By Qiaojia Li, co-founder and CEO at the award winning wealthtech company, Rosecut
For many people, the process of investing can seem opaque and impenetrable, and filled with jargon.
They can see the potential benefits, but they can also see the Financial Conduct Authority (FCA) risk warnings.
Despite – or perhaps because of – this, the long-term trend suggests that more individuals are open to investing. One set of statistics suggests the percentage of individuals investing in stocks and shares in the UK grew nearly three per cent between 2010 and 2018.
Here are four steps for sensible investing:
1. Figure out why you invest, ahead of everything else
The key here is knowing what the overall goal is.
It is a constant source of amazement that when it comes to investing, few people stop to consider why they are actually doing it. Whether they have £100 or £100,000, many do not think about how their approach should be dictated by their overall goals.
For instance, someone looking to buy a house in the next 12 to 24 months should not be looking to dive into the world of bonds and equities, because they have a short-term target which requires reasonably fast access to cash. Tying their resources up in different funds and stocks will not only limit how quickly they can get their hands on their money when it comes to putting down a deposit, but they will not see the return that they would expect due to the short term price fluctuation of these assets. They would be better using a Cash ISA and enjoying the tax-free allowance.
On the other hand, if they have spare cash lying around that they won’t need for the next 3-5 years or longer, or they want to get a headstart on earning their retirement or long-term financial freedom, investing into financial markets is the way to generate compound return. That will give them a chance to beat inflation and, in all likelihood, it will give them a higher return than real estate would.
It is like any big project – determining the overall goal informs the strategy, which dictates the tactics. In the world of investment, this means management. Yet even deciding what goals they are working towards can be challenging for some people – they might have overinflated ideas or be too conservative.
This is where independent, objective, and knowledgeable financial planning comes in. By giving an individual’s finances a thorough check-up – much like visiting a GP – a qualified and experienced financial planner can consider circumstances, wishes and constraints. Only when this has been completed can they assess how feasible a client’s goals are, and the client can start considering how they should invest.
It needs to be a bespoke diagnostic and prescription process, in much the same way that a trip to the doctor requires the practitioner to have an understanding of any contributing factors and your medical history.
2. Seek professional help
If you were going to buy a property, you would look for a capable and qualified property lawyer instead of reading legal textbooks and undertaking training. The same logic applies to other professional advice, such as accounting, medical treatment and tax. Strangely, though, when it comes to investing, many people attempt to teach themselves.
While this approach is to be applauded, and there is certainly a huge amount of information readily available within a couple of clicks, the intricacies and vagaries of asset classes and funds, opposing investment styles, individual savings accounts and a hundred and one other terms can be overwhelming.
Forging ahead without professional guidance is a bit like having a pain in your hand and deciding to do a bit of exploratory surgery based on watching medical documentaries – there is only a slim possibility everything will turn out fine. This is why 99% of people have lost money by DIY-ing their own investments. It is a risky learning curve that, frankly, is better outsourced. Learning how to find a good investment provider can be a more efficient and less risky use of your time.
3. Do not trade
In the report quoted above, there is an alarming line: “Investors are now holding onto their shares for 0.8 years on average before selling them. In 1980, the average was 9.7 years, representing a decline of 91.75%.”
The proliferation of trading apps brings convenience and lowers barriers, helping people to access financial products, but the user friendliness of the technology often encourages over engagement at a real financial cost.
On an individual basis, each time you buy and sell any financial product (not just shares, but funds too) you lose a tiny slice of your capital, even if you can trade for free – this is due to “spread” which, put simply, is the price difference between purchase price and sale price. As you trade, this quickly adds up and eats into your principal, which you need to earn back before seeing any profit. This is a direct cost, in addition to the time you invest, checking the share price several times a day, the sleep you lose during volatile days, and the potential for developing an addiction, which is a common result of trading. Take a look at your work pension investment report if you have any – there is a reason why professional investors don’t buy and sell frequently.
On a collective basis, crowd trading behaviour drives more “boom and bust” cycles of financial markets, which has happened many times before and will continue to happen in the future. It is a more pronounced characteristic of less developed financial markets where there are fewer professional/institutional investors to stabilise the market for everyone’s benefit.
4. Diversify globally, meaningfully
Sensible investing requires a skillset that is the opposite of most professional careers or entrepreneurship. In the latter, one strives to become an expert in a chosen arena in order to command the highest possible pay or profit margin. A wise investor, meanwhile, needs to be a generalist rather than a specialist, and investing is about hedging all possible risks before seeking a return. One of the biggest principles to reduce risk is to diversify on various levels:
- Your holding currency – for example, GBP has lost more than 15% in value against USD compared to the pre-Brexit high of five years ago, so it is a bad idea to hold all your assets in GBP only
- Your country/geography exposure – for example, you can buy GBP priced US assets, or USD priced US assets, such as S&P 500 tracker, to have a slice of US economy growth. We strongly encourage people to consider a globally diversified portfolio, for the reason that different economies go through business cycles and are at different stages at any given point of time. With a globally diversified portfolio, you can always benefit from the growth of some country, somewhere, at any given point of time
- Asset classes – If all your money is in London real estate, for example, you are likely to have felt some value depreciation since 2014. You take a risk if you tie your financial future to a single city’s economic cycle and potential rise and fall.
- Industry allocation – as a former banker I never bought banking stocks or bonds, simply because my job and salary were already tied to the UK banking sector, and owning a piece of banks is like doubling down in a casino – not wise for risk mitigation. This is an often overlooked risk – people like to invest into companies and sectors they know well, typically from professional exposure and “inside knowledge” but this leads to blind spots and concentration risk.
Investing should be part of one’s long term financial strategy hence there is no one size fits all recommendation that I could give here. A simple step by step guide is:
1. Save a good portion of your monthly income, that allows you to enjoy your current life but also prepare for the future
2. Shortlist 3 financial planners (include Rosecut as one option) and pick one that you feel you can trust and who is cost effective to lay out your big picture and future plan
3. Invest regularly into a globally diversified, professionally managed portfolio that fits with your future goal and then make minimal changes. Ideally you should only even consider changing on an annual basis
4. Learn from this loop, iterate and optimise, ask many questions along the way!
Rosecut is a financial planning partner and investment manager, giving access to the knowledge you need to plan for the future you want. Start your free financial health check today at https://app.rosecut.com/ or download the app.
COVID-19 creates long and winding road for startups seeking investment
By Jayne Chan, Head of StartmeupHK, Invest Hong Kong
Countless technology and other companies describe themselves as innovators, disruptors or game changers, or maybe all three, and sometimes that’s true. But none have had quite the disruptive force of COVID-19 which has flipped work and life habits upside down and sucked so much oxygen out of the global economy. The impact will be lasting: many of those new habits are here to stay.
Yet, while a recalibration of lifestyles and business processes is perhaps overdue – and to be embraced given it’s happening anyway – the change presents huge challenges for startups and new businesses that were on a growth trajectory prior to the pandemic. Few would deny that opportunities exist amid the disruption, but the challenge right now is to survive the crisis intact.
The global economy this year will see its biggest contraction in decades. The World Bank projects global gross domestic product to fall by 5.2% this year, with advanced economies shrinking 7% and emerging economies 2.5%. It forecast East Asia and the Pacific to grow just 0.5% this year, down from 5.9% last year. These forecasts assume the markets will return to somewhere near normality during the second half of the year.
Despite all the economic murk and gloom, there are signs that a post-COVID bounce is likely. The World Bank predicts economic growth of 6.6% in East Asia and the Pacific in 2021.
Some business sectors fare better
Looking around, it’s reasonable to anticipate a relatively speedy recovery. In a few business sectors, such as healthcare and telemedicine, e-commerce, fintech, home delivery and food retail sectors, there are companies that have fared better. In some instances, the situation has been transformational in a positive way.
In fintech, for example, global investment actually rose year-on-year in the first half of 2020, according to Accenture, up 3.8% to US$23.1 billion from US$22.3 billion, albeit with the help of COVID-related government loans in some markets. Asia-Pacific saw a sharp rise driven by China and Australia. In the first half, China’s fintech market grew 177% year-on-year to US$2.3 billion, while Australia’s grew 189% to US$1.2 billion.
Resilience is clear to see, but businesses face huge challenges. From a startup perspective, within weeks of the COVID-19 outbreak, many companies went from being solid-growth enterprises, possibly looking to raise money, to ones simply trying to stay afloat.
Debtor books have grown massively as companies stop cash going out the door. Many well-run companies have customers who may not be cancelling, but they are also not paying as fast. For such companies, it becomes a cash issue rather than a fundamental underlying business one. The reality is that businesses are ensuring that every penny going out the door absolutely needs to – so payment terms get stretched. It’s understandable, but it’s problematic if everyone does it.
For startups seeking to work their way onto the fundraising ladder, the process typically starts with an initial pre-seed and/or seed round, which then moves on to Series A to B, C and onwards as needed. The funds usually come from angel investors, accelerators or venture capital firms, in return for an equity stake. Even at the best of times, pitching to get on the first rung of the ladder is perhaps the greatest challenge.
Bar for investment higher as company valuations drop
Advice for many prospects looking at fundraising, certainly during the first wave of COVID-19, was to do nothing except focus on survival. For investors, a business that weaves and navigates its way through the crisis, or even take advantage of the pandemic environment to flourish, is likely to resonate.
Even for those companies that have fared better in recent months, barring an utterly compelling reason to raise funds, now may not be the ideal time. It’s clear that the bar for investment has gone up and company valuations have come down, neither of which is a surprise given higher risk profiles at present.
For companies that are well known to investors, such as Grab, Lu.com, Airwallex or WeLab, fundraising is more manageable. And for slightly smaller but relatively new companies, there are plenty of examples of recent success attracting fresh investment, often through existing investors.
But for smaller, newer companies, not being able to do face-to-face pitches creates much more of a challenge – after all, most funds like a boots-on-the-ground physical interaction before putting money in, particularly if the sums are large.
Despite all that, for new businesses planning to seek funds down the line, there is no harm warming up investors. Having the right conversations now makes sense and would help a startup to hit the ground running when the pandemic abates. The conversations should include ones with government funding organisations. For an investor, matching government funding is attractive because of the higher startup success rate.
Pandemic drives consumers and businesses online
Thanks to the pandemic, people are now far more willing to go online for all manner of transactions. Working remotely from the office is now commonplace, with work hours more flexible.
This trend among consumers, healthcare professionals and office workers has become more entrenched – more retailers are going online, while companies rethink their office space needs. This extends to investors, many of whom initially sat on their hands expecting COVID-19 to quickly pass by. They quickly adapted when it became clear coronavirus was going nowhere fast.
Quantitative easing and low interest rate policies by central banks, along with a boom driven by the lockdown – appetite for online entertainment, financial services, communications, healthcare, shopping, etc. – spurred fresh demand for tech products, pushing share prices rising to record highs. This created an attractive environment for investors to seek fresh investment opportunities.
A consequence of widespread digitalisation is that software, e-commerce and, more broadly, digital startups have an advantage in the competition for funding. An ability to do business both face-to-face and remotely makes such businesses less vulnerable to other trade pitfalls and therefore more attractive for investors.
Conversely, it’s harder for hardware startups at a time when global trade is weakening. They have to consider whether production costs and the markets they promote will be affected by such issues as tariffs or people flow. This type of startup is likely to have access to fewer financing opportunities.
It may seem obvious, but it’s of paramount importance for startups seeking funding to be clear about what they are looking for from investors. Are they simply injecting capital as a passive investment hoping for a return, or are they looking to create synergies to help develop the business? Startups should consider what resources investors can bring to the business besides capital.
These are testing times. However, founders of startups need to stay positive and true to their mission and vision, and why they started the companies in the first place. After all, that’s their value proposition.
COVID-19 and PCL property – a market on the rise?
By Alpa Bhakta, CEO of Butterfield Mortgages Limited
Over the last five years, demand for prime central London (PCL) property has been fairly inconsistent. Sudden peaks in interest from buyers could be followed by periods of stagnate price growth. Nonetheless, the advantages of PCL property investment, particularly by international investors, has remained well known.
Well-funded development and neighbourhood re-generation schemes, alongside an influx of overseas investment, has resulted in a vibrant market with a diverse range of opportunities for prospective buyers.
Nonetheless, the PCL market has not been immune to the impact of the COVID-19 pandemic. During the first half of the year, the lockdown meant physical valuations and onsite inspections could not take place. People in the UK were also discouraged from moving properties unless they found themselves in extreme circumstances.
However, as we now enter the final weeks of 2020, I believe there’re plenty of reasons to be optimistic about the future prospects of the PCL property market. Buyer demand has resulted in a new wave of activity, and this is resulting in significant house price growth. Indeed, it was recently revealed by Halifax that the average rate of house price growth in November was at a four-year high.
Obviously, there are multiple factors that have helped sustain this strong level of house price growth. Most notably, the Stamp Duty Land Tax (SDLT) holiday has succeeded in coaxing buyers back to the property market––be they seasoned buy-to-let (BTL) investors or first-time buyers––by offering up to £15,000 in tax savings on any given property purchase.
However, it’s worth considering the other factors underway in London’s property market. With the UK in a second national lockdown, many investors will be keen on hedging against future COVID-imbued market uncertainty through acquiring safe-haven assets like British property. As you’ll read below, this is having a positive impact on the PCL market.
Investors are flocking to PCL opportunities
The PCL property market has managed to be one of the most active areas of the UK’s real estate market during the whole of 2020. When discussing why this is so, we must first begin by understanding the behaviours of overseas buyers.
Given that international investors represented over half (55%) of all the PCL property purchases recorded in the second half of 2019, anything to further incentivise or dissuade such foreign actors would hugely impact PCL property transaction figures.
Earlier in the year, alongside the announcement of the aforementioned SDLT holiday, UK Chancellor Rishi Sunak indeed announced that he would be implementing 2% SDLT surcharge for non-UK based buyers of British property from April 2021 onwards.
So, for those seeking properties worth over £5 million in the UK capital, a 2% additional cost may represent a substantial amount of wealth. To avoid this, many overseas buyers who may have been contemplating a PCL property acquisition have rushed to buy such properties before this surcharge is applicable. This trend will undoubtedly continue until 1 April, 2021.
Remote working and PCL
On the topic of the PCL market’s future, many property speculators were concerned earlier this year that London’s property market would potentially collapse entirely as a result of remote working. With homeworking set to remain the norm for the foreseeable future, commentators predicted that professionals would escape the capital en-masse in favour of roomier, cheaper properties farther from their London employer’s offices.
While there have been some signs of shifting demand from urban London neighbourhoods to suburban ones, according to Rightmove statistics, there has been no recordable effect on the UK’s property market as a result.
Conversely, property specialists Savills have actually discovered that over half of all transactions including properties worth more than £5 million in the UK this year were all located in just five central London postcodes.
A busy few months
Given the performance of the PCL property sector in 2020, I only foresee this market growing stronger and stronger in the years ahead. Recent developments in the production of COVID-19 vaccine have many hoping that we may return to normality by Spring 2021, which would represent fantastic news for those involved in bricks and mortar, should it transpire.
In the coming months, I anticipate a surge in activity across the PCL market as buyers look to take advantage of the tax breaks on offer. As such, it will be important that these buyers have access to the financing needed to complete these transactions quickly. If not, there is a risk any purchase they attempt might be concluded in April 2021 when the current tax breaks in place are removed.
Overall, I cannot help but be impressed by the performance of the property market more generally during the pandemic. Having experienced slow growth in the years following the EU referendum in June 2016, it is clear that buyers are eager to take advantage of the opportunities on offer. This is particularly true when it comes to PCL property.
An outlook on equities and bonds
By Rupert Thompson, Chief Investment Officer at Kingswood
The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.
The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.
Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.
Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.
Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.
Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.
Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.
We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.
We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.
We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.
On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.
Three questions the financial services industry must answer in 2021
Xformative, a Mastercard Start Path recipient, shares what these questions mean for fintech partners and their innovations This year, fintechs...
A quarter of banking customers noted an improvement in customer service over lockdown, research shows
SAS research reveals that banks offered an improved customer experience during lockdown A quarter (27%) of banking customers noted an...
Is Digital Transformation the Key to Business Survival in the New World?
After a turbulent year, enterprises are returning to the prospect of a new world following an unprecedented pandemic. Around the...
Virtual communications: How to handle difficult workplace conversations online
Have potentially difficult conversation at work, like discussing a pay rise, explaining deadline delays or going through performance reviews are...
Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna
Payment processor Mollie reveals the most popular payment methods for Black Friday Mollie, one of the fastest-growing payment service providers,...
Brand guidelines: the antidote to your business’ identity crisis
By Andrew Johnson, Creative Director and Co-Founder. How well do you really know your business? Do you know which derivative of your...
COVID-19 creates long and winding road for startups seeking investment
By Jayne Chan, Head of StartmeupHK, Invest Hong Kong Countless technology and other companies describe themselves as innovators, disruptors or...
The Bank of England partners with Appvia to assist in the design, construction and assurance of a new cloud environment
The Bank of England has appointed self-service cloud-native delivery platform Appvia to support the creation of a new cloud environment....
2020: The paradoxical year that has reshaped the future of motor insurance and related sectors
By Alan Inskip, Tempcover CEO & Founder There’s no doubt that 2020 will be remembered as the year that changed...
Leadership and management in a WFH world
By Carolyn Moore, SVP of People at Auth0 Although many of us will have settled into some kind of groove,...