Tuesday, 23 August 2011

Stock Market Returns - Majority Rules

One of the first practical things you learn as a financial adviser is that you have absolutely no control over "the market."

"The market" is a backward looking measure of valuations and in that sense, the market never actually "does" anything. You may hear on the news that "The market has done well" or more likely at present that it has done really badly but in reality it has done nothing...

We on the other hand, as investors have done everything. Every transaction has a buyer and a seller and as such they agree on a price for the stock. As individuals we simply make our decisions based on the news we hear, news I might add that everybody else has heard as well.

So this is where sentiment comes into play. Everyone, especially retail investors would be wise to understand the role sentiment plays in the determining the short term value of stocks. THE MARKET WILL 'DO' ONLY WHAT THE MAJORITY OF PEOPLE THINK IT WILL DO!

If the majority of traders feel a stock is going to take a tumble they will try to sell their holding. Basic supply and demand forces dictate that while supply (people trying to sell) outstrips demand (people willing to buy) a stock price will fall...

As the stock price falls it becomes more and more attractive. At the tipping point the majority of traders will switch from being sellers to buyers. The price will start to rise as more and more people try to get hold of the stock (demand outstrips supply). This is why a dramatic fall in the price of a stock is very often followed by a very steep rise; with some 'lucky' traders profiting from the stock price volatility...

Despite how it feels at the minute the majority of stock prices are usually relatively stable. The short term stock price really reflects only what the majority of people think that stock is worth rather than the actual value of the company...

As the stock price rarely accurately reflects the underlying value of a business it is a dangerous game to try and "play the market." Traders can react to news very quickly which is how we see dramatic alterations to stock prices. A retail investor, without having all the news available to the market and then having the ability to react correctly to and with the majority of other people is more than likely going to make the wrong decisions...

Retail investors are rarely in a position to react to news quickly enough to protect themselves from short term volatility. In the week or so it takes to sell or transfer an ISA investment for example "the market" will no doubt have moved on, it's possible that the retail investor will be selling at just the point where the majority of traders are starting to buy again.

Instead of playing the short term game, which is very difficult if not impossible, the vast majority of people need to avoid the sentiment driven market reactions and instead opt for a long term strategy. If the majority of traders swing from buy buy buy to sell sell sell the likelihood is at some point they / you are going to get it wrong. If you take a step back and understand that the real value in the UK stock market is in the dividends and long term solid understandable company growth then all the bluster about short term prices should be less of a worry for you.

Companies tend to grow, that is what capitalism is about, so in the longer term you will receive a much happier investment experience if you understand that short term sentiment rarely effects long term profitability, only short term volatility.

So in my humble opinion the way to achieve the most successful investment experience is to avoid getting caught up in the sentiment driven reactions to short term media driven news, maintain a long term strategy that you stick to not just when things are on the up and try not to panic when all around seems to be negative and suggesting you should start to sell... By the time you have got that news it is already too late, just ride it through.

Monday, 15 August 2011

Do what you can to avoid the 50p tax rate

In an article (Osborne seeks Revenue check on 50p tax rate) published today on IFA Online there is a strong hint from the Chancellor that the 50p tax rate will not make it past the next budget.

I never assumed this upper tax limit would be something a Conservative lead Government would be keen on keeping so it has been no surprise that this sort of pre-emptive suggestion of it's abolition is no doubt a subtle way of saying to the wealthier part of society, don't worry things will be back to normal soon.

I am certainly not one of the many masses who constantly bemoan the wealthy and the privilege that wealth brings. I spend most of my days talking to parents who are in the fortunate position of being able to consider sending their children to private school and a great deal of what we discuss is how we can save tax in order to help fund it... I have no doubt in my mind that this is the right thing to do...

Some people, (most of my clients would not mind me saying that they consider themselves far from "wealthy") make a choice to send their children to private school and therefore do not burden the state with the cost of another school place. That saves the Government thousands of pounds per year so why shouldn't those helpful parents try to reduce their tax bill to compensate for their extra costs. Until roughly 15 years ago you could get direct tax relief for sending your children to private school through the use of a children's educational Trust. I see no reason why this type of arrangement should not be in use today.

The Government has set up the Free Schools initiative which helps parents provide a better education for their children by setting up state funded schools run partly by the parents of the children who will be attendees. If the Government is prepared to fund this, by way of an annual payment for each pupil in attendance at the school then why not allow transparent tax relief for sending your children to a private school... Maybe once we are properly beyond these austere times this is something for a future budget, hint hint Mr Chancellor!!!

Getting back to the 50p tax rate, HMRC will provide results by the 2012 budget on exactly how much tax has actually been raised as a result of the 50p tax rate. It appears (I consider this another hint) that Mr Osborne believes that due to tax avoidance measures the amount of tax actually raised by the extra high rate of income tax will not be as sizeable as assumed and therefore it should be scrapped.

HERE IS THE MESSAGE: There are perfectly legitimate ways of avoiding tax, pensions, EIS and VCT investments for example, not to mention actual tax avoidance structures themselves. If you are earning income above the 50p tax rate, in fact if you are earning income of around £100k or above then you need to speak to someone about reducing the amount of tax you pay.

The more people subscribe to avoiding the top rate of income tax the better, MR OSBORNE IS LISTENING and in my opinion has said clearly although not outright, that if more people avoid the 50p tax his decision to scrap it (assuming that is what will happen of course) will be easier to justify.

If you want help with tax mitigation then speak to your financial adviser or you can get in touch with me if you like...