The Importance of Financial Planning

Monthly Investment Note: November 2023

/in , , , , , , , , /by

The House View Summary:

With our Celtic Samhain festival over for the year, the real horrors of the world are laid bare, flashing on our screens as we enter November. Coming towards the year end, we have one eye on the investment journey of the past 10 months and one eye on where we may end up at the end of the year.

In October, EU Inflation as measured by the Harmonised Indices of Consumer Prices (HICP) continued its downward trajectory from an average of 4.3% to 2.9% with a range of -1.7% in Belgium to 7.8% in Slovakia. Ireland followed suit with lower inflation (5.0% to 3.6%) in the same period. All this points to ECB interest rate policy, with interest rates unchanged at 4.5%, being effective in impeding inflationary growth and indeed, successfully rolling inflation back towards the desired 2% rate which is the goal of the ECB monetary policy.

This is a far cry from the start of year when we experienced an inflation rate of 9.2% in the EU and 8.2% in Ireland.  Noting, of course, that like coastal erosion, inflation erodes “permanently” the value of money over time; our €100 today will no longer buy us the same basket of goods as this time last year.

Jumping across the pond to the US, we note a smaller reduction in the rate of inflation from 3.7% to 3.2% and like Europe, the Fed funds rate remained unchanged at 5.5% for the November meeting, a portent  that perhaps, progress was slowly being made towards the 2% acceptable rate. However, some commentary emerged from a few Federal State Central Bankers, around a further increase in the FED rate by another 25 bps, something which will be addressed as the data emerges. Raising the FED rate further will depend on how core inflation will behave to the sustained higher interest rate environment. This is anything but trivial and given the US is at near “full” employment, will be more difficult to gauge in the coming months.

Looking forward to next year, both the ECB and Fed have expressed a desire to hold interest rates higher for longer, something which will no doubt hamper earnings growth on the equities side. I came across a very interesting chart recently which was published by Research Affiliates, regarding US interest rates. The chart shows the Federal Govt interest payments (in blue) versus the National Defence, Consumption & Investment are now almost aligned, in other words, the US government is now paying interest at the same level as is allocated to the huge defence budget, (ca. €1Tn per year).

fed-interest-payment Turning to US Treasury yields, we are now starting to see changes in the yield curve dynamics. The 2 year and 20 year bonds are now yielding 4.83% and 4.82% respectively and the 5 year and 10 year bonds are yielding 4.43% and 4.45% respectively. These yields are all down since September indicating that the bond sell-off in US debt is probably close to being over.

Finally, we are seeing that Oil prices, having hit the lofty early $90’s per barrel earlier in the year have for now returned back to $81 per barrel (at time of writing) a swing in correction of ca. 11%. No doubt, Middle East dynamics, OPEC plus and the war in Ukraine, could still threaten supply, but supply chains to the developed economies for both crude Oil and natural gas have been re-engineered over the past 12 months and stocks have been replenished ready for the coming winter months.

So, economics aside, what does all this mean for investors? Year to date, returns from global equities markets are ca. 13.7% which is down by ca. 9% from the July high of 15.1%. European Equities have recovered their recent shock in September to deliver ca. 9.4% since January, while US equities have delivered ca. 16.3% and Japanese equities have delivered 11.2%, all in Euro terms. These are increases from the September numbers and show a return of confidence in risk assets.

Looking forward, we are seeing forward price / earnings ratios continuing their reversion to long term averages with global equities trading at 15.4 times, European equities at 11.3, Japanese equities trading at 14.1 and US equities trading at 17.3 times their earnings. These are all lower than their seven month averages indicating that (apart from the magnificent seven) equities globally, are trading at good to fair value in the current interest rate environment.

The long-term forecast for growth in global stocks has remained largely unchanged at 10.4% with an average yield of 2.3%. This puts the equity risk premium at ca. 5.6%, nonetheless, current conditions still continue to drive fund flows to the money markets which are currently yielding ca. 3.8% and which are a component of many portfolio’s.

As always, we take the long view on Investments and are happy with globally diversified portfolios. In today’s (relatively) high or normal interest rate environment, we continue to see fair value in across global equities (fPE’s falling to 15.4). We have seen a small resurgence in equities driven by the perceived ECB and US monetary halt in future interest rate rises, which may (or may not) come to fruition and the acceptance that rates will likely not fall to any great extent until late in 2024 at the earliest.

Our view, on global bonds has also remained as per last month. As mentioned, the US 10 year treasury is now yielding 4.45%, which is attractive when compared to the average dividend yield of 2.3% for risk assets. Therefore, with bond yields at current levels, and interest rates almost at their forecast apex, this asset class continues to look more attractive, than in recent years. Our cautious view on lower volatility portfolios continues to be implemented through the use of money market funds, currently yielding ca. 3.8% and hedge fund positions to exploit market inefficiencies; all in all, providing some degree of protection in the current volatile climate.

Sources: Central Banks: Federal Reserve, ECB, CBOI, Sharepad®. Euro Inflation is measured by the Harmonised Indices of Consumer Prices (HICP).  Periodic Market updates & reading materials  from Vanguard, Bloomberg, Ruffer, Davy Select & others depending on subject matter. All views and details contained are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use. 

The Importance of Financial Planning

Monthly Investment Note: October 2023

/in , , , , , , , /by

The House View Summary

1

As the leaves turn a different shade of green & we start to light the fires indoors, heading into the final quarter of the year, we are starting to see a change in sentiment in Markets.

In September, EU inflation (HICP) across the bloc, reduced by 0.9% to 4.3% (from 5.2% in August), US inflation remained flat at 3.7% and Irish inflation actually rose slightly to 5% (from 4.9%). The conclusion from these data as articulated by the respective central bank presidents is that the “job is not yet done”; the “job” being restoring economies back closer to the normalised inflation rate of 2%.

How this is achieved creates a conundrum for central bankers, where on the one hand, they have a remit to bring inflation under control and on the other, they don’t wish to send their economies into a tailspin of recession. The so-called soft-landing option is their desirable outcome and in the US (at least) this might seem plausible, while in the EU, this might pose more challenging given that some economies (Germany) are already in recession. The big question on everyone lips at the moment is whether both the ECB and the FED will hike another 0.25% in interest rates or hold the current rate level for longer.

2

Technically, there are plausible arguments for both cases, but I want to drill down to the case of hiking rates. As a business, with the increased rate hikes, the cost of credit increases. This places pressures on margins, leading to lower earnings which inevitably leads to a price correction of publicly quoted companies, seen in September across most developed markets. All is not rosy on the Sovereign side too, as higher interest rates lead to higher yields (the US 10 years Yield is 4.91%; its highest since 2007), which means higher debt servicing costs and less liquidity for national investments.

Extending this further and incorporating the stubborn high (core) inflation we are still seeing, both industry and governments are now being hit on both sides at the same time. With the costs of raw materials and labour increased significantly over the past two years, margins and returns on capital are again lowered. Finally, with inflation still high but relatively stabilised, we are now seeing a potential shortfall in oil production. Should the tragic events of the middle East not be resolved, this will exacerbate. Oil has already pushed passed the $90 per barrel range, a psychological trigger for alert with investors.

3

So, what does all this mean for investors? Year to date, the returns on global equities markets have dropped from 15% (in July) to ca. 11% at time or writing which is a downward reprice of the markets by ca. 26% from the high in July this year. Notably however, trading volumes are low suggesting that many participants are holding safe-haven assets. Indeed, with US inflation at 3.7% and US 10 year bond yields at 4.9%, who can blame them. Similarly, we are seeing money market funds providing 3 to 4% in yields, so the parking of new capital in risk-off assets seems to be a prevalent feature of current market conditions.

As always, we take the long view on globally diversified investments. In today’s (relatively) high or normal interest rate environment, we continue to see fair value in across global equities (fPE’s falling to 15.8), a return towards fair value for US equities (fPE = 17.3) and as noted when we compare the stock market capitalisation with US GDP. Just to highlight one important point, when we strip out the capitalisation of the magnificent 7 (AAPL, MSFT, AMZN, GOOG, TSLA, NFLX and Meta), and apply equal weight to all US500 stocks, we see and negative -0.8% return of the combined businesses, YTD. Something to ponder. No surprise then when we see the price correction due to prolonged, higher, interest rates but this highlights the importance of maintaining our outlook on global equities.

4Our view, on global bonds has also changed. As mentioned, the US 10 year treasury is now yielding 4.9%, its highest since 2007, which is attractive when compared to the average dividend yield of 2.3% for risk assets. Therefore, with bond yields at current levels, and interest rates almost at their forecast apex, this asset class now looks more attractive than in recent years. Our cautious view on lower volatility portfolios is augmented by money market funds, currently yielding ca. 3.85% and hedge fund positions; all in all, providing some degree of protection in the current volatile climate.

Sources: Central Banks: Federal Reserve, ECB, CBOI, Monthly Market updates from Vanguard, Zurich New Ireland & Bloomberg & Davy Select. All views and details contained are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

 

The Importance of Financial Planning

Monthly Investment Note: September 2023

/in , , , , , , , , /by

The House View Summary:
Dusting off the málaí scoile, September is back to school time and the adjustment back to routine and familiarity, the family taxi service and preparing for another academic year. Hopefully everyone has managed has had some time to rejuvenate the spirits for the final push to the end of the year. We had a plethora of global macroeconomic data during the break period often providing contradictory signals and coalescing to produce a muddy picture of the global economy which I have tried to breakdown as follows;

  • US resilience
  • EU & China laggards
  • Earnings beat expectations
  • The glorious Seven
  • Inflation Combat
  • Bond Market adjustments

In the US, Consumer confidence, labour market and industrial production throughout the summer months remained robust and despite eleven interest rate hikes, economically, the US economy did not slow as quickly as commentators anticipated. US inflation data actually increased to 3.2% in July from a previous of 3% which bucked the year to date trends of reduction from 6.4% in January. It was always known that reducing inflation by the last percent to achieve the 2% Fed target would be fraught with difficulty. Bearing in mind that often, monetary policy takes time to shake through the system, it could just be a matter of time before, we this in the key economic performance indicators. The bottom line is that with the current growth projections, the US is unlikely to tip into recession in 2023 though projections for 2024 do not yet rule this out.

In Europe, Inflation showed a very minor reduction to 5.3% (from 5.4%) and the recent drop in the PMI (purchasing managers indices) suggests likely recession in the coming months. The bottom line is that Europe is struggling economically and the ECB must decide in September, on whether to act hard or soft on future interest rate hikes in the coming months, to steer the economic cycle back to a growth phase. Broadly speaking, while central banks continue to analyse the data, we can continue to expect pro-longed higher interest rates until reversion of inflation rates back to the long-term desired level of 2%. This must be achieved with interest rate adjustment but as mentioned on the last note, our biggest flag for concern continues to be the ability to repay credit in a highly indebted corporate world with the case in point being some of the biggest property developers in the world’s second biggest economy.

Speaking of which, the long-heralded reopening of China has indeed fallen short of expectations with lower exports, foreign direct investment and land sales all declining. So, while the economy will likely still reach its targeted growth of 5% in 2023, in reality, this is far short of expectations from an economy emerging from the throes of COVID.

Turning to Q2 earnings, with the delivery season now almost completed, we saw contraction of US earnings by ca. 3% overall and in Europe by ca, 5% confirming an earnings recession. While it would be expected that the US would likely emerge from this period of earnings recession earlier, (within the next 6 months), European companies are likely to take longer to adjust back to growth; probably down to the faster implementation of the monetary policy by the FED. Guidance on the return of European companies back to earnings growth again is Q2 2024.

Continuing the theme of earnings, the glorious seven (Microsoft, Apple, Tesla, Google, Amazon, Nvidia and Meta) once again outshone their US 500 peers with the all encompassing “AI” narrative and really helped to drive US equities growth so far this year. The markets recognise that Artificial Intelligence is indeed transformational changing technology which will drive future innovation across business sectors. But, despite these heady factors, the fundamentals cannot be ignored. The parody of inflation & economic growth has stumped commentators thus far but with inflation having decidedly dropped in both the US & EU, it is now at the stubborn end 3.2% (US) and 5.4% (EU) where the Central banks must decide whether it is better to continue or hold off on further interest rate hikes in order to achieve their stated goal of 2%. What is not in doubt is that Central Banks are near the end of interest rate hikes cycle and this requires us to consider our options on the credit markets.

Speaking of which, we saw bond markets corrected over the last coupe of months as the continued strength in the US economic data prompted a sell off in US treasuries raising the all important US 10 year yield to 4.34%. It should be noted that the US two year yield remains significantly higher (4.89%) at writing, maintaining the inverted yield curve, an economic feature which very often predicates a recession within 18 months. Fundamentally, this means that the bond market has corrected for higher interest rates for longer, making yields which are available, more competitive and valuable as a part of a diversified portfolio. When Central banks make it clear they are finished raising rates, credit quality should add value to portfolios containing bonds.
Against this economic backdrop, we note that a globally diversified portfolio of equities continues to deliver good value. For portfolio’s not requiring full on risk assets and, with the terminal interest rates starting to appear, our view on long duration bonds has changed from a HOLD to BUY while still acknowledging the utility of the counter correlated hedge funds. Money market funds are now providing higher yields and thus also an attractive option to holding cash on deposit. We also acknowledge the aforementioned liquidity risk as being a significant risk to credit providers and continue to add the counter correlated hedge funds as a risk hedge to diversified portfolios at the lower risk end.

Sources: Central Banks: Federal Reserve, ECB, CBOI, Monthly Market updates from Vanguard, Zurich New Ireland & Bloomberg & Davy Select. All views and details contained are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

The Importance of Financial Planning

Monthly Investment Note: July 2023

/in , , , , , , , , /by

One of the golden rules of investing advises investors to avoid timing the markets as anticipation can be a costly venture and is probably appropriate here. With the recent June inflation data from the US starting to show a sustained reduction marked to 3%, from the recent year to date high of 8.1% in Feb, commentators are starting to discuss whether further rate hikes remain necessary to continue the FED’s journey of inflation steerage back to their heralded utopia of 2%. This is turn has stimulated the bond markets to re-price sovereign bonds which, as a consequence, has led to enthusiastic rallies on global markets. On a cautionary note, Euro investors are not necessarily seeing the benefits from this as along with these re-pricing mechanics, we are also seeing a significant weakening of the USD currency versus the Euro. So, while the markets “givith” with one hand, they take with the other.

Broadly, we expect interest rates to continue to rise but at a slower pace and with consideration to evaluate their effect on national CPI data. With this in mind, our biggest flag for concern continues to be corporate liquidity & the ability to repay credit in a highly indebted corporate world. Although behavioural research shows investors have less appetite for risk when interest rates are high, interestingly, most investors’ portfolios are still shaped for a zero interest rate world – but ……….the world has changed!

Against this backdrop, we note that a globally diversified portfolio of equities continues to deliver good value. For portfolio’s not requiring risk assets and, with the terminal interest rates starting to appear, our view on long duration bonds remains from a HOLD to BUY while still requiring the utility of the counter correlated hedge funds. Money market funds are now providing higher yields and thus also an attractive option to holding cash on deposit.

Commentary:
With the first half of the year done & dusted, we saw inflation reductions across the EU and US from the early year highs in the EU (HICP) of 8.6% to 5.4% and the US of 6.4% to 3%, noting of course that the US commenced their rate hikes earlier in the tightening cycle. In Ireland, the pace of reduction was slightly behind that of the European average with a reduction from 8.5% in Feb to 6.1%. EU interest rates were raised to 4% but a hike was skipped in June in the US with the headline FED rate fixed at 5.25%. FED commentary had suggested a further 0.5% increase by the end of the year and bond / equities markets had priced these in at the early part of the year though current sentiment regarding this approach is faltering somewhat with arguments now being made for a continued pause.

During the first half of 2023, we also saw a reduction in Oil prices from $85.91 to $72.3 and settling finally at $79.93 pb, still sub $80 pb despite production reductions driven to no small extent by the economic slow-down in the Chinese economic recovery after the COVID 19 pandemic.

With the recent inflation data from the US, we have seen a re-pricing of sovereign assets in July. US 2 & 10 year bond yields are now 4.668% and 3.791% respectively which represents a 5.5% increase on the short part of the yield curve and a reduction of 2.2% on the 10 year yield since the beginning of the year.

The first half of the year also saw Developed market Equities rally since the lows of 2022 with the US leading the charge delivering ca. 12.7% returns, the Euro stocks providing 11.2% and Japanese stocks providing 10.3% (all hedged to Euros) while the emerging markets was more muted at 3.4%. This was against the backdrop of the dollar v’s the euro which fell 4.9% since the beginning of the year making US exports more attractive.

Whether these market returns are sustainable remains to be seen but a flag of worry remains about the Chinese market post pandemic recovery. As reported last month, May exports plunged 7.5% year on year and further to 12.4% year on year in June. Sino commentators continue to push the line of blaming a “a weak global economic recovery, slowing global trade and investment, and rising unilateralism, protectionism and geopolitics”. Time will reveal how this plays out on the global markets in the coming months.

I would suggest there are other issues at play here too. Rising interest rates, tightening credit lines and reductions in corporate liquidity all provide ingredients of the recipe for a perfect storm. We see monetary inflows to the Japanese Yen currently, why?…….Japanese interest rates are currently -0.1% and bond yields are -0.041 on the short end of the curve and 0.475% on the 10-year bond. If a liquidity crisis does indeed unfold over the coming months, those stocks with low exposure to interest rate sensitive credit tightening policies will likely fare better.

Not to be the harbourer of doom & gloom, enthusiastic investment sentiment has illuminated the star performers in the US markets which once again have been participants in the technology sector driven by the meteoric rise of the potential for Artificial Intelligence applications. The NASDAQ index which contains 100 stocks has first half returns of an eye watering 43.6% in USD but with a fPE ratio of 27.25 for those stocks in comparison to the broader US500 market which is trading with a fPE of 18.8 and compared (again) with global stocks which are trading at fair value of 16.65 times earnings. Noteworthy as well, is the good to fair value of Japanese, European and Emerging Stocks which now trade at fPE’s of 14.21, 12.4 and 12.33 times respectively and higher yields.

We continue to be positive but cautious on a globally diversified portfolio of equities and bonds and with money market funds also now looking attractive providing yields of 3% plus, we are starting to make switches from cash positions into these funds as an alternative. We also acknowledge the aforementioned liquidity risk as significant and continue to add the counter correlated hedge funds as a risk hedge to diversified portfolios.

All views and details contained are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

The Importance of Financial Planning

Monthly Investment Note: June 2023

/in , , , , , , , /by

As we roll into the end of the first half of 2023, we continue to see inflation dominate the macroeconomic system, though with the main central banks taking time to consider their next steps in terms of rate increases.

The Euro (HICP) Inflation rate for May is 6.1% (and for Ireland is 6.3%) down from the 7% in April. Across the pond, inflation in the US is 4.9%, (May inflation date is available on 13.06.23) but with core inflation remaining stubborn, the rate at which inflation drops closer to the FED stated 2% inflation target will be slower and more difficult to achieve.

So, interest rate policies across the globe continue to focus on the Central Bank’s goals of inflation reduction with the US considering halting rates at 5.25% for this cycle (but might go another 0.25%) and the European Central Bank with rates at 3.25%, continued to signal that more rate rises were likely. Despite Saudi Arabia deciding to cut oil production by 1M bpd, Oil (Brent Crude) continues to trade below $80 pb ($76 pb at time of writing).

After weeks of negotiations and speculation in Washington, we finally saw a deal between the Republican & Democrat parties to raise the debt ceiling which provided some relief to the US & Global markets, but did anybody really think that the US would default on its sovereign debt obligations? Out of interest, US national Debt is currently ca. $31.8 Tn with a debt to GDP ratio of 96%, much higher than Ireland’s debt to GDP ratio which is ca. 60%.

Stocks in the Asia Pacific region also benefitted from news of a US debt ceiling agreement however, weaker than expected Chinese Purchasing Managers Index and a slower than expected post covid recovery in the region has seen muted returns in 2023. Indeed, China’s exports in May plunged 7.5% year over year to $283.5 billion, where Economists were only expecting a 0.4% drop. May’s fall was so steep that export volumes were lower than those at the start of the year, after accounting for seasonality and changes in prices signalling a slow and difficult recovery to growth.

Time will reveal how this plays out on the global markets in the coming months.

Global equities have continued their rally with the index of global stocks up 10.9% since the beginning of the year. While US equities have risen 11.5%, Japanese equities risen 12.9%, (mostly in the last month), it is now the European equities which underperform the global market with a rise of 10.7% this year so far; (all Euro hedged). This is a lesson for timing the Markets, and it is well known within investment circles that the biggest gains for the year occur over the period of less than 10 days. Timing the markets cannot be done consistently and better to stay within the markets when there is downward volatility, than dip in and out.

The strong performances of the US & Japanese markets are driven by the meteoric rise of the potential for Artificial Intelligence applications into virtually (no pun intended!) every facet of life. It seems that any company which can play a part in the “AI” story has seen phenomenal growth in its share price and this is in turn reflected in the fPE ratios of the NASDAQ which remain high at 24.8 times earnings compared to the overall S&P500 at 18.9 times earnings.

While the performance in European stocks is also impressive, it is driven (in large part) by the good value on offer with a plethora of companies showing strong balance sheets & free cashflows and trading at good value (fPE = 13 x) in other words good quality companies trading at good value and suitable for this economic cycle. A similar situation is seen in Japan with markets trading at 13.6 times forecast earnings and the UK at 14.2 times.

The Importance of Financial Planning

Monthly Investment Note: May 2023

/in , , , , , , , , , /by

While global GDP and inflation pressures continue to persist in the financial system, European & US economies are reporting lower inflation in the first quarter of 2023. However, in these economies inflation is still viewed as being stubborn and requiring a considered interest rate increase which is juxtaposed with balancing the cost of credit considerations. The key for Central banks is to find the optimal terminal interest rate; just high enough to continue reducing inflation but not to stifle growth too much and push their economies into recession.
 

At the end of March, US annual inflation was measured at 5% and European inflation at 6.9% (Ireland is estimated to be 7.7%) while UK inflation was estimated to be 8.9% and these headline figures continue to drive interest rate policies from Central Banks, currently. Notably also are the oil prices (as measured by Brent Crude) which have dropped by ca. 7.4% since early January and are currently trading at below $80 pb (ca. $79.60) at time of writing.
 

With the FED interest rate, adjusted in May to 5.25%, EU rates increased to 3.25% and UK rates at 4.25%, bond yields have also risen and have as a result, reduced valuations over the course of the interest rate hikes. While it was thought that the FED might start to ease the rate of interest rate increases early this year, it is now increasingly likely that further rate hikes or longer timeframes at current rates may yet be required. Therefore, it is likely that interest rates may indeed peak over the next 6 months and we continue to move cautiously on long term bond purchases until there is sight of the terminal interest rate, expected later in the year.
 

Global equities have continued their rally with the index of global stocks up 5.97% since the beginning of the year. While US equities have risen 5.35%, Japanese equities risen 3.02%, it is the European equities that continue to outperform with a rise of 11.4% this year so far; (all Euro hedged). This strong performance is driven (in large part) by the good value on offer with a plethora of companies showing strong balance sheets & free cashflows and trading at good value (12.7 x fPE) in other words good quality companies trading at good value and suitable for this economic cycle.  This is in contrast to US equities which are trading at ca. x 18.6 fPE.
 

We continue to favour taking positions in Globally diverse equity funds which are trading at good to fair value and are cautious on new positions in long / medium term bonds for the foreseeable future. These bond calls will be portfolio dependent. Conservatively, therefore, as per our previous notes, we still look to total return funds as potential alternative investments to bond funds.
 
As an aside, the link below (Courtesy of Visual Capitalist) shows an animation of the various business sectors contributing to the growth in the S&P500 in the first quarter 2023. Note the contributions from the mega cap companies which provided the greatest returns….Enjoy!
 
Click Here to See the Sectors Contributing to Growth in the S&P500 in Q1 2023
 

All views and details contained within this article are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

The Importance of Financial Planning

Investment Snippets #6

/in , , , , , /by

#STICKTOTHEPLAN: How to deal with Market Volatility

Volatile Markets rattle the nerves of investors, but we should remind ourselves why, as investors, we invest.

Consider that when we purchase shares in a company, we are buying ownership of that company, so we become a shareholder and that entitles us to a share in the profits. The profits may be distributed in the form of a dividend or invested back into the company. The upshot is when a company is profitable; it usually increases its net asset value.

However, the profitability of a company is not always reflected in the share price and visa-versa, Price doesn’t always reflect profitability. This is highlighted in the chart which shows Unilever PLC’s share price and the company’s profitability which we measure using Earnings per Share. Here, we see even with consistent increasing earnings there is significant “volatility” in the share price.

 

Unilver

 

The share price is what most people are familiar with and it can be difficult to tease out the cause of its volatility. Genuine reduction in profits due to  changeable local economic factors, interest rate policy, bond yields and inflation, employment, political interference, and world trade agreements all influence investors emotions to varying degrees and therefore their appetite for investment which is reflected in the share price. A hard look at the facts is always warranted when we see volatility to understand that the investment case remains sound.

If you are a lump sum investor, then downward volatility has to be ridden out. Strong emotions will tempt you to SELL holdings and preserve the CASH. This is a mistake as it will likely crystallize a permanent loss, which if repeated frequently, is the quickest way to destruction of your wealth. Consider also, that you will likely be selling a good value asset at low price which is a bargain for a buyer on the other side.

On the other hand, we view Share price volatility as an opportunity to pick up quality assets at good value. If you are a regular investor, a monthly contribution invested will allow you to take advantage of a lower price paid for your holdings which can help to enhance long term capital appreciation.

And so back to Unilever, which if you had acquired in 31/10/2013 at a price of £25.01 per share, then today, 5 years later, that share is trading at £40.85, which represents a gain of £15.84 (63% or a compound growth rate of 10.31% pa).

How do we deal with market volatility?…….we ALWAYS look at a 5 year investment term.

If you have any queries, reservations, concerns or just want to talk it out, do give us a ring on 085 866 9813

The Importance of Financial Planning

Investment Snips #5

/in /by

The Yield Titans….

As investors, we look to place our investment where we hope to receive an income (a yield) or a capital appreciation or both on the initial investment, over a period of time.   In recent times however, the fixed income asset “tool box” would likely not have contained long dated sovereign bonds. The reason for this is that yields from these bonds were at historically low levels (See the US Treasury 10 Year Bond Yield in the chart below).

lifetime-financial-10-year-us-treasury-bond-2Recently, however, an interesting observation can be made on the movement of US 10 Year bond yield over the last three months. It has grown by 12.4% over the past 2 months and at date of writing the current yield of the US 10 Treasury bond stood at 2.62%. Compare this to the average (forecast) yields on the Dow Jones Index and US500 equities indices offering 2.4% and 2.3%. To further contextualise this analysis, the US (FED) interest base rate currently sitting at 1.3% and US inflation rate now sits at 2.1%.

That means if you deposit your hard earned money in the bank, the interest rate and the capital will be eroded by inflation. If you purchase a US 10 Year treasury bond, you will receive a net (Real) yield on your investment of 0.5% better than had you placed the cash on the markets which you can expect to receive a net yield of 0.4% ignoring capital appreciation. These returns are before costs of trading are incorporated.

Why is this important? Well, US equities exemplified by the Dow index have been trading bullishly since March 2009 resulting in year on year record breaking market valuations being achieved.  At the end of 2017, the combined market capitalisation of the Dow Jones Industrial Average (DJI) was an eye watering $6,873,564.2M. In 2018 already, the DJI has jumped in value by 4.3% adding an additional $295,563M to the valuations contained within bringing to adjusted total combined market value of companies contained on the index to $7,170,139M.  To put this into context, the total market capitalisation of the DJI at the end of 2009 was ca. $3,499,645M.

These astronomical valuations reflect the sentiment of investors who sought their yields from equities when bond yields were falling and deposits were erosive and which, in an improving corporate and economic climate made perfect sense. As a result, it leads many professional investors to view these markets as overvalued when compared to their long term averages and likely to proceed with caution.

So, with the US Treasury 10 year bond yield, edging closer towards the desirable 3%, might we soon see a movement in investor’s monies from equities and a correction in this long running bull equities market? At Lifetime Financial Planning, we pay close attention to such subtleties.

If you would like to hear more about how we manage these difficult investment environments please feel free to contact us via the website.

The Importance of Financial Planning

Stand Back from the Scrum Snips #5

/in , , , , , , , /by

Its happening again, Stock markets are at all-time highs and confidence is flying high. But at Lifetime Financial Planning we use our tried and tested Value Based Investment Strategy to identify good value for our Clients. And from the 600 largest companies in the US and UK, only 12 meet our value criteria currently, which means 98% are not good value. However, the good news is we are likely to see a lot of Volatility in 2017, and volatility always means good value buying opportunities for our Clients.

Talk to us if you would like your Pensions and Investments to be managed in a strategy with a long (20 year) successful track record, and with a focus on value for money assets.

As always, bear in mind that Investments fall as well as rise, and past performance is not a good guide to future performance.

The Importance of Financial Planning

Reminder to Submit Your Pension Contribution Before the Pay and File Deadline

/in , , , , , , , /by

We’re just writing to remind you to take full advantage of the generous tax relief available on your 2015 pension contribution before the pay and file deadline of 31st October, or 10th November if you file through Revenue Online Service (ROS).

Depending on your age and income, you may be eligible for up to 40% tax relief on your personal pension contribution for 2015.

Depending on your age and income, you may be eligible for up to 40% tax relief on your personal pension contribution for 2015

Every €100 you contribute to your pension could cost you as little as €60*

* Revenue rules, age and income related rules apply.

With tax free growth on your investment we believe it is a highly efficient and effective method of converting your current income into long term personal wealth.

To take full advantage of this generous tax relief, review your existing pension funds and start your Lifetime Financial Plan please call us at 046 9240961 or visit our website at www.lifetimefinancial.ie

We look forward to hearing from you.

 

Aidan Wall

Aidan Wall

QFA, FLIA, SIA

Aidan Wall is a Qualified Financial Advisor, a Fellow of the Life Insurance Association and a Senior Investment Advisor.
Aidan has been providing impartial financial advice to clients since 1983, and he has acquired vast experience in the areas of Financial Planning, Family Income Protection, Retirement Income and Investments.

E: aidan@lifetimefinancial.ie

Dr Michael Wall

Dr Michael Wall

APA, PhD

Dr Michael Wall, PhD, is an Authorised Product Advisor (APA).
As an Authorised Product Advisor (APA) Michael is working under the mentorship of Senior Financial Advisor, Aidan Wall and has completed his QFA (Qualified Financial Advisor) examinations.

E: michael@lifetimefinancial.ie

The Importance of Financial Planning

Meeting Investment Expectations

/in , , , , , , /by

Investors now have a much wider range of investment choice open to them than ever before, ranging from the US stock market to the value of the euro versus the Japanese yen, the price of commodities such as oil, German government bonds and a whole range of other securities. For the non-professional, attempting to devise an appropriate investment strategy with all of these options and choices available can be a daunting task.

It is widely understood that higher investment returns are accompanied by higher risks. While we might dream of making a killing on the stock markets, however, we might not want to risk our hard earned cash on high risk strategies. Fortunately there are now some quite useful and necessary tools available to assess an individual’s risk appetite to ensure they don’t find themselves outside their comfort zone.

There are three key elements that feed in to an investors profile and risk tolerance with regard to the investment strategy required.

  • Attitude to Risk
  • Requirement
  • Capacity

Attitude to Risk

This deals with the individual investors own risk attitude and/or their tolerance of risk.

“How can I emotionally handle moves in the value of my portfolio?”

Are you likely to panic, for example, if there are significant downward movements in values? On the other hand are you a bit of a gambler and feel you can take on lots of risk and volatility in order the achieve high returns? To get the balance right the attitude to risk then need to be co-related to requirement and capacity, bearing in mind that in most cases taking some level of investment risk is key to higher investment return.

Requirement

Here the need is to focus in on what is the objective of any investment. If, for example, the investor has €200,000 and wishes this to grow to €300,000 over 10 years this is probably achievable without too much risk. On the other hand if the need is to do this over 3 years then history shows us what short-term volatility can do to an investment over that period. In addition an individual’s requirement when it comes to investing a capital sum for example could be quite different to the same individual’s requirement for his pension scheme. In the first case the time horizon may be quite short while for the pension you are probably looking at a longer term.

Capacity

This is perhaps the most important consideration of the lot and deals with the individual’s ability to take the financial risk.

“If this investment lost a significant amount of its value would it make a material impact on my financial position?”

Capacity is particularly important for individuals taking on higher levels of risk obviously. Risk tolerance and appetites change over time and can actually change very quickly. It could be a significant inheritance or business success that changes circumstances for the better or when it comes to pension planning it will be necessary to calibrate risk capacity the closer the person gets to retirement. Suffice to say that there are strategies to suit each circumstance and it is vitally important you review risk tolerance regularly.

Aidan Wall has been providing impartial and unbiased investment and pension advice to clients at all stages in the their lives since 1983. If you would like to talk to Aidan about a lump sum investment or pension fund please call 046 924 0961 or email: aidan@lifetimefinancial.ie

At Lifetime Financial Planning we also conduct regular reviews of your investment / pension fund performance, which we believe are the key to ensuring your chosen fund(s) can meet your expectations.

The Importance of Financial Planning

How to Invest a Lump Sum

/in , , , , , /by

HOW TO INVEST A LUMP SUM

As someone who has advised clients on their investment options for over 30 years, people often contact me seeking impartial and unbiased advice on how to invest a lump sum. Whether you have recently received an inheritance, successfully completed the sale of an asset or even won the lottery jackpot the advice I provide is pretty much the same in every case. Here are some simple steps to help demystify the whole process:

 

1: Decide on your investment goals

Some important questions to ask yourself at the early stages of investing include:

  • How long do I want to invest for, is it short or long term?
  • What level of return do I expect to receive?
  • Do I want a guaranteed level of return?
  • Will I need access to my fund if my personal circumstances change?
  • Do I want to receive a regular income from my investment?
  • How much risk should I take?

 

2: Seek Impartial Advice

Often people assume that they save money on fees or commission by arranging their investment directly through a product provider, bank or other financial institution when in fact the opposite is often the case.

The Competition Authority recently noted that Life and Pensions companies tend to provide better product design, more flexible terms and more competitive quotes when engaging with an Impartial Financial Broker.

An Impartial Financial Broker is a highly qualified professional who is required by law to work in your best interest, not in the interest of investment companies.

Their impartiality enables them to research the market thoroughly for the most suitable investment opportunity and to provide a range of choices to suit your needs. This is known as “fair analysis” of the market as it gives you a much better picture of the range of investment choices available.

 

3: Ensure your Advisor conducts a “Factfind”

Before imparting any advice on how to invest a lump sum your advisor should conduct a “Factfind”, which is essentially an in-depth analysis of your current financial circumstances and includes your income and expenses, your family situation (number and ages of dependants etc) and your existing assets and liabilities. This helps both advisor and client to build up a picture of where you currently stand financially.

 

4: Ensure a Risk Assessment is carried out

All investment funds are rated from 1 to 7 in terms of the level of risk involved, with low rated funds offering lower returns and less chance of volatility, and higher rated funds offering the potential for greater returns, but also greater volatility.

By conducting a Risk Assessment an advisor can ensure that you fully understand the different levels of volatility risk involved. In recommending a particular investment for you, the advisor will also take into account what they believe to be your threshold for withstanding any potential losses that could occur. This helps you to gauge your own attitude to risk when deciding what type of fund you may want to invest your money in.

At Lifetime Financial Planning, conducting a Factfind and Risk Assessment is an integral part of our advice process.


5: Review your Investment Options

At this point your advisor will research the market thoroughly for a range of options to suit your needs, providing you with a choice of suitable investments based on your requirements, your financial situation and your attitude to risk.

A good impartial advisor will also take a number of other factors into account, such as the financial strength of the product provider, the past performance of similar investments, and the cost of fund management fees.

 

6: Conduct Regular Reviews

When you have made your investment decision we strongly advise conducting regular reviews with your advisor in order to stay up to date on the performance of your chosen fund. Conducting reviews also enables your advisor to stay updated with regard to your personal financial circumstances and recommend any changes needed to ensure you stay on track to meet your goals.

 

About Lifetime Financial Planning

At Lifetime Financial Planning we have been providing impartial investment advice to clients at all stages in their lives since 1983. If you are seeking impartial advice on how to invest a lump sum or you wish to conduct a review of an existing investment then please don’t hesitate to contact us.

We can help you to diversify your investment, devise a phased strategy and/or switch or redirect an existing investment if you so choose.

Call Aidan Wall, Lifetime Financial Planning, at 046 924 0961 or email: aidan@lifetimefinancial.ie

Website: www.lifetimefinancial.ie

Investments can fall as well as rise. Past performance is not a reliable guide to future performance.

Aidan Wall Financial Services Ltd T/A Lifetime Financial Planning is regulated by the Central Bank of Ireland.