The questions clients are asking us

When markets are volatile, economies are in trouble and governments are changing the goal posts, it can be unsettling for investors.

During these times we tend to get more phone calls – clients wanting things explained or guidance on what to do with their investments.

We thought it might be helpful to highlight some of the most common questions we are currently receiving and the answers we are giving – in case you had the same query.

1. Why have my investments gone down in value this year?

2022 has not been a good year for most investments. According to Ruffer, in the first quarter of the year, the best-case scenario for a stock and bonds investor was a loss of 4.5 per cent from high yield bonds*. Every asset class had fallen and there was nowhere to hide. Interestingly, this was the first time this happened since 1990.

Since then, things have improved slightly in some areas, but most major stock markets and bond markets are still in the red. It’s only really been commodities and commodity-related countries or indices that have managed to produce positive returns.

Why has this happened? The short answer is that inflation started to come through and remain persistently high. This led to interest rates rising, which in turn meant that ‘growth’ stocks - which had done so well for so long – started to look less appealing and bond yields rose rapidly causing bond prices to fall resulting in some very significant losses.

Those falls were then accelerated in the UK as investors reacted to the then government’s tax-cutting plans in the now infamous mini-budget. Overseas investors lost confidence in the UK meaning unloved equities remain shunned and government bond yields spiked as investors were unwilling to lend to a government that was intent on embarking on large amounts of unfunded spending.

2. Is the worst now over?

It’s impossible to call the bottom of a bear market in any asset and opinion is divided among the managers we speak to. Several – including Hugh Sergeant, manager of ES R&M UK Recovery fund – believe that we are now near ‘peak fear’ on a number of indicators and that recovery could begin in the first half of next year.

Other managers fear the worst is not yet over. Interest rates could rise further in the coming months, which would mean bond prices could fall further. Likewise, there could be more bad news from the Ukraine, geopolitical tensions could worsen between China and the US, or something else could knock markets completely out of the blue, and equity markets could wobble.

Whatever the outcome, what we do know is that over the long term, bear markets once again become bull markets.

3. Is inflation bad for my investments?

A little bit of inflation is not bad for your investments, but rampant inflation can be very bad.

As we have seen this year, very high inflation means most assets other than commodities will fall. If inflation is higher than cash savings account rates even the ‘safest’ of assets can lose value in real terms.

Inflations is also bad for our investments in that if we are having to pay more for food, energy, and fuel, etc, we have less to invest.

4. Is now a good time to invest?

It’s certainly better now than it was in January! As many asset classes have fallen in value, there are better opportunities today. One thing we have learned in our many years in this industry is that you are more likely to make money investing in good value assets than in expensive ones.

Any avid readers of our “outlook” articles will know that we have disliked bonds for many years. Today, we think they are offering good opportunities.

Likewise, beaten up areas like smaller companies are now trading on attractive valuations.

A third area we like are UK equity income funds. As Adrian Gosden, manager of GAM UK Equity Income pointed out to us recently, a dividend on 4% or more from the UK equity market goes a long way to making up for inflation. When you compound this over a number of years and add in potential capital growth, it could be a good strategy in uncertain times.

That said, the outlook is still uncertain, and investors may benefit from adding smaller, more regular amounts to investments rather than a big lump sum.

5. Should I put my money in cash?

With interest rates now rising significantly, cash is starting to look interesting once again, especially for low-risk investors or those that need their money within a year or two.

The bad news is that interest rates are rising because the Bank of England is trying to fight rampant inflation, which is currently 11%. That means that even with the enhanced cash rates on offer from many banks and building societies, your money is still losing value in real terms if inflation is higher than the rate of interest you earn. And that’s if your bank passes on all the rises – they can be notoriously slow to do so.

Does that mean savings accounts should be ignored? No. These accounts are important as they enable you to set money aside – particularly money you may need in the short term - and have it earning at least some interest. But to put all your money into cash could be mistake.

6. Shall I wait until the stock market has recovered before I invest?

It’s always tempting to wait until things look much better and markets are more stable, but that can also mean that you miss out on some of the best returns. When markets start to recover, they can bounce back very quickly. If you are not invested, you cannot benefit from this part of the recovery.

As we have said before, trying to time the market is impossible and investing a little, often, can be a good way to invest during uncertain times. This way, you don’t risk large amounts of money if markets fall further, but you also enjoy some of the recovery.

7. How do I add money to my investments?

You can add money to your investments in one-off payments or regular payments, the choice is yours.

All you need to do is log into your account on or call our client services team on 020 7384 7300 and they will be happy to help.

8. I have to pay more income on my dividends now, what can I do?

Chancellor Jeremy Hunt’s Autumn Statement took 60 minutes to deliver last month. And in that one hour, three tax changes made pensions and ISAs more important than ever.

First there was news that the thresholds for basic and higher rate income tax are to be frozen until 2028, while the threshold for the addition rate of 45% would be lowered from £150,000 to £125,140, dragging hundreds of thousands into higher tax brackets.

Then we were told that the government will reduce the Dividend Allowance from £2,000 to £1,000 from April 2023, and to £500 from April 2024.

The third strike to investors was the announcement that the Capital Gains Tax (CGT) Annual Exempt Amount would be slashed from £12,300 to £6,000 from April 2023 and to £3,000 from April 2024.

If you don’t want to pay more dividend or capital gains tax, then pensions and ISAs can help.

ISAs are free of both taxes and all income is paid without any further liability to tax.

While you may be liable to income tax when you eventually take income from your pensions, there is tax relief when you start investing. This can help reduce the amount of tax you pay overall and help boost your savings for the future.

If you want to move unwrapped investments into your ISA or pension, please call our client services team on 020 7384 7300 and they will be happy to help.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice

Published on 06/12/2022