The Importance of Financial Planning

Monthly Investment Note: May 2023

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While global GDP and inflation pressures continue to persist in the financial system, European & US economies are reporting lower inflation in the first quarter of 2023. However, in these economies inflation is still viewed as being stubborn and requiring a considered interest rate increase which is juxtaposed with balancing the cost of credit considerations. The key for Central banks is to find the optimal terminal interest rate; just high enough to continue reducing inflation but not to stifle growth too much and push their economies into recession.
 

At the end of March, US annual inflation was measured at 5% and European inflation at 6.9% (Ireland is estimated to be 7.7%) while UK inflation was estimated to be 8.9% and these headline figures continue to drive interest rate policies from Central Banks, currently. Notably also are the oil prices (as measured by Brent Crude) which have dropped by ca. 7.4% since early January and are currently trading at below $80 pb (ca. $79.60) at time of writing.
 

With the FED interest rate, adjusted in May to 5.25%, EU rates increased to 3.25% and UK rates at 4.25%, bond yields have also risen and have as a result, reduced valuations over the course of the interest rate hikes. While it was thought that the FED might start to ease the rate of interest rate increases early this year, it is now increasingly likely that further rate hikes or longer timeframes at current rates may yet be required. Therefore, it is likely that interest rates may indeed peak over the next 6 months and we continue to move cautiously on long term bond purchases until there is sight of the terminal interest rate, expected later in the year.
 

Global equities have continued their rally with the index of global stocks up 5.97% since the beginning of the year. While US equities have risen 5.35%, Japanese equities risen 3.02%, it is the European equities that continue to outperform with a rise of 11.4% this year so far; (all Euro hedged). This strong performance is driven (in large part) by the good value on offer with a plethora of companies showing strong balance sheets & free cashflows and trading at good value (12.7 x fPE) in other words good quality companies trading at good value and suitable for this economic cycle.  This is in contrast to US equities which are trading at ca. x 18.6 fPE.
 

We continue to favour taking positions in Globally diverse equity funds which are trading at good to fair value and are cautious on new positions in long / medium term bonds for the foreseeable future. These bond calls will be portfolio dependent. Conservatively, therefore, as per our previous notes, we still look to total return funds as potential alternative investments to bond funds.
 
As an aside, the link below (Courtesy of Visual Capitalist) shows an animation of the various business sectors contributing to the growth in the S&P500 in the first quarter 2023. Note the contributions from the mega cap companies which provided the greatest returns….Enjoy!
 
Click Here to See the Sectors Contributing to Growth in the S&P500 in Q1 2023
 

All views and details contained within this article are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

The Importance of Financial Planning

Monthly Investment Note: March 2023

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Global GDP and inflation pressures continue to persist in the financial system with the European & US
economies reporting higher than expected inflation and lower GDP for the final quarter of 2022. US inflation was measured at 6.3% and European inflation at 10% (Ireland is estimated to be 8%) in Feb, while the UK inflation was estimated to be 10.1% and these headline figures are driving interest rate policy currently.
 

It was thought that the FED might start to ease the rate of interest rate increases early this year but it is now increasingly likely this may be postponed until later in the year or until they have sight of the core inflation rate (4.7%) falling.
 

With the FED interest rate at 4.75%, EU rates at 3% and UK rates at 4%, bond yields have risen in line and have resulting in valuation reductions in the last 14 months. It is expected that interest rates will continue to rise over the next 6 months and therefore we have decided to halt long term bond purchased until there is sight of the terminal interest rate, expected later in the year.
 

Global equities have enjoyed a start of the year rally with the index of global stocks up 4.3% (in Euro term) since the beginning of the year. While US equities have risen 3.1%, Japanese equities risen 2.4%, it is the European equities who are the start performers following a rise of 7.9% this year so far. (all Euro hedged). This strong performance is driven (in large part) by the good value on offer with a plethora of companies showing strong balance sheets & free cashflows and trading at good value (12.5 x fPE) in other words good quality companies suitable for this economic cycle.  This is in contrast to US equities which are trading at ca. x 18.4 fPE.
 

We continue to favour taking positions in Globally diverse equity funds which are trading at good to fair value and avoiding the purchase of long / medium term bonds as we expect to see further interest rate rises in 2023. Conservatively, therefore, we are looking at total return funds as alternative investments to bond funds.
 

All views and details contained within this article are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

The Importance of Financial Planning

Monthly Investment Note: February 2023

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On the back of a dismal 2022, global markets have somewhat rallied during January 2023 on the back of a tapering of inflation expectations and sight of what the market perceives to be a landing area for the terminal interest rates.
 

US Stocks posted gains after the announcement of an above expectations, Gross Domestic Product (GDP) figure for Q4 of 2022. Showing that GDP in the US rose by 2.9% in the last quarter of 2022. Consensus among economists had been for a 2.6% increase. The higher-than-expected result was viewed by many as an indication of a more positive economic climate than had previously been forecast.
 

The gains seen in European stocks of late have resulted in positive sentiment from investors in the Eurozone, however the European Central Bank (ECB) has remained hawkish in its stance towards tackling inflation. ECB President Christine Lagarde has consistently left little room for doubt about the central bank’s commitment to raising rates and with the ECB set to announce an interest rate decision in the coming week, many investors are poised for a 0.5% rate increase.
 

Last week also saw the release of the Eurozone Purchasing Managers Index (PMI) for manufacturing and services activity. The figure came in at 50.2 in January, up from 49.3 in December and ahead of expectations of 49.8. This result represents moderate growth while the flash composite PMI for the UK dropped to 47.8 from 49.0 in December adding to investors doubts about recession risk. UK equities finished the week down -0.2% in euro terms. Indeed, coupled with the latest report from the IMF suggesting that the UK will be the only developed economy to enter recession in 2023,
 

Finally, equities in Japan had a stellar week returning 2.8% in euro terms. Much of the performance is seen as a result of the Japanese central bank’s commitment to maintain ultra-low rates. With inflation showing signs of tapering and economic indicators stronger than previously anticipated, there is a cautiously positive sentiment for equities markets currently and we continue to recommend a globally diversified portfolio of equities as part of any regular investment strategy.
 

Additionally, with rising interest rates driving the correction in bond prices and yields, in 2022, bonds now offer an attractive portfolio addition for investors for the foreseeable future.
 

All views and details contained within this article are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

The Importance of Financial Planning

The CSO Household Finance & Consumption Survey 2020

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The CSO Household Finance & Consumption Survey 2020 has been published.

This publication by the Central Statistics Office presents the results of the 2020 Household Finance and Consumption Survey (HFCS), which was carried out between July 2020 and January 2021. Detailed information on household assets and liabilities is collected by the HFCS, as well as data on gross income and credit constraints & the full survey report is available via the link https://www.cso.ie/en/releasesandpublications/ep/p-hfcs/householdfinanceandconsumptionsurvey2020/introduction/

The survey provides an insight into the nations wealth and the data was collected from private households on the basis of self-assessment.  A summary of the results is presented below:

 

household-finance-consumption-survey-2020

  • The median net wealth value of Irish households is €193,100. The median net wealth value, (defined as gross wealth less debt), is obtained by arranging all households in ascending order from the smallest to the largest value and then selecting the middle value. Therefore, half of all households have a net wealth value less than €193,100.
  • More than two-thirds (69.6%) of all households own their main residence, either with or without a mortgage. The median value of the household main residence (HMR), for those households that own their HMR, is €260,000.
  • In 2020, 4.1% of all HMRs owned with a mortgage are in negative equity.
  • More than two-thirds (68.1%) of all households have some form of debt. Overall, the median value of debt for households with any form of debt is €25,000.
  • The proportion of credit constrained households is 6.4%. A credit-constrained household is one that applied for credit and was turned down or received less credit than the amount applied for. It may also be one that considered applying for credit but did not do so due to the perception that the application would be turned down.
  • The median debt to asset ratio, the ratio of total liabilities to total gross assets for households with debts, is 23.3%.
  • The debt to income ratio, the ratio of total liabilities to total annual gross household income, is 40.8%.
  • For households that have a mortgage on their HMR, the median loan to value ratio, the ratio of the outstanding amount of the HMR mortgage to the current value of the HMR, is 45.2%.
  • More than nine out of every ten households (97.1%) own some form of financial asset (e.g. savings, shares, voluntary pensions.) For households that own financial assets the median value is €13,300. See PxStat table HFC2008.
  • The Gini coefficient for net wealth, (a statistical measure of inequality), is 65.4 in 2020.  See Figure 8.1.

households-with-assets-debts

 

If you would like talk to us about your personal finances, contact michael@lifetimefinancial.ie or aidan@lifetimefinancial.ie

Michael Wall Ph.D CFP® is a Director at Lifetime Financial Planning. Lifetime Financial Planning Ltd Trading as Lifetime Financial Planning is regulated by the Central Bank of Ireland. All views and details contained within this article are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

The Importance of Financial Planning

How Can a Company Pension Benefit Me?

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Tax Relief on Contributions
Employer contributions – Corporation Tax Relief
Employee Contributions – income tax relief & not treated as a BIK

Investment Options
Access to thousands of Global Equities, Funds, Bonds, and Property, on regulated markets and managed though a single portfolio

Tax Free Investment Growth
Capital Growth & Income received from Investments made within Retirement Funds are tax free

Retirement Benefits
Tax Free Lump Sum up to €200,000 is available, (can be 1.5x salary or 25% of fund) the next €300,000 is taxed at standard rates

Income Drawdown Options
Flexible Income drawdown using an ARF allows tax management with other retirement income
Guaranteed income from an Annuity

Estate Planning
Protect the Family Balance Sheet
Lump Sums & pension options for your dependants in service & in retirement. ARF asset passes to your estate

 

How can a company pension benefit me?

 

The Importance of Financial Planning

The Short and Long Term View

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Over the recent economic cycle, the acceleration in Global equities Returns was driven by three catalysts including (1) growth in corporate Earnings (2) a downward trend in interest rates (with bond yields reaching all time lows and indeed dipping into negative territory) and (3) massive liquidity injected into the financial system by Central Banks. (Notably, this resulted in their balance sheets being expanded from $4 trillion to $22 trillion since before the Great Financial Crash). And “Voila”, we are where we are today with market valuations.
Looking across Global Markets, we see divergence in the returns since 2014 when the US (in blue) is included & excluded (in orange). (EAFE: Europe, Australasia, Far East)

 
WORLD & EAFE Standard returns since 1998
NET RETURNS (Euro priced) FROM DEVELOPED MARKETS WORLD (incl US) AND EUROPE AUSTRALASIA AND FAR EAST WORLD (EAFE) (ex US) (Source: MSCI)

 

Taking a closer look at the US markets, we observe today that the Cyclically Adjusted Price Earnings Ratio CAPE for US Equities (shown below) is about 30.6 times earnings compared to its 20 year average of 25.6 and its all time PE average of 17.1. Similarly, the Buffet Indicator (Market Cap to GDP) currently stands at 176.6%. To put that into context “fair” value falls in the range of 93% to 114%.

Ratio of current US500 levels

RATIO OF CURRENT US500 LEVELS TO 10 YEAR AVERAGE PE RATIO ADJUSTED TO INFLATION (CAPE) (Source: Shiller RS)

 

Though US valuations usually tend to be higher than other global regions, it is reasonable however, to attribute this (over) growth in US market valuations (by in large) to the technology sector. While overheated valuations within sectors are not unusual, it appears that the US growth stocks are particularly affected by over exuberant market participation leading to often eyewatering valuations. Indeed, one could argue that we are in a period of irrational exuberance within this sector when we see stocks like Tesla inc (TSLA) trading at Price/Sales = 13.8x, Price/Book Value = 35.2x, Price/Earnings = 224, and EV/Operating cash = 101.3x.
So, the CAPE, Buffet indicators (& others) suggest that US equities are indeed overvalued implying likely lower returns in the long term.
Casting our “Valuation” eyes around the globe however, we see a different picture. In Europe, Australasia, the Far East and Emerging Markets, valuations (and hence long-term returns) do appear more attractive. As the chart below shows, current Price to Earnings (PE) and Future Price to Earnings ratios (fPE) are lower than those for the US.

 
Current & Forward Price to Earnings Ratio

CURRENT (in blue) AND FORWARD (in orange) PRICE TO EARNINGS RATIOS FOR GLOBAL EQUITIES (Source: MSCI)
As investors really favoured “Growth” over “Value” factors for the past 5 years, we are now seeing attractive entry points across the European, Australasia, Far East and in particular, Emerging Markets. An opportune time then to consider adding a list of some of the worlds great and innovative companies to your portfolios from these regions?
Perhaps, but as always, we need to add further consideration and perspective to the analysis. As we begin a cycle of more challenging corporate outlooks and continued low interest rates, global earnings too, will be challenged and we shouldn’t be surprised if overall future returns are lower than the last decade. Indeed, within sectors, we shouldn’t be surprised where we also see swift reversal of fortunes of stocks which are currently in favour.
So how does all this distill into your long-term Financial Plan? From a practical viewpoint, if your plan contains long-term financial objectives, having a solid core of funds invested in Global Equities in your portfolio provides a decent foundation for long-term returns. Being Globally invested, your investment will already be positioned to take advantage when investor sentiment shifts to more attractive valuations within markets and across regions.

At Lifetime Financial Planning, our core beliefs continue to be…..that portfolio diversification, time in the market, not timing, passive investments and a long-term horizon all lead to decent and consistent capital returns in portfolios. We just have to remain disciplined (some would say boring), accept the short-term volatility and ignore the “noise”.

Michael Wall CFP® PhD is a Director of Lifetime Financial Planning. Aidan Wall Financial Services Ltd Trading as Lifetime Financial Planning is regulated by the Central Bank of Ireland. All views and details contained within this article are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

The Importance of Financial Planning

Stick to the Plan – Time in the Markets!

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Just a brief note to share a thought on the recent market activities. As a long-term investor in equities, I remind myself regularly that I am buying a small stake in the world’s most innovative companies. These global businesses are the service, travel & leisure providers, drivers of technology and manufacturing advancements, medicine discoverers, communication enablers, food producers, green energy innovators, etc. who shape the world as we know it today.

 

Investment Although it is nigh impossible to put a future value on these companies currently, if you are a regular investor, today you are purchasing a stake in these companies at a discount to what they were valued at two months ago.
If you are fully invested, then it is worth noting that you already own that stake and if you SELL now, you are gifting somebody else a potential bargain.

 

Remember, SELLING equities in a temporary decline in markets could lead to a permanent loss to your portfolio and a bargain to someone else, which is not rational.  

 

Experience from a decade ago teaches us that these world innovators will adapt, will revamp their business, will tool up and will face the new business environment in a post Coronavirus era. This may involve new ground being broken, a change in business and work practice or new products and services.
So, during these temporary declines in valuations, it is important to remain rational and recall that it is “diversity & time in the market, not market timing” which leads to better investment returns over the long term. This is exemplified by the S&P500 index of North America’s biggest 500 companies (above)
If you have any queries or concerns about current market conditions, please do give me a call on 085 866 9813.
Please do stay safe & check in on those who are cocooned.
Michael

The Importance of Financial Planning

International Women’s Day Sunday 8th March

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There are plenty of national and international studies showing lower participation rates for women contributing to a pension and for those women who do participate, smaller pension pots.

The reasons and impact of the resulting pensions pay gap for women are manifold. Here are 7 simple step’s which women, and their employers, can take to help narrow the pension pay gap women experience.

  1. Join or set up a pension plan at your earliest opportunity. The funds built up can continue to grow even if you take time out during your career.
  2. Link salary increases to pension contribution increases. This is even more effective if committed to in advance. Simple percentage contribution rates do this automatically.
  3. Maximise contributions by availing of the maximum employer contribution rates and considering making Additional Voluntary Contributions (AVCs) where affordable.
  4. Continue making pension contributions, both employer and employee, while on maternity or other types of leave.
  5. If affordable make pension contributions while on a career break via a personal pension or PRSA. Take advantage of the tax reliefs available.
  6. Maximise contributions when returning to work after maternity leave or a career break.
  7. Take financial and/or investment advice which takes account of your specific circumstances and plans.

If you would like to take control of your finances and get your Lifetime Financial Plan in place then please contact Aidan Wall, QFA, or Michael Wall, QFA, at 046 924 0961.

The Importance of Financial Planning

Investment Snippets #6

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#STICKTOTHEPLAN: How to deal with Market Volatility

Volatile Markets rattle the nerves of investors, but we should remind ourselves why, as investors, we invest.

Consider that when we purchase shares in a company, we are buying ownership of that company, so we become a shareholder and that entitles us to a share in the profits. The profits may be distributed in the form of a dividend or invested back into the company. The upshot is when a company is profitable; it usually increases its net asset value.

However, the profitability of a company is not always reflected in the share price and visa-versa, Price doesn’t always reflect profitability. This is highlighted in the chart which shows Unilever PLC’s share price and the company’s profitability which we measure using Earnings per Share. Here, we see even with consistent increasing earnings there is significant “volatility” in the share price.

 

Unilver

 

The share price is what most people are familiar with and it can be difficult to tease out the cause of its volatility. Genuine reduction in profits due to  changeable local economic factors, interest rate policy, bond yields and inflation, employment, political interference, and world trade agreements all influence investors emotions to varying degrees and therefore their appetite for investment which is reflected in the share price. A hard look at the facts is always warranted when we see volatility to understand that the investment case remains sound.

If you are a lump sum investor, then downward volatility has to be ridden out. Strong emotions will tempt you to SELL holdings and preserve the CASH. This is a mistake as it will likely crystallize a permanent loss, which if repeated frequently, is the quickest way to destruction of your wealth. Consider also, that you will likely be selling a good value asset at low price which is a bargain for a buyer on the other side.

On the other hand, we view Share price volatility as an opportunity to pick up quality assets at good value. If you are a regular investor, a monthly contribution invested will allow you to take advantage of a lower price paid for your holdings which can help to enhance long term capital appreciation.

And so back to Unilever, which if you had acquired in 31/10/2013 at a price of £25.01 per share, then today, 5 years later, that share is trading at £40.85, which represents a gain of £15.84 (63% or a compound growth rate of 10.31% pa).

How do we deal with market volatility?…….we ALWAYS look at a 5 year investment term.

If you have any queries, reservations, concerns or just want to talk it out, do give us a ring on 085 866 9813

The Importance of Financial Planning

A Little Care and Attention Can Save on Tax

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Many people own shares in publicly listed companies such as Aviva, Glanbia, Ryanair, Kerry, Vodafone etc, but few are aware that a little care and attention in managing these can save you a considerable amount of money in tax.

At Lifetime Financial Planning, we provide that attention. Invest 20 minutes of your time today and we will show you how.

For Personal Financial Planning advice, talk to Michael or Aidan, at Lifetime Financial Planning today. Visit us at www.lifetimefinancial.ie then call us on 046 9240961. Lifetime Financial Planning; with you every step of the way.

The Importance of Financial Planning

Moved to Ireland from the UK? – Transfer Your UK Pension

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If you worked in the UK and have moved to Ireland, you may have left one or more UK Pensions behind. We strongly recommend that these assets be transferred back to Ireland, you thereby gain control of your asset.

BREXIT means this should be done sooner rather than later. The funds can be retained in Sterling if desired.

At Lifetime Financial Planning, we have the technical expertise and experience in transferring UK Pension Funds to Ireland.

If you need help in relation to transferring your UK pension or any other financial matter give us a call at Lifetime Financial Planning.

Tel +353 (0)46 924 0961. Email: michael@lifetimefinancial.ie or aidan@lifetimefinancial.ie

The Importance of Financial Planning

Moved Job – Lost Track of your Pension ?

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Lost track of your pension after moving jobs?

If you work in a job which includes a Pension, then you have a valuable asset. If you move to another job though, you might have lost track of your pension, especially if you change your address.

Indeed you might have moved job several times, and have several Pension pots. The safest solution may be to take control of these assets yourself so then there is no danger of losing track of them.

If you need help in relation to this or any other financial matter give us a call at Lifetime Financial Planning, Michael 085 866 9813 or Aidan 087 2621 006.