Irish banks and your money

A guarantee on deposits can be found in your local post office – as long as you trust the Irish Government, say the Daily Telegraph.

"Royal Mail's bank accounts are backed by Bank of Ireland, which means customers will benefit from the Irish government's pledge to protect all Irish banking deposits without limit." said Rosie Murray-West.

As branches all over the country are closing like wildfire, it appears that the Irish bank guarantees could make the trusty PO the safest place to hold new savings while the recession storm blows in from across the Atlantic.

But the savings rates, some of which run as high as 7.05%, depend on the Irish banks' ability to buy sterling on the international market.

"Anglo Irish offers one of the best interest rates on Britain's high street. Its seven-day access account is paying 6.55 percent, while its instant access account is paying 6.4 percent."

"The Post Office, backed by Bank of Ireland, has a competitive 6.2 per cent cash Individual Savings Account (Isa), for those who have not yet invested their £3,600 tax-free savings limit this year, while its Instant Saver offers 5.75 per cent."

Meanwhile Kevin Mountford of Moneysupermarket.com said his website had seen three times more traffic directed towards Irish bank accounts this week than last week. "That's a reasonable barometer that people are taking this seriously," he said.

However, the Telegraph adds that British savers with British banks had not lost a penny throughout the recent problems in the banking sector, and advised them to choose their banks with regard to good interest rates rather than compensation limits.

Meanwhile, The Guardian reports that savers stand to earn negative interest on their deposits following an announcement that inflation reached 5.2% in September.

"The only way savers can be sure their money earns interest in line with inflation is to choose an inflation-linked account," says Hilary Osborne. "National Savings & Investments offers saving certificates linked to the retail prices index (RPI) - currently at 5% - but savers have to commit to locking up their cash for at least a year. Leeds building society offers a similar deal."

SIPP

It is not often that pensions are described as 'sexy' but SIPPs (self-invested personal pensions)are apparently just that. These DIY pensions that offer a wide range of investment options and the opportunity for investors to manage their own money have soared in popularity since they took off two years ago. That was largely due to the biggest shake-up of the pensions system since Lloyd George introduced the old age pension in 1908.

But while they might be seen by some as the ‘Rolls-Royces’ of pension savings, others fear they are the next big financial services mis-selling scandal in the making. They are not for everyone. Far from it: in fact many people would be better off with a traditional pension arrangement.

More than a quarter of a million people have taken out a SIPP since ‘A-Day’ ushered in an era of unprecedented flexibility in pension saving. The new rules, introduced on April 6, 2006, scrapped restrictions on how much savers could stash in their pension fund: from then, people could save up to 100 per cent of annual earnings, subject to a current cap of £235,000.

It became easier to take pension fund benefits, and the reforms also meant that, for the first time, people in company pension schemes could set up their own personal pension arrangements too. And, despite ministers performing a U-turn on allowing residential property to be held in pension funds – the most-trumpeted benefit of SIPPs prior to the introduction of the new regulations – their take-up has rocketed. SIPP sales rose almost 53 per cent to £1.16 billion in the 2007/08 tax year compared to the preceding 12 months, according to data from Hargreaves Lansdown.

“SIPPs are booming.” says Tom McPhail, head of pensions research at the independent financial services provider. “The drivers for growth are manifold: the A-Day rules allow really substantial investment contributions; the development of technology, such as online access to investment fund supermarkets, has boosted the self investment market; and competition has drive SIPP administration costs down". “At the same time, investors have become disenchanted with investment restrictions on other types of pension product and employers are beginning to appreciate that group SIPPs allow staff who have participated in maturing employee share schemes to continue to hold their shares in a tax-efficient environment.”

The past year, well-known companies such as Kingfisher (owner of B&Q), GlaxoSmithKline and Stagecoach have added group SIPPs to their benefits packages. The rise in demand shows no signs of abating. SIPPs will become increasingly prevalent as a retirement saving and income product in years to come, according to independent financial research company Defaqto.

Matt Ward, principal consultant for pensions and wealth management and author of its recent report ‘SIPPS in the UK 2008 – The Personal Pension of the Future’ says: “Since their launch in 1990, SIPPs have blossomed from a niche to a mainstream pension proposition and the attention now paid to their importance by numerous financial services institutions in the UK will ensure their market longevity.”

Like other pension products, tax relief is given on the way in, meaning it costs basic-rate taxpayers just £8,000 and higher-rate taxpayers £6,000 to invest £10,000 in their SIPP. But SIPPs notably differ from traditional personal pensions in the range of investment options. They can hold investment trusts, venture capital trusts, direct investments in stocks and shares, commercial property, exchange-traded funds, options and traded endowment policies. Come October, they should also be able to hold funds built up from contracting out of the state second pension. But different types of SIPPs offer different levels of investment flexibility.

‘Supermarket’ SIPPs, the most basic form, typically only allow investment in unit trusts and shares, but are generally low-cost. Hargreaves Lansdown’s Vantage SIPP and similar products from Alliance Trust and Killik & Co allow savers to set up and run a SIPP for free, other than fund charges.

A string of insurers also offer SIPPs, largely sold through intermediaries. Herein, however, lies the root of warnings over the potential for SIPP mis-selling. Independent financial advisers (IFAs) attract high levels of commission when consolidating pension arrangements into life office SIPPs. And, last year, the Financial Services Authority warned IFAs against recommending SIPPs – which tend to be more expensive than traditional pension products – where personal pensions were more appropriate.

SIPPs are fairly unusual among financial products in that the initial and annual management fees are usually a set number of pounds, rather than a percentage of the total fund invested. Initial fees are generally a few hundred pounds, while annual charges come in at an average £500 or so. Investment charges, generally the only charge on traditional pension products, also tend to be higher at around two per cent of the sum invested compared to 1.5 per cent or less on funds held in stakeholder pensions.

“There’s a bandwagon effect going on.” Malcolm Cuthbert, managing director of financial planning at independent financial services firm Killik & Co, said. “In the same way that people got into the tech boom, they’re now getting into SIPPs, and sometimes individuals are going from a life company personal pension to a life company hybrid SIPP, and are paying more for effectively the same investments.” Figures from Standard Life, the biggest player in the sector, show that almost 35 per cent of money invested in its SIPP (£2.78 billion out of a total £8.1 billion) was held in its own funds as of end-March.

‘Full’ SIPPs, meanwhile – offered by smaller specialist firms such as James Hay, Pointon York Sipp Solutions, Suffolk Life and AJ Bell, as well as Standard Life – give the run of the entire market. These are, again, more expensive than other types of SIPP, but can prove particularly suitable for small business owners. Up to 50 per cent of the value of assets held in the SIPP can be borrowed to buy the property, and rental income is paid gross into the fund.

The same borrowing limits apply to Axa’s recent move to allow its SIPP investors to invest in hotel rooms through specialist investment company GuestInvest. Investors can buy a hotel room on a 999-year lease and receive 50 per cent of the income on lettings throughout the year. They will also benefit from any capital appreciation on resale and the investment offers a guaranteed minimum six per cent return for the first year.

This greater flexibility clearly offered by SIPPs also extends to options at retirement: SIPPs allow people to keep their pension invested, while taking 25 per cent as tax-free cash at retirement and drawing an income.

What Factors Influence share price?

When you look at the performance of the stock market at the end of a trading day it can be hard to work out why shares have either risen or fallen in value.

Broadly speaking, share prices are influenced by news or information: new data on employment, manufacturing, directors’ dealings, political events or even the weather, all kinds of news can influence the way shares move.

You will sometimes, however, see little move in share prices when, for example, interest rates shift. This is because investors try to anticipate what is going to happen in the next few months and try to move their portfolios in or out of these stocks before the rest of the market catches on. Sometimes, of course, these expectations can be wrong and if this happen, markets can move very sharply.

If you want success in shares trading you will need to know what news other investors look at and how they will look at it. This will help you pick the best moment to buy and sell your shares. Read more about monitoring news on a company.

The Economy
The health of the global economy has a fundamental influence on share prices because it is ultimately responsible for driving company profits. Broadly speaking, if the economy is growing, company profits improve and shares will become more highly valued. If the economy is weakening, company profits will fall and share prices will go down.

Investors look at a vast amount of data to try and work out what is going to happen to the economy and shift their portfolios before the events occur. This is why you will often see markets move well ahead of an actual event occurring. You may, for example, get little reaction from the stock market when interest rates rise. This is because investors have already anticipated the shift months in advance and adjusted their portfolios beforehand.

You can usually assume that the stock market will anticipate moves in the economy by around six to nine months. So if you want to stay ahead of the game you will need to follow economic data as closely as the professionals.

The kind of information you need to play close attention to is: employment data, the reports put out by the Monetary Policy Committee (to get an idea where interest rates are headed), trade with other countries, retail sales and manufacturing. Sentiment surveys produced by trade bodies such as the Confederation of British Industry are also important indicators of where the economy is heading.

It is not only news about the UK economy that will impact on share prices. The signals coming out of other major economies, particularly the UK’s major trading partners, such as the US and Europe will affect UK shares as what happens in these economies will have an impact on our own.

When looking at economic data, you need to think not only how the wider economy will be affected but whether certain areas will be more affected than others. A rise in interest rates is, for example, often bad news for house builders as people feel less confident about taking on debt. Retailers are often badly affected too as people spend less. Pharmaceutical companies are, however, usually unaffected as people’s demand for drugs is not influenced by the state of the economy.

Companies whose profits are closely tied to the health of the economy are known as ‘cyclical’ stocks. Those businesses that aren’t too affected by the economy are called ‘defensive’ stocks. If economic conditions deteriorate you will often see investors shift from cyclical stocks to defensives


Company News
The way investors interpret news coming out of companies is also a major influence on share prices. If, for example, a company puts out a warning that business conditions are tough, shares will often drop in value. If, however, a director buys shares in the firm, it may be a signal that the company’s prospects are improving.

Companies put out a great deal of news and most of the major announcements are covered by the financial press. But some announcements not regarded as so important and sometimes, particularly among smaller firms that are monitored less by investors and financial journalists, indicators of the company’s health can be missed.

You can stay one step ahead of the game by looking carefully at all the information sent out by companies you own, their competitors and other companies you are interested in. This information is usually available on companies’ websites.

Try to think laterally about the information you are getting. If, for example, a competitor to a company you have shares in produces a revolutionary new product, it will probably hit profits at the company you own. Also think about the impact it will have on suppliers to that business. An increase in sales of mobile phones with cameras in them will not only be good for the phone company but the firms that supply the technology in the phones.

Takeovers, or even rumours of takeovers also have a big influence on prices. This is because investors expect the bidder to pay a premium to shareholders.


Analysts’ Reports
Reports produced by independent analysts also influence share prices. If an analyst changes their recommendation from ‘sell’ to ‘buy’, for example, the shares will often rise in value. Analysts’ reports are produced primarily by investment banks for professional investors, although some stockbrokers will make their research available to private investors. You may find summaries of some reports published on financial news websites or in newspapers and magazines. Some investment banks also publish their reports on their websites for free.

You should remember that the recommendation an analyst puts on a company will affect its share price very quickly and can become irrelevant within hours. This is because the analyst will usually say a stock is a ‘buy’ within a particular price range. If the price moves above their targets the improvements the analyst expects may be ‘priced in’ and so the shares not worth buying.

But analysts’ reports are always worth reading, even if the recommendation is out of date. The reports usually contain a great deal of useful information on the company and how its business is developing. They also often look at how the company rates against its competitors.


Press Recommendations
The financial pages of most national newspapers and investment magazines usually contain share tips. Like analysts’ reports these tips can have a major influence on share prices.

If a journalist recommends a share, the price will usually rise and if they write a negative story the price will fall. These moves usually happen very quickly so if you are going to follow the recommendation it often makes sense to do so as soon as possible.


Sentiment
Investor sentiment is almost impossible to predict and can be infuriating if, for example, you have bought shares in a company that you think is a good ‘buy’ but the price remains flat.

Investor sentiment is influenced by a wide variety of factors. Share prices can, for example, be flat during the summer simply because so many major investors are on holiday or attending major sporting events such as Royal Ascot and Wimbledon, hence the adage ‘sell in May and go away’.

Investor sentiment can lead to irrational buying or selling of shares and result in bull and bear markets. A bull market is when share prices rise while a bear market is when they fall. In the technology boom of the late 1990s, for example, investors paid extremely high prices for shares and ignored traditional valuation measures, such as P/E ratios. This carried on until 2000 when investors belatedly realised these shares has risen too far and resulted in a three year bear market in shares.


Technical influences
Share prices can rise and fall for a variety of technical reasons that may have nothing to do with the actual outlook for an individual company or the outlook for the market.

It is, for example, a common occurrence for share prices to drop back after a strong rally. This happens because investors take profits on some of the shares that have risen in value, protecting their gains just in case the shares start to slip back. Investors often refer to this as market consolidation.

Another technical reason for share prices to rise or fall is the quarterly adjustment in the FTSE 100™ index. Shares that are expected to enter the FTSE 100™ may experience a sharper rise than one would expect in the weeks beforehand while shares that leave the index can fall more sharply. This happens because funds that simply track the index, have to match the composition of the index. Some professional fund managers who hold the affected stocks also adjust their portfolios as they do not want their holding to be too far above or below the company’s weighting in the index.

Share prices can also be affected by investors who use technical analysis to drive their investment techniques. Technical analysis, also known as Chartism, is simply the study of past share price movements and stock market index trends, which are then used to forecast how shares and stock markets will behave in future. Read more about strategies for investment.

Marketmakers can also influence prices. If they, for example, do not own enough shares to balance their books they will have to buy more. Marketmakers also influence prices if the market is looking flat, reducing prices to attract buyers.

Hotel Room Investment

Although it's one of the strangest forms of property investment, it could just catch on. The idea is simple: you buy a hotel room on a 999-year leasehold.

Prices range from £50,000 to well over £250,000. In return, you get 52 nights a year free accommodation at the hotel; the rest of the time the hotel lets out the room on its usual terms.

You typically earn 50% of the income from occupancy, and can put it into a self-invested personal pension (SIPP), so any income and capital growth are tax-free.
Guest Invest was the first company in the UK to promote this scheme in several central London hotels.

Owner Hotel is now selling rooms in two four-star hotels in Hull and York, and is building a low-cost hotel with much smaller rooms in Hull.

Four Pillars is running the Cotswold Water Park scheme, where it is selling buy-to-let hotel rooms aimed at the tourist market. And developer Galliard Homes is building a 900-room buy-to-let hotel opposite the House of Commons in central London.

It sounds like a good alternative to investing in a flat or house in city centres, where there may be a saturated market for renting.

But there are risks. First, there is no established resale market to prove if hotel rooms appreciate over time. 'Studies in the U.S. suggest capital appreciation will mirror the mainstream housing market,' says David Galman, of Galliard Homes.

He points to a study showing hotel rooms in Manhattan rising in value by 25% over four years, and another by UK hotel analysts The Bench, predicting increases in London room rates.

Second, it may be hard for investors to get a mortgage. 'There's not much appetite among lenders for this investment, which, in the past, has been considered riskier than conventional buy-to-let,' says Melanie Bien, of Savills Private Finance, a mortgage broker. 'We have a pool of lenders, among which there used to be three willing to give mortgages on hotel rooms. Now they've withdrawn those deals.'

But Guest Invest and Owner Hotel have their own finance deals. 'We sold rooms in York and Hull in a very short time. The interest rate we offered was 4% above base rate, but still we sold well because of the high returns on offer,' explains Andy Woodcock, the developer behind Owner Hotel.

'We're now re-arranging deals at between 1.4% and 2% above base rate.'

A third danger is a possible slump in hotel usage. Although Owner Hotel offers a 10% guaranteed rental income for the first two years of ownership, the investor must then rely on the market.

If there is a global shock - another September 11, for example - leading to reduced business and tourism, then occupancy could drop dramatically.

'That's why we haven't chosen the sexiest locations such as London, Paris or New York,' says Mr Woodcock. 'We're looking at new schemes in Halifax, Gloucester, Glasgow and Bath, where we reckon there's a shortage of goodquality, mid-cost business hotels. We think these will withstand any slowdown.'

Buying a hotel room as a UK property investment may be for the brave, but this room service may well work in your favour.

Visit Guest Invest to find out more: http://www.guestinvest.com

UK Property Investment

For an asset with all the bell boys and whistles, don't
just book a hotel room – buy it.

As property investment continues to cash in on the tourism market, drawing income from guests and sell for big profits, what's the room service like for investors?

The UK is a tourism hot- spot with a thriving hotel industry, and London has the highest average room rates in Europe. And in the past few years, property investors have been offered the chance to get in on the action by buying a hotel room, often in a plush new development.

But is this really the penthouse suite of investment, especially for those with no knowledge of the hotel industry? And what is the chance of making a genuine, sustained profit in such volatile times for the domestic and global economy?

The theory is that those with a minimum of £50,000 can buy a room that is then managed entirely by the hotel itself. Investors don't need to worry about people stealing the bathrobes or rock stars throwing TVs through windows; the cost of repair or replacement will be borne by the hotel.

Owners typically earn 50 per cent of the income from occupancy, and get around 52 nights every year to stay in one of the company's chain of hotels. The room can even be added to a self-invested personal pension (Sipp), so income and any capital growth are tax free. The general rule is that the better the location of the hotel, and the more stars it attracts, the higher the starting point for investment.

GuestInvest, a hotel room investment firm, focuses on the very well-to-do investor, with rooms in its most upmarket hotel starting at £1m for Blakes in west London. Its latest project, The Jones near Hyde Park in central London, offers rooms from £317,000 and the investment comes with a 6 per cent guaranteed return for the first year.

If you can't quite stretch to that, others, such as the Owner Hotel chain, offer rooms in budget hotels from around £50,000.

"This is a purchase that bucks the trend in investment," says Johnny Sandelson, chief executive of Guest Invest. "Returns are based on occupancy rates, which continue to rise – as against stagnant house prices and a faltering stock market."

Any capital growth depends on the success of the hotel and the value of the land on which it's built. As for the level of annual income earnt, this relies on the hotel's occupancy rate, which in turn can often depend on tourism.

So with property prices – even in London – falling and the US possibly heading towards recession, with the potential fallout this has for the British tourism industry, are hospitality investors set to lose out?

The hotel investment firms say the good times continue to roll and that some eye-catching returns are still possible. According to GuestInvest, people who bought rooms in 2004 at its Guesthouse West, in Notting Hill, west London, are enjoying annual income of around 8 per cent. Those who have since sold their rooms, GuestInvest reports, have netted average capital growth of 15 per cent.

Meanwhile, Owner Hotel says that, based on 90 per cent occupancy of its £49.99-a-night rooms, the annual income for owners is around £7,547 before the annual service charge is deducted. That equates to 15 per cent of the £50,000 original investment. If the room is occupied for only half the time, the annual income drops to around £4,923, or 8.2 per cent. Nevertheless, that's a better return than can be gleaned from a savings deposit account or, in most years, shares.

But Peter McGahan, managing director of independent financial adviser Worldwide Financial Planning, is sceptical about hotel room schemes. "The exceptional returns are based on almost total occupancy," he points out. "And you have to ask yourself whether hotel rooms are only ever empty for a few nights of the year."

Hotels may be in for a rough ride, he adds, with the downturn in the global economy meaning that fewer people have spare money for holidays. Americans have been hit hard by their own credit crunch and the low value of the dollar against the pound. Considering that US tourists made up almost 12 per cent of the total number of overseas visitors to the UK in 2006, this alone could have serious repercussions for room occupancy.

If you are still keen to buy into one of these deals, but don't happen to have several hundred thousand pounds burning a hole in your pocket, there are only a few lenders that will be willing to give you a mortgage. GuestInvest works with four mortgage pro- viders, including Bank of Scotland. Its product offers a loan of up to 70 per cent of the room price, in a tracker deal set at Bank of England base rate (5.25 per cent currently) plus 1.5 per cent. That is one of the highest rates of interest around.

GuestInvest's rooms can be sold on the open market, or through the firm itself, says spokeswoman Sally Wiber. But Miles Shipside of property website Rightmove points out that the likely size of any profit between buying and selling is hard to assess. "This is a very new industry with no track record of capital appreciation to look at."

In the current property market, he adds, "how reliable is the valuation of the appreciation of a hotel, let alone one room in a hotel?"

GuestInvest claims that its rooms are typically on the market for just eight weeks before being sold. But experts question how easy it really is to sell rooms if there are so few lenders offering funding.

Mr McGahan urges investors to be cautious and asks: "Why – if they are confident of such huge returns in the long term – are these companies offering these deals to investors rather than keeping them for themselves?"

Money can officially buy you happiness

Countless years of folk wisdom have been undermined as a new report claims that money can, in fact, buy you happiness.

A study by two US economists suggests that inhabitants of richer countries are happier than those of poorer ones, The Financial Times reports.

he research contradicts several earlier findings, which have suggested that higher national earnings do not translate to a happier populace - a belief which led French president Nicolas Sarkozy to announce an effort to find other ways of measuring national success that takes in to account quality of life.

However, a paper by Betsey Stevenson and Justin Wolfers, economists at the Wharton business school at the University of Pennsylvania, suggests that this somewhat paradoxical state of affairs is not actually true.

Basing their findings on improved statistics covering more countries, the researchers claim that the higher your GDP, the wider your smile.

However, Professor Richard Easterlin, whose 1974 paper first suggested that income and happiness were not linked, said that more research was needed.

The report does not specify how much happiness a pound will buy in the current market or whether, with the weak state of the dollar, it would be more cost-efficient to buy your happiness in the US. Concerns that the UK happiness market will be flooded by cheaply-made overseas contentment imports have so far proved unfounded.

As ever, the last word must go to Spike Milligan: "Money can’t buy you happiness", he said, flatly contradicting the latest research, "but it does bring you a more pleasant form of misery."

Equities – investment friend or foe?

Over the last few months stockmarkets around the world have suffered increased volatility, with the UK FTSE All Share falling over 10% from its high in 2007.

It is not surprising, therefore, to hear such comments as ‘Markets are uncertain’ and journalists and other ‘experts’ questioning whether capitalism as we know it will cease. Markets are driven by news and such news is random. Stock markets are always uncertain, otherwise there wouldn’t be a return premium for owning equities and we would all own government bonds or cash. In addition, while seeing the value of one’s capital fall and rise wildly can be emotionally uncomfortable in the short term, inflation is arguably the greater threat to long-term financial security and freedom of choice.

Short term forecasting of what will happen to different asset classes is a fool’s errand and is of no benefit to the smart investor. Whenever annual investment returns from equities depart materially from the long term norm this is not usually due to the economics of investing - the earnings growth and dividend yield of companies. Earnings growth has been positive in every moving decade since the 1930s and dividends are always a bonus, not a given. Stockmarket returns are volatile because of the emotions of investors and their willingness to pay a higher or lower multiple for earnings from companies. The price/earnings ratio, as it is known, reflects the swings in investor emotions ranging from greed (high P/Es) to hope (moderate P/Es) to fear (very low P/Es).

Because the bulk of returns from stock markets are based on earnings and dividends, the market has a positive sloping return expectation and in broad terms there is a 3 out of 4 chance of returns being positive in any given year. Therefore, forecasting long-term returns, rather than short term investor sentiment, is actually a much more achievable task. Benjamin Graham, the famous American investor once said “in the short run the stock market is a voting machine... (but) in the long run it is a weighing machine.”


Investment return and speculative returns

John Maynard-Keynes, the famous economist, divided stock market returns into
1) Investment Return – being the dividend yield on equities plus the subsequent earnings growth; and
2) Speculative Return, being the impact of changing P/E ratios on equity prices. Putting the two together gives us
3) Total Return on equities.

So if we assume a dividend yield of 3% and earnings growth of 4.5% we get an expected return of 7.5% for the next 10 years. Let’s assume, say, that the P/E rises from 11 to 15, representing an increase of 36%. Spread over a decade it would add over 3.5% per annum to the return. If, say, the P/E fell to 10 then the return over the following decade would be just under 0.90% per annum less.

Over the last 100 years the average total return on equities of 10.1% was almost the same as investment returns from dividends and earnings growth of 9.90X%. All that speculation only generated an additional 0.20% annual return. But speculation does create many short term variations such as in the tech boom of the late 1990s or the melt down of the early 1970s.


Future return expectations

So how can we use this approach to predict future returns from equities over, say, the next 10 years or more? Nominal earnings growth has historically averaged about 7% per annum depending what time period and market one looks at. If we assume it will run parallel to the growth rate of the economy then over the next 10 years there is no reason not to assume between 4-5% as earnings growth, so I’ll use 4.5% per annum.

Dividends are slightly different and from a high of 6.80% in the late 1970s, when they contributed almost 70%% to the total return, they fell to 2.2%% by the start of this decade, a reduction of almost 70%. The yield on the UK All Share Index is now about 3.5%, as a result of the fall in share values and rising profits, so when added to our growth rate this represents well over 40% of the expected return.

The P/E ratio rose throughout the 1980s and 1990s from a low of 10 (fear) to a high of 25 (greed). There then followed a reduction to the current ratio of 11. Looking forward, which is always the tricky part, it is highly likely that the P/E will ease downward rather than surge upward, so my best guess is that we will see the P/E ratio fall from the current 11 to, say, 10, which is below the historic long term average of 13. This would mean the P/E ratio would fall 9%, equivalent to a reduction in the expected investment return over 10 years of 0.90% per annum. If you have your own ideas on the direction of P/Es then do your own calculations to determine your expected future return using the same formula.

I think it is safe to assume that over the next decade or so we are unlikely to experience the double digit returns of the 1980s and 1990s. A return in the range of 6-8% per annum seems more reasonable but it will probably come with more volatility. So the only certainty about the future is that it is uncertain. There are returns from capitalism that are there for the taking but one needs to focus on the long term trends, not the short term noise. Or put another way, don’t measure the distance between your home and your office with a 6 inch ruler!

Written by Jason Butler
Jason Butler APFS IMC CFP is a Chartered Financial Planner and Investment Manager. He is the founder and senior partner of Bloomsbury Financial Planning based in The City and has 20 years’ experience advising successful families on managing their wealth.

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Hiding Investments from Mr Taxman

Almost every time we earn or spend money, the taxman is waiting to take his slice. Unfortunately there is no exemption for your savings.

But there are legal ways to shelter your nest-egg from the Inland Revenue’s grasp by taking advantage of Individual Savings Accounts (ISAs). There is also a whole host of other options that will allow you to minimise the amount of tax you pay each year and, therefore, make the most of your savings.


Individual Savings Accounts
The Individual Savings Account (ISA) is simply a tax-free umbrella that enables you to legally shelter cash, shares and insurance from income tax and capital gains tax. The scheme was introduced by the government in April 1999 to replace the previous tax free savings vehicles – Peps and Tessas.

Unfortunately, by replacing the old regime, the government cut down on the tax breaks available to individual savers. Under the old rules investors could save up to £9,000 a year in Peps and £9,000 over five years in Tessas. Now, under ISAs, savers are limited to £7,000 a year.

The government has also decided to cut back the tax benefits even further by removing the 10% tax credit on dividends from 5 April 2004. But the tax shelter is still worth having, providing you invest for the long term.

There are three types of ISA – cash, insurance and equity ISAs. A cash ISA can be a simple deposit account or a cash unit trust while an insurance ISA can be used to shelter investment bonds, such as with profit bonds, issued by insurance companies. Equity ISAs cover a wide variety of stock market investments, including shares, funds and investment trusts.

Under the government’s rules you can shelter up to £7,000 of savings from tax every year under the ISA umbrella. You can apportion this allowance by either putting the whole amount in an equity ISA (known as a maxi-ISA) or split it between the three types, with a maximum of £3,000 in cash, £1,000 in insurance and £3,000 in the equity element. This is called a mini-ISA.

Once you have decided how to split your allowance, you cannot switch it later. You cannot, for example, move money from a cash ISA into the equity ISA, although you can, of course, switch the underlying investments you hold. You can, for example, switch from investing in Marks & Spencer shares to HSBC shares.

It is also important to remember that if you take out a maxi-ISA you can only have one plan manager a year. That means you cannot split your £7,000 allowance between one investment fund and another. There are, however, ways around this. You can, for example, buy funds through a fund supermarket where the supermarket acts as your plan manager and offers a wide range of funds to you.

Having one plan manager is not a problem for investors who want to shelter their shares as stockbrokers will buy any shares you instruct them to. There is also less of a problem for mini-ISA investors as the government allows you to put the cash, insurance and equity elements with different plan managers.

You should also remember that these allowances work on a ‘use it or lose it’ basis. Basically that means if you don’t use up your entire allowance by April 5th each year you will lose the part you haven’t used. It also makes sense to try to avoid taking any money out of your ISA as the government will not let you replace it at a later date.



Individual allowances
Once you have made the most of your ISA allowance you will have to pay tax on the remainder of your investments. You need to do this every year by declaring any income you have earned and capital gains you have made on your Self Assessment form.

But there are other ways you can cut down on the amount of tax you pay. One easy way to do this is to make the most of your personal allowance.

Every taxpayer gets a personal allowance, which enables us to earn a few thousand pounds of income each year without paying tax. If your spouse does not have an income that exceeds the personal allowance you can put some of your investments in their name to minimise tax.

You can use a similar principle if one of you pays basic rate tax and the other pays higher rate tax. Simply switch some of your investments into your partner’s name so you pay higher rate tax on a smaller sum.



Minimising Capital Gains Tax
Capital Gains Tax (CGT) is the scourge of all investors. Basically, every time you sell an asset for a profit, you make a capital gain which is taxed at 40%, although this rate falls the longer you hold the investment.

Luckily everyone has an individual CGT allowance and if you have built up a big portfolio over a number of years it is sensible to make the most of this allowance every year. If, for example, some of the shares you have been holding have quadrupled in value, it might make sense to sell a portion of them each year to use up your CGT allowance.

You can also use your spouse’s allowance so if you have a big tax liability and they don’t it is worth considering switching some assets between you. Remember that if you have made a loss in any one year, you can carry this forward to future years to set against any gains.

If you do find you are paying tax on investment income or capital gains it is probably worth employing an accountant. It might cost you a few hundred pounds but if they can rearrange your investments to minimise tax, it is money well spent.

Vinyl records investment

Hold on to your old records!

Old vinyl records are rapidly emerging as a high yielding alternative investment, it has been reported.

According to Stephen Maycock, a specialist in rock and roll memorabilia affiliated to Bonhams auction house, during the "past few years some records have soared tenfold in value, but when first released they could have been picked up for pennies".

Among the records which command high prices are early or rare releases from British rock giants such as The Rolling Stones, The Who, Pink Floyd, The Smiths and The Beatles, whose seven inch single recorded as The Quarrymen 'That'll be the Day' can fetch up to £100,000.

Also commanding high prices are soul singles, such as a first pressing of Frank Wilson's 'Do I Love You?', which was last sold for £15,000.

Mr Maycock told the Telegraph: "The Beatles are the giants for collectors as they hold universal appeal, but there are still plenty more which can prove to be great investments."

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Savers urged to take out Isas amid falling share prices

Consumers considering investing in an individual savings account (Isa) should act now, it has been claimed.

According to Anna Bowes of advisers AWD Chase de Vere, the downturn in financial markets makes this an ideal time to commit funds to an ISA.

This is despite the fact that the value of the shares may dip in the short-term could mean picking them up even cheaper.

However, Ms Bowes, said by watching and waiting for too long in the hope of securing a bargain, consumers risk missing out on good deals altogether.

She told the Observer: "If you hold out too long, you not only risk losing your Isa allowance for this tax year but could end up investing when prices are higher."

Her sentiments were echoed by Karen Ritchie, independent financial adviser at Financial Planning for Women, who urged investors to take a long-term perspective over their investment.

Ms Ritchie said: "Shares are for the long term, which in my view is seven to ten years, so you have time to ride out the volatility."

Source: London Stock Exchange website

Inflation to hit pensions prediction

Pensioners are facing the prospect of having to cope with a seven per cent rate of inflation during 2008, according to a new report.

Figures compiled by Newcastle Building Society Equity Release Service show that the rate of inflation experienced by the elderly is significantly higher than the four per cent level of the Retail Prices Index.

The main contributory factors to this are food and energy prices, which the Office for National Statistics estimates make up a third of pensioners' expenditure.

Food costs increased by 12 per cent last year and look set to keep rising, while three major gas and electricity suppliers have implemented sizeable price rises in recent weeks.

Newcastle Building Society's Bob Mottershead said the figures paint a "bleak picture" and predicted some pensioners would struggle financially in the coming months.

"For the many relying on the basic state pension of just £87.30 per week, these increases could negatively impact everyday quality of life," said Mr Mottershead.

The warning comes just weeks after a study by Alliance Trust found that working people in their sixties viewed inflation as the biggest threat to them being able to have a comfortable retirement, ahead of illness and a stock market crash.

A larger loan 'could reduce interest payments'

Borrowers need to be "on their toes" when considering taking out a loan, it has been claimed.

According to Defaqto, smaller loans are often charged a higher rate of interest than bigger sums.

The financial research company explained that borrowing as little as £1 more could result in an interest rate reduction of around eight per cent.

"Borrowers should take care when choosing the size of loan they want, as a little effort in researching the interest rates charged on different tier levels could save them a considerable amount of money," advised David Black, principal consultant of Banking at Defaqto.

He said that the length of the loan is an important factor as choosing a longer period can result in lower interest rates.

Finance website Moneyfacts.com recently urged consumers to consider consolidating their debts to one loan.

The website claimed this could often lead to lower monthly payments and a reduction in interest rates.

The Risks of a UK secured loan

In a secured loan, the house of the borrower needs to be pledged as collateral. This is to reduce the risk faced by the lender in case the borrower is unable to repay the loan. Due to a lower risk factor, UK secured loans carry a lower rate of interest. For borrowers with adverse credit this is an easy way to get a loan because otherwise they are denied credit due to low credit scores. Secured loans are also known as home equity loans or homeowner loans.

A secured loan offers no security to the borrower. The term 'secured' refers to security provided to the lending institution or bank. For the borrower there is enhanced risk as he/she stands to lose his/her home if there is default in the scheduled repayment. The lender can repossess the house and sell it for satisfaction of his debts.

This is one of the reasons why many people are apprehensive of obtaining a UK secured loan. A borrower, especially one saddled with an adverse credit history, should carefully assess his credit needs and ability to repay while pursuing a UK secured loan. It would be wise for a borrower to look into alternative options of availing credit before opting for a secured loan. If nothing else is feasible, then the best way would be to be to shop around for a UK secured loan with the lowest rate of interest and also arrange for a payment protection plan.

It is usually possible to obtain a UK secured loan with some type of a payment protection plan added to it. A payment protection plan is in fact an insurance cover that protects a borrower in case he is unable to honor his payment obligations for the secured loan due an unforeseen exigency. If the payment protection is taken at the time of obtaining the secured loan then the amount of the insurance premium is added to the monthly repayments against the UK secured loan. This will ensure that the borrower is protected against any missed repayments against the loan due to some unexpected happening beyond his control like sickness, accident, unemployment, disability, or leave of absence to take care of an immediate family member. In case of a borrower's untimely demise, the balance of his UK secured loan is paid by the insurers sparing his loved ones from the added burden of loan repayment.

If you are a UK secured loan borrower, it would be a wise move for you to take payment protection insurance in order to reduce the risk of losing your home pledged as collateral. Life is full of uncertainties and it is not possible to be sure if things will always remain in a state of wellness. When times are tough, the peace and security offered by your own home is of immense value. By paying a little amount each month against payment protection coverage you can protect one of your most valued assets and be sure of enjoying the continued security offered by your home.