It comes around quicker than you think: the end of the tax year. The time of year where we should be giving our personal finances a good ‘spring clean’, whether it’s sorting out your tax bill or topping up your pension or ISA.
The promise of a tax year end rush is with us again, and this year we have Easter falling just before the all-important 5 April deadline. It can be easy, and tempting to leave things to the last minute, not least when you have family visits and Easter egg hunts to plan.
This year there’s another reason why investors may be slightly hesitant about getting on with it: market volatility. After a year of eerily calm markets, 2018 has got off to a far bumpier start. With many investors worried about the bull market getting long in the tooth, they’re nervous about when and where they put their money.
We get that. That’s why the latest episode of MoneyTalk, our flagship video programme, is dedicated to how you can navigate this tax year end, whether you’re worried about markets, struggling to stump up the cash, unsure about whether you’re saving enough or just short of good investment ideas.
If you want to watch the full episode - it’s at the bottom of this page, and for exclusive extended videos with the star managers featured in this episode - Fidelity’s Alex Wright and Nick Train of Lindsell Train, visit the MoneyTalk page.
Here are the three key questions on investors’ minds, which we’ve addressed in the latest episode:
1. What happens if I invest just before the market goes ‘pop’?
That’s always a risk. As we’re told time and again, markets can and do go up as well as down. But there’s an easy formula to ensure you don’t run the risk of investing when the market is high - it’s called pound cost averaging or in layman’s terms: drip-feeding your money into the market.
Instead of investing your full ISA allowance of £20,000 at the start of the tax year, you break it up into small chunks, making regular investments. This means you don’t have to stump up a large amount of money. It could also mean that you actually manage to buy more shares or units in the fund for the same amount of money as a lump sum investor.
By investing small amounts of money into a fund consistently every month, you are likely to overpay at times when the market is high, for example during the tech bubble of the late 1990s but you will also pay a fair price at other times, and sometimes you will underpay for your investments (or get more for your money) when the market is depressed, such as in 2008. Over time these overpayments and underpayments should net out to a fair average.
Pound cost averaging logic can work on the sell side, too. If you are ready to exit a fund and you slowly draw down your investment rather than taking out your capital all at once you avoid the risk of selling everything at exactly the wrong time.
2. How can I make sure I am saving enough for retirement?
None of us know for how long we are going to live and what the cost of living will be in the future, which makes it rather difficult to determine if you’re saving enough. And, even if you know you need to save more, it can be hard to do with daily expenses.
But if you’re saving for your retirement - it doesn’t have to happen overnight - building a pension fund large enough to give you the retirement you hope for is a long-term process. It’s evolution rather than the big bang.
By making small changes today, you will be amazed at what your retirement saving could evolve into. By increasing your pension savings by a percentage point each year, you could double your pot by the time you retire. Ed Monk explains more in MoneyTalk.
3. After nine years of rising markets - where should I be investing?
Splitting the world of investment into neat categories can be both limiting and dangerous, but generally speaking investors tend to choose from two main investment styles: value and growth.
A growth investor will typically look for high quality companies with the potential to grow earnings over time. Value investors, on the other hand, look for stocks that are unloved and undervalued by the marketplace.
With the wrath of the financial crisis burnt into memory, many investors have preferred to play it safe, choosing to invest in high quality, ports in the storm type companies while steering clear of out of favour sectors and stocks. But these so-called ‘bond proxies’ like pharmaceuticals, consumer staples and utility companies have come under pressure recently as bond yields rise, denting the relative appeal of their reliable dividend streams. Is there more value in a value-based approach?
In the latest MoneyTalk, Tom spoke to renowned quality investor Nick Train, manager of the Select 50 fund LF Lindsell Train UK Equity Fund and value investor, Alex Wright of the Fidelity Special Situations Fund, another Select 50 fund, to get both sides of the debate.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. If you invest in an ISA or pension there is no capital gains tax on growth and no income tax on interest. The value of tax savings and eligibility to invest in an ISA or self-invested personal pension (SIPP) depend on personal circumstances. All tax rules may change in future. Select 50 is not a personal recommendation to buy funds. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.