Subscribe
Share
Share
Embed
Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Hello, and welcome to On The Money, a weekly investment bite sized show that aims to help you make the most out of your savings and investments. In this episode, we're gonna be answering questions that have been submitted by listeners over the summer months. And joining me to tackle these questions is Craig Rickman, who is personal finance editor at Interact Investor. Craig, great to have you back on the show.
Craig Rickman:Thanks for having me on, Kyle.
Kyle Caldwell:So, Craig, I'm gonna pass the baton to you straight away. So the first question that's been submitted essentially asks, with stock markets at record highs, is this a concern? And the reason, Craig, I've asked you to answer it first is because in a previous life, you were a financial adviser. So I thought it'd be interesting to know whether this question cropped up on occasion when stock markets were performing well. Did you ever have experiences of clients then becoming a bit nervous, a bit concerned, and maybe looking to take profits when they saw that stock markets were riding high?
Craig Rickman:Yeah. I mean, it would happen every now and then. I would say that clients would be more concerned or more clients were concerned when when markets were actually on the way down rather than they were buoyant. But now when markets are high and when they've reached record highs like they have recently, it does trigger some some questions and some considerations for investors about, you know, what is the best approach from here on in. I would say that, you know, the majority of clients understood that a financial plan or an investment plan was very much a long term thing.
Craig Rickman:And while it would be reviewed periodically, usually at least once a year, making changes in response to to stock market behavior was largely avoided. I mean, mainly because, you know, obviously, are are are high at the moment, but we still don't know which which way they're gonna go. So you're trying to get into this thing around timing the market. That said, in in some circumstances, in some specific circumstances, there would be people who would either, yeah, cream off profits and and spend the money. So an example might be those in retirement if they've already got enough guaranteed income from other sources and they had some savings and investments or investment portfolio that was performing well.
Craig Rickman:They wanted to, yeah, take some of the profits and enjoy the money by either going on nice holidays or buying a new car or perhaps even gifting money to children. Then there were some some instances of that. I guess another one was not so much sort of realizing the gains and selling out, but reducing risk before retirement. So if someone had or their their pension was performing well, markets were doing well, and they were approaching retirement, they were looking to to buy guaranteed income, then it wouldn't be uncommon for them to look to to consolidate the gains there as well. And that would be typically by moving into safer investments to protect them should markets fall.
Craig Rickman:So there are a couple of examples. I think the thing to watch out for if you are looking to consolidate gains and actually take money out of your investments is tax. So if you've got money in if you've got money in ISAs, that's fine. But if you have investments in a general investment account, then you need to watch out for capital gains tax. And if you're making withdrawals from your SIP, you'd need to watch out for income tax if it doesn't form part of your tax free tax free cash.
Kyle Caldwell:Whether or not to consolidate gains is central to the question that's been sent in. So it's sent in by Gillian who asked, Kyle, I know you don't have a crystal ball, but do you think stock markets being at record highs are a concern? Markets have quickly recovered the losses in case early this year, and I'm now concerned that markets have become too complacent to the impacts of US tariffs, and there are no shortage of geopolitical tensions. I'm thinking about taking some risk off the table and taking some profits that I've made from Investment Trust Holdings. So as you mentioned, Craig, in terms of whether or not to take profits, really does depend where you are on the investment journey.
Kyle Caldwell:You know, if you're ten, twenty years away from the time and in all likelihood, you gotta take a step back, think of your long term plan. And if your investment objectives haven't changed, then potentially your investments aren't gonna change either despite them having a a good run of form. In terms of risks, I get the point made that stock markets have moved quickly over the past couple of months, and it has probably surprised most investors how strongly markets have recovered. Just to put some figures on this. So before we started recording the podcast, crunched the numbers.
Kyle Caldwell:And from the April 8, which was the day when stock market started rebounding following the announcement of a ninety day pause on US tariffs being implemented, the S and P 500 has gained 24.5%, and the MSCI World Index is up 23.1%. Those figures are to the September 4, and those returns are for UK based investors. If you're a US investor, you'll actually have made more than that. But because of the weakness in the US dollar versus the UK pound, it has blunted retains for UK investors. So in US dollar terms, the S and P 500 is up 31%, and the MSCI Wales index is up 29.5%.
Kyle Caldwell:Our own home market has also recovered strongly. So from April 8 to the September 4, the 4,100 is up 18.6. And year to date, it's gained 16%, and that's outstripped gains of 6.43.8% for the MSCI World and S and P five hundreds. Naturally, due to the strong recovery, I I can understand why there is some apprehension or that there could potentially be a pickup in stock market volatility. You know, the question which we don't know the answer to is have have markets moved on from uncertainty from The US tariffs too quickly.
Kyle Caldwell:However, there was a really interesting piece of research a couple of months ago from Schroders, the full manager, which highlights that in the case of The US stock market, the market actually reaches an all time high more often than you might think. So it it looked back at historic data from January 1926, and it found in the 1,000 one hundred and eighty seven months since then, the market was at an all time high in 363 occasions, so that's 31% of the time. I thought that was a fascinating piece of research, and it it just highlights how over the very long term, The US stock market has been a wealth creating machine. And Troja's research also highlighted the well, it debunks the notion of investors trying to time the top of the market by switching into cash when when when a stock market's at a record high. So its research found that it was actually better to invest at all time highs rather than switch to cash and then try and reinvest when stock markets fall to a lower level.
Kyle Caldwell:I'm gonna include a link to the article we wrote up on this research so that you can check that out in more detail and see all the performance figures that are quoted for yourselves. But going back to, you know, being wary of the stock market hitting a record high, there's always reasons to be bearish. There's always headwinds. I actually think if there wasn't any headwinds, then that in itself would be a potential that would actually be a fear that the stock market is unsustainably high. There there always needs to be some sort of reason to worry.
Kyle Caldwell:Otherwise, if the stock market's far too buoyant, then that's also very dangerous. So, I mean, at at the moment, we wrote an article well, one of our freelance writers wrote an article that outlines the biggest risks that are keeping full managers awake at night. And, again, I'll include a link to this below the podcast description for you to check out yourselves. And among the the biggest risks that full managers highlighted where some of them made the point that markets are potentially being too complacent on US tariffs, geopolitical tensions, some pointed out that the AI theme is potentially becoming overheated in terms of its valuations, and some managers also highlighted the risk of inflation being sticky due to The US tariff regime. Now closely linked to those sort of inflation concerns as well is that some managers warned that the high levels of government debt across many economies are potentially a very big accident waiting to happen.
Kyle Caldwell:So elevated government debt, what this does is it raises the the threats that increases in government bond yields will call into question the government's economic and fiscal credibility. At the moment, there are worries about the lack of economic growth and potentially some indirect tax rises coming the upcoming budget, and rising bond yields make that debt more expensive to service. And a sign of that debt becoming potentially too elevated is the fact that the yields on thirty year UK government bonds, also known as gilts, A couple of days prior to this recording, we hit a twenty seven year high. The yield reached just over 5.7%. So that that is among the biggest biggest concerns at the moment.
Kyle Caldwell:Another question that we've had related to stock market performance, which I'm gonna now pass to you, Craig, asks, if stock markets are volatile in the leads up to retirement, should I carry on working? And that question came from Robert.
Craig Rickman:Yeah. It's a very good question. I think, you know, managing volatility and managing investment risk in the years leading up to retirement is, you know, one of the most important things that you can do throughout your sort of savings and investment journey or your saving for your journey of saving for retirement. And, you know, as the the question notes, if something were to happen or something drastic were to happen and markets were to slump, and let's say that wiped off 20 or 25% of your of your savings, then ultimately, if you do as you if you've sort of set a date for retirement, you you have two options. That's either you retire with a smaller fund and ultimately less income than you originally would have liked or originally could have got, or you carry on working.
Craig Rickman:So it's quite an unenviable position. And I think what this illustrates is the important of of having a plan, which you probably look to start around five years before retirement. I mean, this is a it's a personal thing, so it could you know, for some people, they might want to to plan years before or or some may wanna wanna shorten it, but have a plan as as to sort of what you would do if markets were to be volatile and ultimately if they were to fall. And the the sort of the the tactic here is something called derisking. So you you take risk off the table, typically done over a period of time.
Craig Rickman:So over a number of years, you gradually move from riskier assets such as shares into safer ones. But then, whether you should do that and to what extent will depend sort of several factors, namely what sort of how how you plan to draw an income in retirement, whether you're looking to buy an annuity, a guaranteed income. If that's what you're looking to do, then derisking is is typically more important. If you're looking to take flexible income, that doesn't mean that you shouldn't derisk, but there's less need to because, typically, your money is gonna remain invested throughout retirement. So you wanna keep the sort of potential for investment growth on the table.
Craig Rickman:But, yeah, the the key thing here is to plan ahead. The other thing is is to diversify. If you've got different types of assets in so you've, you know, you've got some in equities, you've got some in bonds, you've got some in cash, maybe some commodities as well. If one asset is isn't performing particularly well and is volatile, others might be there to to back them up. Others more sort of those that are more cautious.
Craig Rickman:So there's no sort of one size fits all way to do it, but, yeah, to manage volatility in the lead up to retirement is really important, and that can avoid you sort of having the unenviable position that you that you carry on working when you'd rather not to.
Kyle Caldwell:And, of course, if you're continuing to use your investments at retirements and you're paying yourself an income from some of your investments, So even if you're in this nightmare scenario of seeing your pension value plumbers just by, like, 25% ahead of retirement, if you keep on investing, then you're giving your investments the chance to recover. Whereas if you buy an annuity, you're locking in that rate, and that's the rate you're gonna get for the rest of your life.
Craig Rickman:Absolutely. Yeah. Yeah. And I think that, again, explains why it's so important to think about, you know, what you would do with volatility. Mean, volatility in itself isn't necessarily a bad thing.
Craig Rickman:It's it's how that volatility would impact your retirement plans and how it would potentially jeopardize them. You know, for example, if if you were retiring and you had, yeah, you had you had a good solid base of guaranteed income. So if you had some defined benefit that you're gonna claim and you were claiming the state pension too, and that was gonna be more than enough to live on and live comfortably on. If you then got a separate DC pot and and things are volatile, but you don't need to draw that money at the point of retirement, then volatility isn't gonna be as much of a problem compared to someone who say is relying on that full pot to to generate income. So they may have a state pension, but they need to generate more to live a comfortable lifestyle.
Craig Rickman:So it's, yeah, it's it's a personal thing, but it's, I mean, it's something that everyone should should think about in years up to retirement. How you go about it will depend very much on sort of your personal circumstances and how you plan to draw an income.
Kyle Caldwell:Judging by some of the questions that have been sent in over the past couple of months, there does seem to be quite a lot of pessimism around. And the next question sort of highlights this as well. So they ask, if I wanted to introduce some hedging, how might I do that? So the person who wrote in, who didn't leave their name, says, like a lot of people, I've got a fairly heavy weighting to The US stock market through both S and P 500 trackers and various global funds. I just read an article from Morgan Stanley that forecasted further weakening in the US dollar over the next year or two and suggesting investors add hedges to their exposure to US assets.
Kyle Caldwell:I think it was targeted at professional fund managers and the like, but it prompted this question for me. I know that there are hedged versions of some funds, but how how do I go about doing this? What are ones available? Do I just change my asset allocation to have less US exposure, or is there some other way that I might do this? So as as I mentioned earlier, due to the weakness of the US dollar versus the UK pounds, the returns for a UK based investor have been blunted if they are invested in a US funds or indeed if they're invested in a global funds because most global funds have a very heavy weighting to The US.
Kyle Caldwell:In particular, if you're buying a global index funds or a global ETF that are tracking the up and down movements of the global stock market, those funds typically have just over 70% devoted to The US. Now for investors that would like to try and mitigate currency risk, there are some funds that come in special versions that strip out changes to the exchange rates. So these are called hedged share classes. These funds, they have the exact same holdings and the same for manager as a regular non hedged funds. However, the difference is that due to the currency hedging, UK investors will see the same percentage rise or if it's been a bad time, same percentage fall in their funds as local investors with no reduction or benefits from the currency movements.
Kyle Caldwell:So these funds, they're not trying to call, you know, which direction currencies will move in. The hedge simply aims to cut out the currency exposure, good or bad. Now one thing to bear in mind with these funds is the hedging currencies cost money, so the annual fund fee on a hedge share class is typically a bit higher. It's typically naught point one, naught point two percentage points higher. Now the trouble is there's not that many hedged share classes available.
Kyle Caldwell:I've actually questioned various salespeople of fund management companies over the years why the fund firm they work for don't offer more hedged share class versions. And the responses I've had over the years are that they're not seeing enough demand. And some conversations I've had, it's been put to me that over the very long term, currency movements tend to even themselves out. I'm not totally convinced about the latter arguments, and I also think that sometimes people wanna try and use a short term opportunity to try and profit, and this is a potential time to to do that with the US dollar weakening. Now just to give you a couple of examples of funds that do offer a head share class for The US stock market, They are Artemis US Select and JPM US Equity Income.
Kyle Caldwell:Both those funds offer hedged and unhedged share class versions. There are other ones available as well, but they're the two that spring to mind when I was thinking about the answer to this specific question. However, there are other ways to reduce the concentration risk with The US stock market while not selling out the whole market entirely. As I've mentioned on this podcast before, you could look for, like, an equally weighted index fund or ETF. So there are some available that equally weight the S and P 500 index.
Kyle Caldwell:So what they do is they own the same percentage weightings to every single stock in that index. So each individual stock will comprise naught point 2% of the index fund or ETF. And there are among the ones available on our platform are from Invesco, X trackers, and UBS. They all have S and P 500 equal weight ETFs. There are other ways to introduce more tactical exposure for those that are looking to lessen the impact of volatility.
Kyle Caldwell:An ETF example that adopts a minimum volatility strategy is the iShares Edge S and P 500 minimum volatility ETF. So what this ETF does, it targets shares that are typically among the steadiest performers, and and it owns a basket of those shares and follows the up and down fortunes of those shares. There's also a global version as well. And another potential route to reduce concentration risk when investing in The US stock market is to target global funds that are underweight US. Examples include Artemis Global Income and Rand Moore Global Equity, and both of those were among our most bought funds in August with Interactive Investor customers.
Kyle Caldwell:We're now gonna move on to a completely different topic. So this was a comment that was beneath one of our podcast episodes on YouTube, And they asked, what are your thoughts on pension funds voluntarily investing 10% of their money as part of the Mansion House Accord? Will they be using all the funds, or will this just be for the most high risk profile funds? Craig, I'll pass that once you've given your your resident pension expert.
Craig Rickman:Thank you. Yeah. So the Mansion House Accord, I think it's worth initially just unpacking what this initiative is, and then I'll sort of share some of my thoughts on it and try and answer those questions. So this is a voluntary agreement among 17 of The UK's biggest pension schemes. So these manage around 90% of active savers defined contribution assets.
Craig Rickman:So some household names here, the likes of Aviva, Legal and General, Royal London, etcetera. So these pension schemes have pledged to invest 10% of their default funds. That part's important, and I'll I'll come on to why in a second. But they've pledged to invest 10% of their default funds in private markets with 5%, so half of this figure, in The UK, and they've committed to doing this by 2030. Just a bit about private markets.
Craig Rickman:So these involve companies that aren't on the main exchanges, so typically things like private equity and infrastructure. The aim of this initiative is to try and boost saver returns and stimulate the economy at the same time. You know, whether it will boost saver returns, we don't know. In fact, the government published some some figures on this to show some some comparisons as to, you know, what people could get by or what schemes could generate for for for savers by increasing allocations to private assets, and the the expected differences weren't huge. They're actually quite small, and, obviously, they're not guaranteed either.
Craig Rickman:So there's a bit of skepticism over, you know, whether this actually will improve returns for savers. So so what are my thoughts? I think just I mean, the government sort of getting involved with, you know, where pension schemes invest savers money is is always gonna be a bit controversial. I appreciate this is a a voluntary agreement, but it's clear that the government has been pretty had some pretty heavy influence on, what's going on. In terms of where schemes will invest, I mean, I can only assume as it's a voluntary agreement that they will you know, schemes will have the discretion about how they deploy this money into private markets.
Craig Rickman:But, again, I think the sort of going going back to the point I made earlier around default funds or elaborating on it, that's one of the really interesting points. So it's only gonna apply to default funds within pension schemes. So these are the ones so when you start at a company and you join the pension scheme, if you don't tell them where you want the money invested, that's what they'll pop you into. So called default funds. And there are sort of a, I guess, a a few problems with default funds or few potential problems.
Craig Rickman:One is that they're designed to cater for a wide range of investors. So they can often be quite cautious by nature. So they're they're looking after we're designed to, you know, hone the money of those who are just starting to save for retirement and those towards the end. I know from a previous employer, I looked into the default fund when I started, and it was only 35% of it was invested in equities, the rest in fixed interest. And at the time, I had, you know, three decades before state pension age.
Craig Rickman:That's a that's a long time to be investing such a small proportion equities. You're far too cautious for what I was looking for, and so I moved it into something else. And that will be available to you from what we understand under this mansion house accord. So if you don't wanna invest in UK private assets and you wanna invest, say, a 100% in global shares, if your scheme has a fund like that, and to be honest, most of these do, most of these offer hundreds of funds, then you can do that. So while this is gonna apply to, you know, savers for those 17 pension schemes, it doesn't necessarily have to apply to you.
Craig Rickman:But you will need to engage with your workplace pension, and you will need to take some action. But I think in in in any case, if you've been put into a default fund, you should review it anyway because it's it's it's possible that there might be other investments and other funds and solutions out there which might be far suitable for you and what you're looking to achieve?
Kyle Caldwell:It's the main thing I bring up, Craig, when I'm just with family and friends. I'm sadly sort of reached start to reach that age where, you know, dinner conversation is central around what you're invested in, your what pension's invested in. Well, you know, that that is a good thing, though, because it's really important to engage with your pension and to really look onto the bonnet and take a view on whether if you are in a default fund, whether that is right for you in terms of how it's allocated. So exactly the same as your scenario, Craig. I mean, I I was firstly put into a pension default fund that was 60% shares, 40% bonds.
Kyle Caldwell:I was in my early to mid twenties. I I don't think at that age, it needs us any exposure to bonds, never mind 40%. So I did switch it, and I put it into a into a global fund that was a 100% global equities. As you mentioned, Craig, if if under this policy, they're they're only gonna go into default funds, then you can then take a view on if you don't wanna have 10% exposure to to UK growth assets, then you don't need to because you can make your own investment decisions and and allocate yourself and decide what you want to invest in. But if you don't and you put and you're gonna default funds, then in future, that's how it may end up being allocated.
Kyle Caldwell:As you mentioned, it is voluntary, but the aspiration is that that's how they will be invested. They will have, you know, up to 10% in growth assets, including private assets. And I think I think AIM shares are also gonna be eligible for inclusion as well, and that was confirmed a couple of months ago. So you just need to be comfortable with the the the risk that's being taken as well. As ever, the importance is to is to look under the bonnet.
Kyle Caldwell:Craig, we're gonna stick with pensions for our final question. Now this is a very big topic, and we could probably devote an entire episode to it. So I appreciate it. I'm gonna give you the final couple of minutes to to give your views. The question's coming from Rupert who asks, how reliant should I be on the state pension when I'm planning for my retirement?
Craig Rickman:Well, I think if you retired with just the state pension and no other income, unless you are incredibly frugal and want to live a very, very simple life in retirement, you're probably gonna struggle. So relying on it in its entirety is yeah. That that might be a a risky approach. That said, I think there are very few people who can retire without needing the state pension to live the lifestyle that they want. So it's worth just just talking through what what you get if you were to retire today and when you can get it.
Craig Rickman:So the full state pension, which you need thirty five years of qualifying National Insurance contributions or credits to receive, is currently just under £12,000 a year. And interestingly, it uprates every year under the triple lock, which means it increases by the highest of inflation, average wage growth, or two and a half percent. So that's a valuable feature as well. The age that you can claim it is currently 66. That's going up to 67 from 2028, and it's and it's scheduled to go up to 68 from 2044 to 2046.
Craig Rickman:The state pension age is currently under review, so that timetable might change. We we should learn more in in the next couple of years. But in terms of sort of relying on it, I guess another important aspect is the sort of age that you plan to retire. So as I say at the moment, you can you can currently claim it at 66. But if you wanna retire at 60, then you're gonna have to factor in six years where you're not gonna have state pension income, which you're probably gonna have to almost certainly make up from from your other savings.
Craig Rickman:So that's a that's an important thing to consider too. But again, I mean, it's it's a really valuable source of income in in retirement. You know, if you wanted to, you know, replicate that with an annuity and plus the fact that it that it increases every year, so an, you know, an escalating annuity, then you you you probably need a pot of, you know, 250 to 300,000 depending on your age. So it's a really valuable source of income in retirement. So although the, people you aren't I don't think anyone could rely exclusively on it, not if you want to live comfortably in later life.
Craig Rickman:Yeah. It's really, really important. I know that some people are skeptical about its future. When you read surveys, younger people are concerned that they might not get a state pension. I guess my view is that there will be a state pension, but the thing that may change is the age that you can claim it.
Craig Rickman:So under this review that's going on, so yeah, it's currently due to to increase to 68 in the mid twenty forties. There's every possibility that that timetable could be brought forward and alternatively or in addition to the age could increase as well above 68. So, you know, I'm I'm due to claim my state pension in 2050. Whether I'll be able to claim it at that point, I'm I'm not too sure. Maybe I'll find out more in the next couple of years.
Kyle Caldwell:On the points on skepticism around whether the state pension will even exist in the decades to come, I actually brought this up with my mom fairly recently, and she said that when she was in her thirties and forties, she thought exactly the same thing. So it it could be a a normal fear that people have in that sort of age category. I mean, you know, people are living longer. People are having longer retirements. So it is gonna become harder to fund in the future because of that.
Kyle Caldwell:I've seen in the past from a think tank, the prospect of state pension being means tested. I think that would be so highly controversial that whatever governments even proposed that, never mind implemented that, they would not win many favors when they next tried to be reelected. So I just can't ever see that happening. But, you know, I think in terms of saving towards your retirement, the the owners are switched to the individual to take control of their financial future. Nowadays, the vast majority of us are in defined contribution pensions whereby what you put in and how the investments perform are gonna make a big difference regarding how big your pension pot is gonna be at retirement.
Kyle Caldwell:And that's why it's really important to engage with your pension. I know we go on about it a lot. Looking under the bonnet, understanding what you're investing in, whether it meets your goals and objectives, and then taking a view on where what you've invested in is still appropriate for you.
Craig Rickman:Yeah. I I think just to add to that is the the important thing is to set yourself a target income as soon as you can. That gives you more time to save and invest towards, which in in you in most cases, you you wanna translate into a pot size, and there are plenty of pension calculators online that can help you do it. But doing that will help to to sort of give you a gauge of what you need to do to, you know, create the kind of retirement lifestyle that you aspire to.
Kyle Caldwell:That's all we have time for for this episode. We have a lot of questions sent in, so I'm I'm sorry that I couldn't get to all of them. But, please do keep your questions coming to otm@ii.co.uk. I'll look to do another q and a episode in the months ahead. My thanks to Craig, and thank you for listening to this episode of On the Money.
Kyle Caldwell:If you enjoyed it, please follow the show in your podcast app and do tell your friends about it. If you get a chance, please leave us a review or a rating in your preferred podcast app too. Those ratings and reviews really help to get the podcast into more ears. So if you can spend the time to give us that five star review, that'd be great. We'd love to hear from you.
Kyle Caldwell:You can get in touch by emailing otm@ii.co.uk. And in the meantime, you can find more information and practical points on how to get the most out of your investments on the Interactive Investor website, which is ii.co.uk, and I'll see you next week.