What we’re reading

At a glance here are the main points from a financial planning perspective.

Steve Jobs’ last words remind us that money isn’t the answer to everything.

Peace of Mind in a Dangerous World, an investment report by Rathbones Investment Management Limited.

By 7IM The Association of British Insurers found that the average price of car insurance has risen by 21% compared to this time a year ago, now coming in at more than £500 per year*. And sadly, their data isn’t on quoted prices, but on actual paid prices – i.e. after you’ve spent an hour on the phone, threatened to leave, been put through to a different department etc … So what’s going on? Well, the car insurance industry is basically still suffering with COVID. Last year, insurers paid out £1.10 in damages for every £1 of premium they received. They made a loss on their car insurance business. The cost of repairs was so much higher than expected, due to the increased costs of spare car parts and replacement vehicles – as the chart below shows. There have also been other cost pressures which aren’t captured in the chart – such as the cost of labour, due to car mechanics retiring or retraining during COVID, or courtesy car hire being more expensive. It’s a great illustration of why inflation is so difficult to get under control, and for central banks to predict. So many moving parts (literally so in this case), and with such long lags before the impact is felt: Economic textbooks always make things sound so straightforward; the reality of why prices go up (or down) is always far more complicated.

By Brooks Macdonald Cash savers are currently enjoying the highest returns in nearly two decades, with some popular savings accounts offering fixed-term deposit rates over 5% per annum. After a prolonged period of virtually zero return on cash, rates today are multiple times higher compared to previous years, and investors are naturally keen to put more into cash than they have done so previously. So, are investors right to prioritise cash? To answer this question, we examine the role of cash in the context of inflation, investment horizon and opportunity cost of reinvestment. Despite the current attractiveness of cash deposit rates, cash may not be the best place to be for long-term investors. Cash is not inflation-proof Cash offers certainty only in its nominal value but not its real value, which is measured by the resilience of its purchasing power over time. Inflation erodes the purchasing power of any asset. While cash may retain its real value to some extent during periods of low inflation, its purchasing power rapidly diminishes during times of high inflation. In fact, in the past two decades, there were only three isolated years where cash managed to outperform inflation and retain its purchasing power. Even during the era of subdued inflation that preceded the COVID pandemic, deposit rates languished at levels even lower. Despite the recent surge in cash rates, they still fall short of the prevailing higher inflation rates. Consequently, relying solely on cash rates often proves inadequate in terms of providing comprehensive real value protection. A diversified portfolio could be a better option for long-term investors It is important to examine the case for cash in comparison to other investment instruments such as equities and bonds. For investors with long-term goals, a diversified 60% equities and 40% bonds portfolio can hold greater potential for generating real returns. If we examine the excess returns of cash versus an equities and bonds portfolio across varying time horizons, we see that over the past 3, 5, 10 and 20 years, cash savings have delivered negative real returns, thereby diminishing the purchasing power of depositors. While cash managed to retain a level of real value over a 50-year period which will incorporate many different economic cycles, it is still lower than the returns generated by the equities and bonds portfolio. By contrast, the equities and bonds portfolio has consistently delivered returns that outpaced inflation across timeframes of 5 to 50 years, regardless of the prevailing macroeconomic conditions. For investors with long-term goals, a diversified60% equities and 40% bonds portfolio can holdgreater potential for generating real returns. Hidden costs of fixed-term deposits Investors attracted by the higher rates offered by fixed-term deposits are often locked in for a period of time. One key consideration for depositors in these situations is reinvestment risk, which is the risk of earning lower returns when choosing a new investment after their original fixed-term investment has expired. Once the fixed rate reaches its end, they must either renew at potentially lower rates or explore alternative investment options. However, the financial landscape at that time could differ significantly, and the investor could have missed attractive entry points in equity and bond markets. Historical analysis also reveals that high deposit rates rarely persist over an extended period. Looking at past patterns, in the five previous hiking cycles, the Bank of England typically maintained peak interest rates for an average of nine months between its last hike and its first rate cut. It is unlikely for higher rates to endure, and investors risk sacrificing long-term opportunities for the allure of short-term ‘guaranteed’ gains. What does it mean for investors? While current cash deposit rates may be attractive, investors should carefully evaluate the role of cash in light of inflation, investment horizon, and reinvestment risks. So, whilst holding cash can be a useful tool for investors with a very short investment horizon, a diversified investment portfolio could provide better returns for investors seeking to preserve and grow their wealth over the long term. Important information Investors should be aware that the price of investments and the income from them can go down as well as up and that neither is guaranteed. Past performance is not a reliable indicator of future results. Investors may not get back the amount invested. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. Investors should be aware of the additional risks associated with investing in smaller companies, emerging or developing markets. The value of your investment may be impacted if the issuers of underlying fixed income holdings default, or market perceptions of their credit risk change. The information here does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. This document is for the information of the recipient only and should not be reproduced, copied or made available to others. Brooks Macdonald is a trading name of Brooks Macdonald Group plc used by various companies in the Brooks Macdonald group of companies. Brooks Macdonald Group plc is registered in England No: 04402058. Registered office: 21 Lombard Street, London, EC3V 9AH. Brooks Macdonald Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England No: 03417519. Registered office: 21 Lombard Street London EC3V 9AH. Brooks Macdonald International is a trading name of Brooks Macdonald Asset Management (International) Limited. Brooks Macdonald Asset Management (International) Limited is licensed and regulated by the Jersey Financial Services Commission. Its Guernsey branch is licensed and regulated by the Guernsey Financial Services Commission and its Isle of Man branch is licensed and regulated by the Isle of Man Financial Services Authority. In respect of services provided in the Republic of South Africa, Brooks Macdonald Asset Management (International) Limited is an authorised Financial Services Provider regulated by the South African Financial Sector Conduct Authority. Registered in Jersey No:143275. Registered office: 5 Anley Street, St Helier, Jersey, JE2 3QE.

By Pippa Stuart-Mills, 7IM After a particularly busy couple of weeks (and weekends!) on the headline front, it’s always a good thing to get some perspective on what’s been happening. And we mean REAL perspective.Rather than dazzling you with investment data, we thought we’d start with the brain. In particular, let’s talk about the part of the brain called the amygdala. This bit of the brain commits our experiences to memory – it’s like the “save” button when you’re working. And actually, we have two amygdala – one on each side of the brain. The amygdala in the left hemisphere of the brain deals with both positive and negative events. But the one on the right only processes negative events.  Which skews our memories. If every positive event is only recorded by half of the brain, we end up needing THREE TIMES as much good things to happen to us as bad things, just for it to seem balanced! This negativity bias in the way we view the world keeps us cautious. Which is pretty sensible in some aspects of our lives – keeping us from walking down dark alleyways, or petting angry looking dogs, or standing too close to an edge. The problem is the 21st century! There are so many things which aren’t life-threatening in the same way as physical danger, but are still extremely scary (I don’t know if you’ve seen the internet …). And nowhere is that more true than in finance. There’s ALWAYS something to worry about, ALWAYS aDr Doom forecasting a recession or a crisis. So how do we manage our brains in an environment that is stacked against us? We have to play the numbers – look for ways to view the world which undo the negative skew. Just LOOKING LESS at the market is a great way to do that. Left to their own devices and without a proper plan, people are inclined to feverishly check what’s going on in their portfolio, especially when there’s bad news around. If you’d have done this daily with the world equity index since 1990 it’s basically a coin toss between whether you have a positive (market going up) or a negative (markets going down) day. Yet over that period, the index is up by more than 700%! On any given day the market is as likely to be down as up. And that will terrify your amygdala! BUT. Zoom out and the picture is different. If you only check returns annually, markets will have been positive nearly three-quarters of the time.  We can’t change our biology, but with the right framing and guidance, we can change how much we let it affect us!