Newsletter February 2021

Financial Planning Wales Updates

The last twelve months has seen a huge level of disruption to not only our working lives but also our everyday lives. It has become increasingly important to be able to communicate through different mediums and not just the traditional meeting.

Whilst we believe there will never be any substitute for the face to face meeting and the social interaction that it brings, we are concious that we must provide information and use different methods of communication to stay in touch with our clients.

Over the coming months we will be enhancing how we send secure information and also making available our updates across a number of social media platforms.

News from the Front

This week we saw the Chancellor of the Exchequer, Rhisi Sunak, deliver his Budget and we have attached a link below that provides full details of his speech. Our view is that his message seemed relatively simple - Government support for businesses and indivividuals will continue whilst necessary but at some point, we will need to start repaying the debt that has been raised to pay for it. The graph below shows the scale of the debt compared to GDP (Gross Domestic Product); prior to the pandemic the ratio had been falling but has now been rising again. To reduce the debt the Chancellor appears likely to use packages to stimulate growth coupled with tax rises (and freezing of tax allowances) to raise Government receipts and narrow any budget deficit.

Public Sector Net Debt to GDP exploded after the Financial Crisis peaking at over 140%

How can we afford all this borrowing?

This is a question that we are frequenlty asked and the answer also explains why low interest rates may be here to stay for some time yet.....

  • The UK Government issues Debt known as Gilts
  • In exchange for capital they pay interest to the purchaser of the Gilt over a set term
  • Low interest rates means that borrowing is currently cheap
  • The UK Government can issue debt for ten years and pay interest of around 1% p.a.
  • As the UK has never defaulted on our debt it is considered low risk
  • The Bank of England are buying most of the Gilts regardless of interest rate
  • With low interest rates and a willing buyer the Government can issue debt easily
  • The risk is that interest rates and inflation rise and cheap borrowing ends
If you want to know more about Bonds head on over to our website where Jon has prepared a really useful article on the inner workings of both nominal and index linked bonds

Funds & Strategies We Like

Hedge Funds

Hedge funds are collective investments that aim to achieve above average growth - also know as Alpha - through a wide range of asset classes and strategies that often employ leverage (borrowing) and complex derivatives.

Hedge Funds have a mixed history and there have been some pretty serious failures over the years that mean when some of us think of Hedge funds we see visions of Gordon Gekko telling Bud Fox that "Greed is Good" or remember Bernie Madoff's famous Ponzi Scheme that was estimated to have failed with $65 billion of losses and resulted in some serious jail time of 150 years for the culprit!

However, with some due diligence and sensible research picking the right one can make a significant contribution to portfolios.

There are many different types from Long/Short Equity Strategies to Global Macro - the main advantage is that they often have a low correlation to other assets creating diversification, reducing volatility and offering retail investors access to complex strategies that are often the preserve of the ultra-wealthy

In early 2019 we felt that an Investment Trust in the Hedge Fund Sector - Pershing Square - offered good value having under performed for some time after previously delivering spectacular annual double digit returns. After completing a detailed review and analysis we decided that recommending this as part of client portfolios was very attractive from a risk/reward perspective, and that simply a return to average performance would be extremely rewarding - it has so far exceeded our expectations returning over 105%!

Pershing Square Holdings 2014 to 2021

The message is dont be scared by Hedge Funds as the good ones can pay a crucial part in improving overall returns. As always with this or any other type of financial strategy obtaining advice from qualified and regulated firms is essential.

What About Bitcoin?

Andrew has posted a short summary about Crypto Currencies on our website - here are some key issues he identified

  • Whilst there is limited supply of Bitcoin, there is not a limited supply of Crypto Currencies; we could easily see investors move to other digital currencies negatively impacting the price of Bitcoin.
  • Governments could get rid of it through heavy regulation leading to a slump in demand.
  • It is not a medium of exchange, and most businesses do not accept Bitcoin as payment for goods.
  • How protected is it from cyber-attack? Is it as secure and private as some claims?
  • With reasonable frequency Bitcoin has fallen by 80% or more – is the volatility worth it?

Ever Wondered How Ponzi Schemes Got Their Name?

Charles Ponzi owned a small firm that sold its "IOU's" to the people of the Boston Suburbs in the 1920's.

These IOU's proved very popular as Mr Ponzi promised to pay each holder 45% interest each year! How did it do this?

It transpired that Mr Ponzi had to sell a new IOU to raise the money to pay the interest to someone who already owned an IOU - as long as he kept selling the IOU's there would not be a problem!

Things starting to go awry when people asked for their money back.....

Unfortunately there wasnt any money there and after eighteen months of enjoying the good times Charles Ponzi went to prison for two years - he was released just in time to sell Florida Real Estate in the boom of the mid-1920s!

Financial Planning Ideas

Tax Efficeincy

We have already highlighted that this years Budget will eventually lead to tax rises so ensure that your financial assets are held in tax efficient wrappers is crucial - with the end of the Tax Year fast approaching dont miss out on using allowances! To double check you are being as tax efficeint as possible just give us a call and we can talk you through the options

Interesting Reads & Listens

This section provides links to articles we have read or podcasts that we have listened to that we think you may also be interested in - click the buttons below to go to each one

If you can leave us a review on Google Business that you would also be happy for us to add to the website it would really be appreciated

We hope you enjoyed our Newsletter - head over the to the website if you are interested in finding out more about us or reading the publications we have posted over the last six years

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Financial Planning Wales Ltd is Authorised and Regulated by the Financial Services Authority. We may record or monitor phone calls for training and quality purposes.

The details and material published in this article should not be considered as advice and has been prepared for informational purposes only without regard to your individual investment objectives, financial situation or means