We’re pleased to announce that we’ve been shortlisted for the Moneyfacts ‘Investment Adviser of the Year 2018’. Thank you to our team and clients for their support in achieving this recognition.
Planning ahead: How to maximise your tax allowance in the new 2018/19 financial year
The UK tax code is now more than 20,000 pages long, comprising over 1,000 tax reliefs and exemptions. At around 10 million words, it’s 12 times the length of the Bible.
It’s natural to be bewildered by tax planning, but it doesn’t have to be. When dealing with such a large body of rules and regulation, you simply need to know where to look.
We’ve just started a new UK tax year. That means there’s no better time to begin your tax allowance planning for 2018/19, with savings to be had for those who think ahead.
Here’s our guide to five key tax breaks you should consider over the next 12 months.
1. Maximise your ISA allowance
ISAs are a simple way to shelter your savings from taxes, allowing you to save up to £20,000-a-year for 2018/19.
This is what’s called the ISA allowance. You can put the full £20,000 into one ISA (like an investment ISA), or you can split it into different accounts.
Over time, this should mean you’ll accrue a large savings pot with many tax benefits. With an ISA, savers are charged no tax on profits, no capital gains tax, no tax on interest earned on bonds, and no tax on dividends.
Which ISA you choose depends on your appetite for risk. Cash ISAs and lifetime ISAs are straightforward, and you don’t pay tax on the interest you accrue.
The financial benefits of these first options could be substantially less than, for instance, an innovative finance ISA, which allows investors to lend to borrowers through regulated funding platforms, paying no tax on interest accrued.
The disadvantage of non-cash and non-lifetime ISAs? Greater risk for the investor. Which will you choose?
Further reading:
Full ISA Guide – Save without paying tax (via Money Saving Expert)
2. Review your pension arrangements
Pension schemes are another tax-efficient way to invest savings. The amount you can contribute to your pension annually while still receiving tax relief is capped, however.
The annual allowance, as it’s called, sits at £40,000-a-year. This applies across all the pension schemes you belong to. It’s not a ‘per scheme’ limit and includes all the contributions made by you and your employer.
If you exceed this limit, you won’t receive any tax relief, and you’ll pay an ‘annual allowance charge’ on any contributions exceeding £40,000. The excess is added to your taxable income for the year.
Further reading:
Guidance on the annual allowance limit (via The Pensions Advisory Service)
3. Beat the Dividend Allowance cut
The Dividend Allowance means you don’t have to pay tax on the first £2,000 of your dividend income. It is available to all taxpayers, no matter what amount of income you earn.
The allowance was reduced from £5,000 in April this year, and will mean a higher tax bill for directors of small businesses, investors, and others who earn dividends outside of stocks and shares ISAs.
However, holding dividend producing investments within a stocks and shares ISA can help to lessen the impact of these changes.
Up to £20,000 can be invested in a stocks and shares ISA this tax year by each individual aged 18 and above, and all income and gains are free of tax.
Further reading:
Dividend tax calculator 2018/19 (via Which)
How to beat the dividend allowance cut (via Your Money)
4. Think charitably
Charitable contributions mean a reduction in the amount of tax you pay because each is subject to tax relief.
To take advantage, you’ll need to keep a record of how much you’ve given to charity throughout the tax year. You can donate multiple ways, with cash being the most common. This way, higher-rate taxpayers can claim effective tax relief of 25%.
An often overlooked alternative to cash donation is offering shares, land or buildings to registered charities. Gifting assets directly – rather than selling first and then offering the sum raised – will incur no capital gains tax. What’s more, you can claim a deduction against your income for the value of the assets donated.
For a higher rate taxpayer, this means an effective income tax relief of 40%.
Further reading:
Tax implications on charitable donations (via Taxation)
5. Give to your family
The standard inheritance tax rate is 40% of anything over the £325,000 threshold. You might also reduce your tax bill by gifting money to your loved ones.
As long as you make the gift more than seven years before death, doing so will prove tax-free. The relief is tapered, too. Gifts made three to seven years before your death are taxed on a sliding scale.
There’s also a gift allowance of £3,000 per year. This is the maximum you can gift tax-free to your heirs while you’re still alive.
Further reading:
Gifts and exemptions from inheritance tax (via Money Advice Service)
The UK tax system is complex and ever-changing. But for individuals who plan ahead, there’s plenty of tax efficiency savings to benefit from.
It’s never too early to start. Tax efficiency and maximising the tax breaks on offer is vital to your family’s financial future. And remember: while some tax breaks can be carried over from year-to-year, others – like your ISA allowance – aren’t transferable. To make the most of them, consider your tax strategy today.
Sailing with the Tides
A mistake many inexperienced sailors make is not having a plan at all. They embark without a clear sense of their destination. And once they do decide, they often find themselves lost at sea in the wrong boat with inadequate provisions.
This piece is by Jim Parker, Vice President – Dimensional Fund Advisors (one of our investment partners).
Likewise, in planning an investment journey, you need to decide on your goal. A first step might be to consider whether the goal is realistic and achievable. For instance, while you may long to retire in the south of France, you may not be prepared to sacrifice your needs today to satisfy that distant desire.
Once you are set on a realistic destination, you need to ensure you have the right portfolio to get you there. Have you planned for multiple contingencies? What degree of “bad weather” can your plan withstand along the way?
Key to a successful voyage is a good navigator. A trusted adviser is like that, regularly taking coordinates and making adjustments, if necessary. If your circumstances change, the adviser may suggest you replot your course.
As with the weather at sea, markets can be unpredictable. A sudden squall can whip up waves of volatility, tides can shift, and strong currents can threaten to blow you off course. Like a seasoned sailor, an experienced adviser will work with the conditions.
Once the storm passes, you can pick up speed again. Just as a sturdy vessel will help you withstand most conditions at sea, a well-diversified portfolio can act as a bulwark against the sometimes tempestuous conditions in markets.
Circumnavigating the globe is not exciting every day. Patience is required with local customs and paperwork as you pull into different ports. Likewise, a lack of attention to costs and taxes is the enemy of many a long-term financial plan.
Distractions can also send investors, like sailors, off course. In the face of “hot” investment trends, it takes discipline not to veer from your chosen plan. Like the sirens of Greek mythology, media pundits can also be diverting, tempting you to change tack and act on news that is already priced in to markets.
A lack of flexibility is another impediment to a successful investment journey. If it doesn’t look as though you’ll make your destination in time, you may have to extend your voyage, take a different route to get there, or even moderate your goal.
The important point is that you become comfortable with the idea that uncertainty is inherent to the investment journey, just as it is with any sea voyage. That is why preparation and planning are so critical. While you can’t control every outcome, you can be prepared for the range of possibilities and understand that you have clear choices if things don’t go according to plan.
If you can’t live with the volatility, you can change your plan. If the goal looks unachievable, you can lower your sights. If it doesn’t look as if you’ll arrive on time, you can extend your journey.
Of course, not everyone’s journey is the same. Neither is everyone’s destination. We take different routes to different places, and we meet a range of challenges and opportunities along the way.
But for all of us, it’s critical that we are prepared for our journeys in the right vessel, keep our destinations in mind, stick with the plans, and have a trusted navigator to chart our courses and keep us on target.
RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
Diversification neither assures a profit nor guarantees against loss in a declining market.
Written by Dimensional Fund Advisors Ltd. (DFAL), 20 Triton Street, Regent’s Place, London, NW1 3BF. DFAL is authorised and regulated by the Financial Conduct Authority (FCA). DFAL does not give financial advice. You are responsible for deciding whether an investment is suitable for your personal circumstances, and we recommend that a financial adviser helps you with that decision.
This document is provided for information purposes and intended for your use only. It does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Any entity responsible for forwarding this material to other parties takes responsibility for ensuring compliance with all financial promotion laws, rules and regulations. It is not intended to provide a sufficient basis on which to make an investment decision. Information and opinions presented in this material have been obtained or derived from sources believed by DFAL to be reliable, but DFAL makes no representation as to their accuracy or completeness. DFAL has reasonable grounds to believe that all factual information herein is true as at the date of this document. DFAL accepts no liability for loss arising from the use of this material.
DFAL issues information and materials in English and may also issue information and materials in certain other languages. The recipient’s continued acceptance of information and materials from DFAL will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
Don’t panic! 5 ways for investors to cope with market volatility
Citywide Financial Partners on avoiding stock market stress, understanding market fluctuations and making effective investment decisions during periods of market volatility.
Worst week for FTSE 100 since 2016 as Dow Jones closes higher after late rally
Volatility could be lurking in financial markets, Bank of England warns
A 35-year-old bull market is ending. This is how all your investments will be affected
The last month hasn’t been kind to investors. After a year of slowing growth and swirling Brexit uncertainty, the stock market’s latest dip will prompt many shareholders to ask: should I panic yet?
Our answer is simple and always the same: no.
Market corrections like we’re seeing across the globe are an integral part of the investment cycle. If they weren’t, it wouldn’t be a cycle. Fear-driven decisions to sell one’s investments during periods of market turbulence are among the worst for long-term investment success.
It helps, therefore, to have a few techniques for coping with investment panic caused by market tremors. Here are five to try next time the headlines have you reaching for your financial planners’ phone number.
1. Don’t panic
Emotional decision-making is the enemy of financial success. Haste is the other.
Effective investment strategies built by qualified financial planners are designed to succeed over the long-term and withstand market shocks. Instructing your planner to sell when panic hits is not a route to sustainable performance and could quickly undo your previous investment gains.
Yet research shows many investors choose to dip their toes in the market at precisely the worst time: after making considerable losses or gains when the market is at its highest or lowest.
When you feel the urge to sell your investments quickly, for fear of losing greater sums, ask yourself: am I thinking rationally or reacting to my own sense of panic? Would a decision to sell now conform to the investment strategy planned between me and my financial planner?
2. Turn off the news
Panic-driven investment (or divestment) decisions typically fail because they’re based on limited or impartial information.
The best supplier of misleading information is the news media. Panic sells papers – but that doesn’t mean you should believe everything you read or react to every worrying financial news story.
“What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact,” says Warren Buffett. Reading more news will not make you feel better about your investment situation, but worse.
The three headlines at the top of this article come from a single newspaper over a period of three weeks, and are only a limited selection of the doom-mongering lines we could’ve chosen from the same publication and period. When panic hits, avoid the papers.
3. Consider the bigger picture
Market corrections – where an index loses 10% or more of its value – are a normal and expected part of the investment cycle.
Their occurrence does not mean that a market is going into terminal decline. In fact, the general trend for long-term market performance is upwards – which is why many investors (including Warren Buffett) choose to invest in passive portfolios. In this way, they trust the rising tide of the stock market to out perform actively-managed funds, often with success.
An analysis of the US stock market between 1979 and 2017 shows that in half of the years, the market lost more than 10% of its intra-year value, and in a third of years, over 15% of its intra-year value. In spite of this, market returns were positive for investors in 32 of the 37 years.
As an investor, it therefore pays to consider market shocks in their wider context.
4. Count the cost
In the moment, investors cannot know whether selling their investment during a period of market volatility is effective. That’s because it’s impossible to gauge whether volatility indicates a longer-term downward trend.
Moreover, it’s impossible to tell whether the moment at which you sell is at the top or bottom of the movement of the market. Sell at the right time, and you could protect your investment from further losses. Sell at the wrong time, and you might have to buy back into the market at a higher price.
Gaming stocks in this way also damages investors’ chances of making the best possible gains. That’s because stocks make their largest gains in the smallest number of days.
Investor A invested in $1,000 in the S&P 500 in 1999 and left their investment intact until 2017, realising a 9.81% annualised compound return. Investor B invested the same amount but sold their investment and missed the single best-performing day in that period, earning a 9.38% return. Investor C did worse still, investing $1,000 but missing the five best-performing days, cutting their return to 8.21%.
The difference in their portfolio value in 2017? Investor A is worth $13,379 and Investor B, $12,313.
Investor C? Just $9,114.
Think twice before selling your investment. It could cost more than you think.
5. Embrace introspection
As Ray Dalio is apt to say, pain is instructive.
If market volatility has left you panicked, it’s worth asking yourself whether you feel over-exposed. If so, your investments are liable to cause you more stress in the future.
Before building your investment plan, your financial planner should have spent time working to understand your long-term financial goals and personality. Crucially, this should include your appetite for investment risk.
If the points above and your financial planners’ assurances have not helped ease your concerns about your investments, it may be time to shift your investment strategy to something more risk-averse. Contact your financial planner to get the ball rolling.
“Time is your friend. Impulse is your enemy.” So says John Bogle, creator of the world’s first mutual index fund.
In an investment career spanning five decades, Bogle amassed a personal fortune of $80 million by advocating an investment philosophy that was almost totally passive. For Bogle, no amount of volatility could persuade a wise investor to panic and relinquish their time-earned gains.
So whilst you stand firm like Bogle you can view the madding crowds sell, sell, sell, with a quiet calm, knowing that this is the way to make real money.
Recent Market Volatility
After a period of relative calm in the markets, in recent weeks the increase in volatility in the stock market has resulted in renewed anxiety for many investors. Our investment partners, Dimensional Fund Advisors, give their view:
While it may be difficult to remain calm during a substantial market decline, it is important to remember that volatility is a normal part of investing. Additionally, for long-term investors, reacting emotionally to volatile markets may be more detrimental to portfolio performance than the drawdown itself.
Intra-year declines
Exhibit 1 shows calendar year returns for the US stock market, the world’s biggest, since 1979, as well as the largest intra-year declines that occurred during a given year. During this period, the average intra-year decline was about 14%. About half of the years observed had declines of more than 10%, and around a third had declines of more than 15%. Despite substantial intra-year drops, calendar year returns were positive in 32 years out of the 37 examined. This goes to show just how common market declines are and how difficult it is to say whether a large intra-year decline will result in negative returns over the entire year.
Exhibit 1. US Market Intra-Year Gains and Declines vs. Calendar Year Returns, 1979–2017
In US dollars. US Market is measured by the Russell 3000 Index. Largest Intra-Year Gain refers to the largest market increase from trough to peak during the year. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.
Past performance is not a guarantee of future results.
Reacting impacts performance
If one was to try and time the market in order to avoid the potential losses associated with periods of increased volatility, would this help or hinder long-term performance? If current market prices aggregate the information and expectations of market participants, stock mispricing cannot be systematically exploited through market timing. In other words, it is unlikely that investors can successfully time the market, and if they do manage it, it may be a result of luck rather than skill. Further complicating the prospect of market timing being additive to portfolio performance is the fact that a substantial proportion of the total return of stocks over long periods comes from just a handful of days. Since investors are unlikely to be able to identify in advance which days will have strong returns and which will not, the prudent course is likely to remain invested during periods of volatility rather than jump in and out of stocks. Otherwise, an investor runs the risk of being on the sidelines on days when returns happen to be strongly positive.
Exhibit 2 helps illustrate this point. It shows the annualised compound return of the S&P 500 Index going back to 1990 and illustrates the impact of missing out on just a few days of strong returns. The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days. The data shows that being on the sidelines for only a few of the best single days in the market would have resulted in substantially lower returns than the total period had to offer.
Exhibit 2. Performance of the S&P 500 Index, 1990–2017
In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualised returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. One-Month US T- Bills is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values.
Past performance is not a guarantee of future results.
Conclusion
While market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term declines could prove more harmful than helpful. By adhering to a well-thought-out investment plan, ideally agreed upon in advance of periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty.
Source: Dimensional Fund Advisors LP.
The views and opinions expressed in this article are those of the author and not necessarily those of Dimensional Fund Advisors Ltd. (DFAL). DFAL accepts no liability over the content or arising from use of this material. The information in this material is provided for background information only. It does not constitute investment advice, recommendation or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision.
The content, style and messages the material delivers are presented for consideration and should be tailored to your firms own beliefs, message and brand.
DFAL issues information and materials in English and may also issue information and materials in certain other languages. The recipient’s continued acceptance of information and materials from DFAL will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.
Indices are not available for direct investment, therefore their performance does not reflect the expenses associated with the management of an actual fund.
RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
Tips for improving your investment experience
For more than 13 years the team at Citywide Financial Partners have aimed to provide clients with robust investment management. Citywide Financial Partners focuses on a set of key principles for improving your chances of investing success. A recent report released by Dimensional outlines the factors we advocate when seeking to pursue a better investment experience.
Don’t outguess the market
It’s common for some investors to try and outguess the market in the hopes of improving their gains. There are also some investment fund managers who will try the same tactics in an effort to boost performance. In reality, no one has a crystal ball that can predict what the market will do with absolute accuracy, so it doesn’t pay to try playing the outguessing game.
Don’t follow past performance
Some investors insist on choosing funds based on their past returns and previous performance indicators. Yet the past performance of a fund or stock is not an accurate predictor of future returns.
Avoid headlines
Many investors are lured into false sentiments about a particular investment based on headlines. The sheer number of investing magazines, daily market news and commentaries circulating all focus on bold headlines to increase readership. Some headlines are designed to instil fear that a market crash is looming, while others are intended to lure investors into chasing the next investment fad. Look beyond the headlines and focus more on maintaining a long-term perspective.
Mitigate risk
Diversifying your portfolio holdings helps to mitigate some of the inherent risk associated with investing. However, trying to diversify within a home market often isn’t enough to protect an investment against adverse market conditions. Considering global investments could help broaden a portfolio’s exposure.
Manage emotions
Investing is about the numbers and the potential returns, but many investors find it difficult to keep their emotions in check when markets move up or down. When market conditions change it can be tempting to react on an emotional level, which can lead to making poor investment decisions. In order to improve your investing experience, avoid reactive investing and focus more on your long-term strategy.
Dimensional’s report accurately supports the investment approach taken at Citywide Financial Partners that we strive to achieve with all our clients.
You can download Dimensional’s illustrated report here.
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