The Importance of Financial Planning

Monthly Investment Note: November 2023

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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: May 2023

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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

The Wood from the Trees

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With the plethora of media attention across multiple platforms, it can be difficult to stick to your long-term investment plan, due to postponed investment decision making. This can adversely affect long term planning, so, when I’m reminded of all the worry, I often refer to the below chart to provide some perspective.

 

The chart shows that during times of great uncertainty, our worlds innovators, step back re-evaluate & adapt to the new reality in their continued pursuit of greater earnings growth; in other words, they adapt. As owners of these innovative businesses, we share in and benefit from these rewards in the long-term.

 

If you are interested in starting your conversation about how investments fit into your Lifetime Financial Plan, please message me direct or contact us through www.lifetimefinancial.ie

 

Earnings Growth

 

Michael Wall PhD CFP® is a Director of Lifetime Financial Planning. Lifetime Financial Planning Ltd Trading as Lifetime Financial Planning is regulated by the Central Bank of Ireland. 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

New Pension Legislation Relevant to Small Self-Administered Schemes

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The Minister for Social Protection, Heather Humphreys announced in a press release issued on Tuesday the 27th of April that she has signed the European Union (Occupational Pension Schemes) Regulations 2021. (IORP stands for Institutions for Occupational Retirement Provision). This means that the EU IORP II directive will be transposed into Irish law through the amendment of the Pensions Act 1990.

How will this impact your Executive Pension Plans?

The legislation specifically targets the Administration and Investment Rules for Small Self- Administered Schemes including Executive Pension Plans. While one-member schemes, such as EPPs, have been granted a transitional period of 5 years to adopt the legislated changes, the increased governance and trustee responsibilities required by the rules are designed to bring immediate benefits to consumers.

What are the Administration Rule changes?

The New Regulations

• Cover trustee qualifications where trustees must pass a “fit and proper” test, risk management, auditing and reporting, cross-border activities, solvency and supervision.
• Provide better protection through enhanced governance and risk management.
• Provide clear, relevant and more consistent communication about pension schemes.
• Remove barriers to cross-border schemes.
• Ensure that trustees have the necessary powers and credentials to supervise schemes.
• Small schemes (schemes with less than 100 members) and trust RACs are no longer exempted from the IORP investment rules.

What are the Investment Rule changes?

The change in investment rules are effective immediately. They apply some restrictions to EPP investments as follows:
• Scheme assets must be predominantly invested in regulated markets. This means that direct property investments and unregulated investments will be restricted to no more than 50% of the aggregate portfolio. We await guidance on what this might look like in practice.
• Scheme assets must be properly diversified in such a way as to avoid excessive reliance on any particular asset, issuer or group of undertakings and accumulation of risk in the portfolio as a whole and
• Environmental, Social and Governance (ESG) issues must be considered when making investments.
These conditions apply only to new investments or borrowings entered into by EPPs and are not retrospective.

What is next?

The Pensions Authority will provide further information and guidance over the coming weeks and months, to ensure the new obligations are fully understood. We are working through the changes as quickly as we can with our providers and will update all our clients where appropriate.

If you have any queries regarding how this new legislation may affect your scheme, please contact our office on 046 92 40961.

The Importance of Financial Planning

How Can a Company Pension Benefit Me?

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Tax Relief on Contributions
Employer contributions – Corporation Tax Relief
Employee Contributions – income tax relief & not treated as a BIK

Investment Options
Access to thousands of Global Equities, Funds, Bonds, and Property, on regulated markets and managed though a single portfolio

Tax Free Investment Growth
Capital Growth & Income received from Investments made within Retirement Funds are tax free

Retirement Benefits
Tax Free Lump Sum up to €200,000 is available, (can be 1.5x salary or 25% of fund) the next €300,000 is taxed at standard rates

Income Drawdown Options
Flexible Income drawdown using an ARF allows tax management with other retirement income
Guaranteed income from an Annuity

Estate Planning
Protect the Family Balance Sheet
Lump Sums & pension options for your dependants in service & in retirement. ARF asset passes to your estate

 

How can a company pension benefit me?

 

The Importance of Financial Planning

Lifetime Financial Planning Remains Open During Lockdown

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We at Lifetime Financial Planning wish to reassure our Clients that we are included in the Government’s list of Essential Services. So we are continuing to work as normal through the lockdown. We have however switched to conducting many Client meetings online, and our Clients are finding this very convenient and safe also in these Covid times.

So stay safe everyone and we will all get through this.

Aidan Wall QFA FLIA SIA RPA

The Importance of Financial Planning

The Short and Long Term View

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Over the recent economic cycle, the acceleration in Global equities Returns was driven by three catalysts including (1) growth in corporate Earnings (2) a downward trend in interest rates (with bond yields reaching all time lows and indeed dipping into negative territory) and (3) massive liquidity injected into the financial system by Central Banks. (Notably, this resulted in their balance sheets being expanded from $4 trillion to $22 trillion since before the Great Financial Crash). And “Voila”, we are where we are today with market valuations.
Looking across Global Markets, we see divergence in the returns since 2014 when the US (in blue) is included & excluded (in orange). (EAFE: Europe, Australasia, Far East)

 
WORLD & EAFE Standard returns since 1998
NET RETURNS (Euro priced) FROM DEVELOPED MARKETS WORLD (incl US) AND EUROPE AUSTRALASIA AND FAR EAST WORLD (EAFE) (ex US) (Source: MSCI)

 

Taking a closer look at the US markets, we observe today that the Cyclically Adjusted Price Earnings Ratio CAPE for US Equities (shown below) is about 30.6 times earnings compared to its 20 year average of 25.6 and its all time PE average of 17.1. Similarly, the Buffet Indicator (Market Cap to GDP) currently stands at 176.6%. To put that into context “fair” value falls in the range of 93% to 114%.

Ratio of current US500 levels

RATIO OF CURRENT US500 LEVELS TO 10 YEAR AVERAGE PE RATIO ADJUSTED TO INFLATION (CAPE) (Source: Shiller RS)

 

Though US valuations usually tend to be higher than other global regions, it is reasonable however, to attribute this (over) growth in US market valuations (by in large) to the technology sector. While overheated valuations within sectors are not unusual, it appears that the US growth stocks are particularly affected by over exuberant market participation leading to often eyewatering valuations. Indeed, one could argue that we are in a period of irrational exuberance within this sector when we see stocks like Tesla inc (TSLA) trading at Price/Sales = 13.8x, Price/Book Value = 35.2x, Price/Earnings = 224, and EV/Operating cash = 101.3x.
So, the CAPE, Buffet indicators (& others) suggest that US equities are indeed overvalued implying likely lower returns in the long term.
Casting our “Valuation” eyes around the globe however, we see a different picture. In Europe, Australasia, the Far East and Emerging Markets, valuations (and hence long-term returns) do appear more attractive. As the chart below shows, current Price to Earnings (PE) and Future Price to Earnings ratios (fPE) are lower than those for the US.

 
Current & Forward Price to Earnings Ratio

CURRENT (in blue) AND FORWARD (in orange) PRICE TO EARNINGS RATIOS FOR GLOBAL EQUITIES (Source: MSCI)
As investors really favoured “Growth” over “Value” factors for the past 5 years, we are now seeing attractive entry points across the European, Australasia, Far East and in particular, Emerging Markets. An opportune time then to consider adding a list of some of the worlds great and innovative companies to your portfolios from these regions?
Perhaps, but as always, we need to add further consideration and perspective to the analysis. As we begin a cycle of more challenging corporate outlooks and continued low interest rates, global earnings too, will be challenged and we shouldn’t be surprised if overall future returns are lower than the last decade. Indeed, within sectors, we shouldn’t be surprised where we also see swift reversal of fortunes of stocks which are currently in favour.
So how does all this distill into your long-term Financial Plan? From a practical viewpoint, if your plan contains long-term financial objectives, having a solid core of funds invested in Global Equities in your portfolio provides a decent foundation for long-term returns. Being Globally invested, your investment will already be positioned to take advantage when investor sentiment shifts to more attractive valuations within markets and across regions.

At Lifetime Financial Planning, our core beliefs continue to be…..that portfolio diversification, time in the market, not timing, passive investments and a long-term horizon all lead to decent and consistent capital returns in portfolios. We just have to remain disciplined (some would say boring), accept the short-term volatility and ignore the “noise”.

Michael Wall CFP® PhD is a Director of Lifetime Financial Planning. Aidan Wall Financial Services Ltd Trading as Lifetime Financial Planning is regulated by the Central Bank of Ireland. 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

International Women’s Day Sunday 8th March

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There are plenty of national and international studies showing lower participation rates for women contributing to a pension and for those women who do participate, smaller pension pots.

The reasons and impact of the resulting pensions pay gap for women are manifold. Here are 7 simple step’s which women, and their employers, can take to help narrow the pension pay gap women experience.

  1. Join or set up a pension plan at your earliest opportunity. The funds built up can continue to grow even if you take time out during your career.
  2. Link salary increases to pension contribution increases. This is even more effective if committed to in advance. Simple percentage contribution rates do this automatically.
  3. Maximise contributions by availing of the maximum employer contribution rates and considering making Additional Voluntary Contributions (AVCs) where affordable.
  4. Continue making pension contributions, both employer and employee, while on maternity or other types of leave.
  5. If affordable make pension contributions while on a career break via a personal pension or PRSA. Take advantage of the tax reliefs available.
  6. Maximise contributions when returning to work after maternity leave or a career break.
  7. Take financial and/or investment advice which takes account of your specific circumstances and plans.

If you would like to take control of your finances and get your Lifetime Financial Plan in place then please contact Aidan Wall, QFA, or Michael Wall, QFA, at 046 924 0961.

The Importance of Financial Planning

Moved to Ireland from the UK? – Transfer Your UK Pension

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If you worked in the UK and have moved to Ireland, you may have left one or more UK Pensions behind. We strongly recommend that these assets be transferred back to Ireland, you thereby gain control of your asset.

BREXIT means this should be done sooner rather than later. The funds can be retained in Sterling if desired.

At Lifetime Financial Planning, we have the technical expertise and experience in transferring UK Pension Funds to Ireland.

If you need help in relation to transferring your UK pension or any other financial matter give us a call at Lifetime Financial Planning.

Tel +353 (0)46 924 0961. Email: michael@lifetimefinancial.ie or aidan@lifetimefinancial.ie

The Importance of Financial Planning

Moved Job – Lost Track of your Pension ?

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Lost track of your pension after moving jobs?

If you work in a job which includes a Pension, then you have a valuable asset. If you move to another job though, you might have lost track of your pension, especially if you change your address.

Indeed you might have moved job several times, and have several Pension pots. The safest solution may be to take control of these assets yourself so then there is no danger of losing track of them.

If you need help in relation to this or any other financial matter give us a call at Lifetime Financial Planning, Michael 085 866 9813 or Aidan 087 2621 006.

The Importance of Financial Planning

Will you have enough to retire?

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It’s a worry, isn’t it. You don’t want to run out of money after you stop working, or have to live in austerity. You may have a mix of things you are relying on, a business, property, pension fund, cash savings, your home. You may also have debts, loans. So it’s complicated, and the State Pension is good, but not nearly enough, and will it stay the pace ?

Our Recommendation. You need a PLAN. We call it a Lifetime Financial Plan, because it’s a long term plan, taking everything into account. And as your circumstances change, the plan is updated so you are always on track. You can get more info about this on our website www.lifetimefinancial.ie In making the plan, we also make sure you are making the best of any opportunities, such as saving tax. The sense of relief, and peace of mind that having a plan brings, means you can confidently get on with enjoying your life.

To find out more, and take the next step to your Lifetime Financial Plan, give Aidan a call at 087 262 1006 or Mick at 085 866 9813.