The market volatility caused by Coronavirus has left many individuals concerned over the presence of investment risk in their portfolios and the losses that they may see.
I have already written about how many, particularly those without advisers may retreat from investments into cash – possibly at the least advantageous time.
The portfolios that Wingate Financial Planning build are highly diversified, and in actuality, the average experience at the time of writing is that most of our clients, through a combination of global diversification and holding both equities and bonds, are broadly back to where they were this time last year.
In working with us as a financial planner, we would have discussed potential volatility well before the shocks in March and April 2020 happened. Historically market cycles have been every five to seven years; this means we expect some sort of shock with this level of frequency – but this rule of thumb is not perfect – it was unusual that the last downturn was so long ago, around 11 years ago (2008 to 2009).
The problem with retreating to cash is that you will see, over the longer term, inflation eroding the value of your assets. And is market volatility the greatest risk in 2020? I consider two others below:
The first risk as I see it is an increase to taxation. It’s been speculated that the two main taxes to change would be employment and property taxes.
Any changes to employment tax is riddled with problems: equalising income tax and National Insurance will hit pensioners particularly hard, who are those who tend to vote for governments. This is because national insurance broadly speaking makes an individuals employment taxes 0%, 32% or 42% (up to £150,000) but for all other forms of income (excluding dividends) it would be 0%, 20% or 40% – it should not be a surprise that most people are in the 32%/20% (basic rate bracket).
On property taxes, there is much talk about increasing capital gains tax (CGT) as a wealth tax, with much of talk of moving the tax to income levels (i.e. 10% becoming 20% and 20% becoming 40% or even 45% – the current rate is 8% more for residential property); the two main problems with this is that capital gains tax doesn’t actually impact true wealth that hard. This is because the very wealthy do not need to turn over assets because of the money they have. Furthermore, I do not believe that it is desirable for capital gains tax to be taxed like income. The last significant changes to CGT removed any allowance for inflation, so this means an asset that’s held for 20 years and grows at around 3% per annum (in line with inflation – an 80% rise) will see all of that value taxed, even if the total gain in real terms is effectively zero.
Of course the government may not decide to increase taxes due to the fact it may impact growth (spending cuts and tax rises are often thought to have this effect), and instead decide to let inflation run for a period. Inflation will naturally hit those that hold cash hard, as the real purchasing power of their assets will be eroded. It may also impact on those that have conventional inflation-linked pensions, as the rate of inflation of many in pensions is reduced from the historically used Retail Price Index to the typically lower Consumer Price Index. Also, most pensions have a inflation cap, often of 3% or 5%, this means if inflation runs above these levels for a period of time, these pension holders effectively become poorer.
Financial planning in uncertain times
These risks, and others, are something that we would consider and plan for. We build custom financial plans to highlight the risks that may impact you or you are worried about. Whilst we can’t necessarily make these risks disappear, planning for each of these events can help to mitigate, and build a plan of action should they arise. If you’re concerned about any of these matters, please don’t hesitate to get in contact.