we are all very aware that investment markets have changed significantly following the volatility of recent years. This has seen (possibly) differing questions being asked, such as ‘Are Gilts riskier than Equities (Shares)?’

It seems to make sense that there would be shorter-term periods when equity markets are less risky than the long-run would suggest. I also think this is what some commentators are driving at when they ask ‘are gilts riskier than equities?’ I think they are suggesting equity markets are less risky than normal at the same time that gilts are more risky than normal. However, the notion of prospective riskiness is closely tied to notions of current value. If equity markets are over-priced there is an increase in the associated level of prospective risk and vice versa.

Considering this further, it is really very difficult to quantify just how risky equity markets are or when they might be more or less risky than usual. It is this uncertainty that goes right to the heart of ‘riskiness’.

The question gives rise to the notion that investors have a choice, either investing in equities or, alternatively, going for gilts. This is a false choice and one that relies too much on market forecasts. The sensible approach is to maintain holdings of both equity and gilts for diversification. Confidence is high that gilts will go up in value in the event that equities go down in value. In a similar way, there is confidence that equities will go up in value when gilts go down in value. Choosing one area over the other is to put yourself at risk of trying to forecast returns, and this may not be a sensible tactic.

Diversification remains the Key

We have, over the years, advocated asset allocation and diversification of funds (within all investment arenas, such as pensions, ISAs, Investments, Trusts, OEICs & Unit Trusts) to ensure that opportunities for investment growth and income are achieved. We will continue to achieve this with our clients (Individuals/SMEs/Charitable Trust) and enquirer’s needs. Any financial/investment planning should be based on your objectives and attitude to investment risk. An Investment Risk Schedule can be found on the Chapters Financial website here.

No individual advice has been provided during the content of this Blog and Chapters Financial Limited can help you with your investment planning, in all its many formats, into the future, continuing to provide the independent financial advice (IFA) into 2013 and beyond.

Past performance is not a guarantee of future performance. Fund values can fall as well as rise.

Keith Churchouse, FPFS, Chartered Financial Planner, ISO22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899