Viewing posts categorised under: Inflation

Investment hurdles

By Mark Quinn
This article is published on: 5th December 2022

05.12.22

The corrosive effect of inflation and fees

Here we look at two key hurdles to investment performance, and ultimately your lifestyle, and some ways to tackle these issues.

Inflation
This is a topical issue as we all experience the pinch of rising energy, food, and other prices, with inflation in the UK and US recently hitting 7% and 8% respectively.

It is important to monitor and understand as it tells you how much return you need to maintain your current standard of living. So, what can you do to try and beat inflation?

Moving out of cash is critical as you are losing money in real terms. There is no one solution but building a diversified risk-rated portfolio gives you a greater chance of growing your money in excess of inflation over the medium to longer term.

Shares/equities – as companies and earnings can adjust upwards, shares tend to keep up with inflation better over time than other investments. However, careful selection here is important as you want to select companies that are able to pass on cost increases to consumers
Index-linked bonds – these are fixed-income investments and their return is linked to inflation rates
Commodities – you can benefit from the causes of price increases by investing in companies that are involved in the production of raw materials, such as oil and metals
Gold – can act as a hedge against inflation and also tends to act differently to the above investment types which means it provides diversification, particularly when geopolitical risks come to the fore

These investments do come with different types of risk so you should seek advice on how to minimise and balance these types of risks. It is also important to monitor and measure risks in relation to the returns you achieve.

Fees and expenses
Another factor often overlooked is fees. These may seem small but over time they can have profound long-term effects. You do not just lose the amount of the fees you pay, but you also lose all the growth that you might have received, compounded over years.

For example, assume you have a €1m portfolio paying 6% p.a. If you had no fees to pay, after 25 years, you would have. €4.3m. If you paid 2% p.a. in costs, you would have €2.6m.

Now going further, if you could reduce your overall charge from 2% to 1% p.a., you would have approx. €3.5m. This seemingly small 1% saving is really €793,215 in real terms over 25 years! And this is being paid to someone else, not you.

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What can you do to control costs?
All investments have cost so you cannot avoid them, but you can manage them at all levels.

Structure fees e.g. a pension or an investment. These are charged by the company providing the structure
Underlying investment fund fees. These are charged by the company that manages the funds within the structure. These are paid out prior to the returns being paid to you, so you do not usually see these, so they can be easy to forget and review
Advice fees. These are paid to your financial professional whose job is to recommend and advise you. Usually, a single set-up fee and an ongoing fee are charged. The effect of the latter is very important as this can have the most significant effect as seen in the above example

I would strongly recommend that you seek clarity on each applicable fee and benchmark these against alternative solutions to get yourself the best deal.

As with most things, as time goes on, innovation usually reduces prices. Review your structures regularly and shop around for independent advice, and lastly, remember that a higher price does not mean higher quality.

Debrah Broadfield and Mark Quinn are Chartered Financial Planners (level 6) and Tax Advisers specialising in cross-border advice for expatriates.

Inflation in Spain

By Jeremy Ferguson
This article is published on: 26th April 2022

26.04.22

Life just seems to be getting so much more expensive nowadays.

Over the last few years we have seen a quite incredible chain of events unfold. Covid reared its ugly head, and caused a massive change in the way in which we live and travel. During this period of lockdowns and people working from home, spending habits took a massive turn. No one had the chance to go out and spend money in bars and restaurants, go to the cinema, or take weekend city breaks to name but a few.

When things started to go back to normal, we saw big supply chain issues coming to light. Microchips for cars meant new car deliveries became more and more delayed, pushing up the price of second hand cars. Demand for consumer goods for the home, having gone through the roof, also meant the cost of these items started to rise.

Many companies wound down production during the covid period, and then all of a sudden were caught short by the sudden surge in demand. You can argue this happened in the fuel industry, as we saw panic buying and massive queues in the UK at petrol stations.

Then, just as we started to look for a hint of normality, with people slipping back into their old spending habits, the war in Ukraine started, immediately hitting the price of fuel, and the one that surprised me, sunflower oil!

All of these factors have meant that the cost of living for all households is increasing at an alarming rate, inflation is with us again, having been dormant for quiet a while. The one that has really hit most people here in Spain is the increasing cost of Electricity. In December the cost rose from its lowest point by almost 500%, something I have no living memory of happening before. For many people, that is creating a huge dent in their disposable income each month.

Most people I deal with are retired or semi-retired, with their income generated by drawing down from their pensions, and then normally substituting it with drawdowns from Investment Portfolios and cash savings. At this stage of their lives, I believe in most circumstances fear tends to be the driving factor behind their Investment decisions, as protecting the money far outweighs trying to get too high a return each year. That makes perfect sense as income streams during retirement have typically ceased, so the ‘pot’ needs to be looked after carefully. Making plans for how long your funds will last is easy to a degree, when the cost of living simply increases a little each year, but now, with the way things are, the plans that previously seemed sensible will certainly need a bit of a shake up.

If interest rates rise as predicted, then maybe people will be able to look for their cash in the bank to increase in value by earning some interest, but that is something none of us can predict at the moment. If inflation continues at today’s current levels, many people will either have to change their lifestyle, or look to try and increase the annual return on their savings, but by doing that, it typically involves taking more risk, which is completely against where people normally want to be at this stage of their lives.

With the changes we are seeing with outgoings, Investment returns, interest rates and inflation, it has never been more important to spend time regularly looking at financial plans, and adjusting assumptions to make sure you have a realistic handle of how things will look going forward. It’s not rocket science, and I am here to help if you find it all a little daunting, so please free to get in touch via the form below or please email: jeremy.ferguson@spectrum-ifa.com

How do I make my cash work harder?

By Mark Quinn
This article is published on: 16th February 2022

16.02.22

This is a question I am asked almost daily, especially by those with cash on deposit in banks earning historically low levels of interest.

The problem
With inflation at elevated levels, the poor returns on offer by the banks are not just disappointing – they can be very damaging to the purchasing power of your money.

To illustrate just how damaging the effects of inflation can be, imagine we have a pot of £2m. If inflation is 2%, the pot would be worth £1,135,000 in 20 years’ time. With inflation at 5% over the same period, the pot is worth £717,000.

These levels of inflation might seem a distant concern, but the Bank of England expects inflation to reach 7% by spring 2022, and inflation remains at high levels across many developed countries.

What is the purpose of holding cash?
The main purpose of holding cash is for daily spending and as an emergency reserve that you can dip into at little or no notice. As such, there is not much else you can do but just accept the frustratingly low returns.

A financial planning rule of thumb is to hold at least 6 months of expenses in cash and this is in addition to any planned purchases. However, with the current uncertainty around Covid, there is an argument of increasing this to 12 months. Of course, this has to be determined on an individual basis but it is a good place to start planning.

For the cash that you do retain on deposit in the bank, give thought to:

where it is held – avoid blacklisted jurisdictions where any interest might be taxed at a punitive rate
level of protection – for example, the compensation scheme in Jersey, Guernsey and the Isle of Man is £55,000 compared with £85,000 in the UK and €100,000 in the EU. This is per person and per institution, so ensure you are spreading your cash amongst unconnected banks
currency – if possible, try and match the currency of deposit with your expenditure to minimise currency conversion risk

How to protect against inflation
With any cash in excess of your set spending period and emergency fund, you should consider purchasing or holding assets that have demonstrated the ability to act as a hedge against inflation. These tend to be equities and commodities, specifically gold.

Equities are traditionally seen as an inflation hedge because they represent ownership of physical capital whose value is assumed to be independent of inflation i.e. a company can offset rising input costs by simply charging more for their product or service.

Commodities are basic goods or raw materials that are treated equally, irrespective of who produced them, for example, sugar, copper, coal, gold. Commodity prices usually rise when inflation does, so they are seen as good protection against inflation.

Gold, a commodity itself, has been a shelter during times of crisis for centuries as it is physical and has generally held its value. As such, it is often considered a hedge against inflation and can even be seen as an ‘alternative currency’, particularly in countries where the native currency is losing value.

Having said the above, investing raises a related issue which is that assets that protect against inflation typically come with more volatility. This means that you must ensure you carefully consider and monitor risk, are properly diversified and are investing in an appropriate manner for your circumstances. If you are not an experienced investor, it is best to seek qualified advice.

How we structure investment portfolios?
We can help clients create well-diversified investment portfolios to meet their financial goals that are appropriate for their circumstances.

Simply put, we can assist with advising on:

Where to invest – choosing the right jurisdiction to hold your wealth for tax efficiency and security
How to structure your investment – selecting the right investment vehicle for your needs
Who to invest with – choosing the right financial institution(s) to entrust with your money
What you should be investing in – building an investment portfolio to meet your needs and preferences e.g. income, growth, ethical considerations, currency choices, risk mitigation, proper diversification

If you would like to talk about any of the points mentioned above, please complete the form below or call us +351 289 355 316

Italian financial update

By Gareth Horsfall
This article is published on: 1st February 2022

01.02.22

Well, well, what a start to the year – it feels like a repeat of winter 2021. As I write I am actually down with Covid again. I first got it in March 2020, right at the start of the pandemic and I have it again now. It is nothing more than a dry throat, cold like symptoms and feeling quite tired, but still it’s a bit annoying to have caught it again, although I think that given the transmissibility of Omicron it was a question of ‘when’ rather than ‘if’ I would get it. Anyway, I am now on day six and feel much better. However, I have just learned that since I only tested positive on day three of my illness, I now have to do another seven days quarantine before I will get the green pass……aaahhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh.

Anyway, I wasn’t writing to update you on my health, but actually to update you on the health of the financial markets at the moment and provide you with some tax updates.

For anyone who has been brave enough to look at their investment portfolio account balance in the last few weeks, you will have noticed that it has probably taken a turn for the worse. I am not talking crash-like turn for the worse, (remember March/April 2020!) but merely correction territory.

In short, equity markets have started to pull back from their highs in 2020 and 2021. I can’t say for sure when the correction will end, but from the information that I have been reading from various asset managers in the last few days there is confidence that markets will rebound in the first half of this year.

It is important to remember that corrections of this magnitude happen in more years than they don’t and rarely prevent equity markets from delivering positive returns during the year!

So what is going on?
Covid related supply problems for goods and services are the biggest concern right now, which is feeding into consumer prices: inflation (microchips, freight and energy are the biggest contributors). I have written about this in a previous E-zine and so won’t delve into too much detail here, but inflation is likely to play a big part in discussions around financial markets in the first half of this year, even though most economic indicators are predicting a quick return to form for the second half of the year.

One of the most important points is that with rising inflation, the central banks (mainly the Fed in the USA) do not start tightening monetary policy too quickly or harshly. There is no indication that they will take extreme measures in this regard and so companies will still have access to capital and will be able to invest. As long as company profits continue to grow and inflation does not start to spiral out of control then there should be a rebound, probably in the first half of the year.

Of course various themes will also continue to play out during the course of the year, namely: cloud computing, green buildings and construction and digital health and wellbeing. This provides us with well needed diversification in our portfolios. Big tech and smaller disrupting companies across many more sectors will play a big part in returns.

Inflation will likely cause some collateral damage along the way. Depending on how fast and high it moves, the biggest sector to be affected could be the residential housing market. It might cause a cooling down of the price rises we have seen in recent years, or may have a more long term and severe impact. A lot of that depends on whether this bout of inflation is ‘temporary’, and caused merely by Covid issues, or is ‘structural’ which means that it will be more bedded in for a long time.

Most of the information I am getting from money managers is that it will be temporary and that things will return to normal much quicker than we expect (think a couple of years!), but I am not so sure. I think it may run a little longer. But regardless of who is right, we need to protect the money that we have. There are plenty of excellent investment opportunities out there whether we are living in an inflationary or non-inflationary environment. The money managers we work with are on top of these and we can rely on them to seek out those returns where possible.

If you are a client then all you need to know is that we have been planning for inflationary rises for some time and so despite the current correction in investment markets, you really have nothing to worry about.  

Tax matters – ‘residenza‘
During my Covid days sat at home in front of the computer, I receive a lot of pop-ups from various fiscal websites and from Sole24Ore (the Italian version of the Financial Times).

One that caught my eye the other day was an amendment to decreto Dl 146/2021, which clarified the fiscal treatment of the ‘family nucleus’ (nucleo familiare) who have established their residence (residenza) in two separate comuni.

The crux of this is that the courts ruled that two family members ‘cannot’ establish their residenze and claim 2 x prima case in the same nor different comuni.

This would seem to be a simple case of trying to avoid paying IMU on second (or third etc) properties. But the new law decreed that it would no longer be possible where members of the same family are living under the same roof. Apparently the law had not been clear enough…. until now.

I am mentioning this change in the law because it also has implications for people who may be registered in Italy as resident but may have a spouse who is claiming residency in another country. In my experience, the main reason for this is to try to save tax and whilst there may be some logic to it, where one member of the couple is working for a foreign company and maybe travelling to and from Italy rather than being permanently based here, it does still raise the question of how the fiscal authorities view the idea of the ‘nucleo familiare’ and what impact this has on our tax liabilities and where they lie. If spouses are registered as living in different places then there is some legal implication of separation and to benefit from any tax breaks, separation must be legally registered somewhere! If not, then the tax authorities will generally consider you as one family living under the same roof, hence both resident in Italy.

It raises some interesting questions, but might be a useful discussion point with your commercialista if you think you might fall into that net.

Contact me with your questions about 'residenza'

Fiscal treatment of Bitcoin
More and more people I meet are starting to dabble with the idea of buying some Bitcoin to add to their portfolio. I have been an investor for a few years, but my experience is not particularly a great one. It tends to go through phases of stratospheric prices rises and then complete collapse. As things currently stand I don’t see much value in the application of the buy and hold investment philosophy in relation to Bitcoin. It would appear to be something for the active trader, and then we are getting into speculative territory!

Anyway, the point of this article is to help you understand the fiscal treatment of Bitcoin in Italy, and to remind you that you will need to declare it in your tax return.

To understand the correct application for tax purposes, we need to remember that it is actually a currency and can be traded in much the same way as any other currency. In fact, since it is a registered currency (through the blockchain) then the Italian tax authorities treat it like any other bank account you might have. Hence, the tax treatment falls into that very simple law of €34.20 ‘bollo’ on any account that has an average annual balance of more than €5,000 in any tax year (less than €5,000, it does not need to be declared).

However, living in Italy would not be the same without some complications. This brings us back to the article that I wrote back in April 2021 on the same issue. Where you hold the value of Bitcoin (or any other currency) of more than €51,645.69 for a period of more than 7 days, any transfers of that currency into another from the 8th day would be considered speculative and capital gains tax would have to be calculated.

I wrote a long article on this subject, which you can read about here: spectrum-ifa.com/do-you-have-non-euro-based-cash-deposits/

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How do I deal with inflation?

By Andrew Lawford
This article is published on: 18th January 2022

18.01.22

“The only function of economic forecasting is to make astrology respectable”
JK Galbraith

This opening quotation might seem somewhat defeatist. Surely economic forecasting, given the importance of the economy’s performance on our investments, must be necessary. The problem is that in order to have a useful piece of information, that information must be both important and knowable. There is no doubting that the economy’s future performance is important information for us investors, but to what extent can we know it?

At the risk of using excessive quotations, there is a good story from Kenneth Arrow, who subsequently won a Nobel Prize in Economics in 1972, about his time analysing long-range weather forecasts in World War II. He came to the conclusion that there was no difference between the forecasts and pure chance, and communicated this finding to his superiors. The following is the memorable reply that he received: “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.”

Which leads me on to inflation, without a doubt the economic piatto del giorno being served up in all current market analyses. Following a 2020 – 2021 in which it was decided, essentially on a global basis, to close down pretty much every non-essential activity and subsequently to apply massive amounts of government stimulus in the hopes of starting things back up again, we are finding a large number of anomalous economic effects. I imagine many people will have their own stories to tell, but my particular one is this: my son got to the point where he needed a new bicycle, having outgrown his previous one. A couple of years ago, this would have been as easy as going down to the local bike shop, choosing the model and swiping my credit card. This time, however, the bike shop told me that they hadn’t had a delivery of new bikes in two months due to logistics problems. They were, however, very happy to take my son’s old bike, a buyer for which was found in a matter of hours.

There have been plenty of variations on this theme in recent times, and it would appear that the process of economic restarting, with its attendant logistics issues, has fed into the current levels of inflation that are being reported. However, it seems unwise to extrapolate one observable trend and conclude that there is some inevitability about inflation remaining at its current high levels. This is the essential problem with economics: modelling extremely complicated systems such as economies is all but impossible: there are simply too many factors to take into consideration and the interactions between them all are unclear.

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Of course, if we are investing, then it does seem like we have to take a view on macroeconomics and position ourselves accordingly. Financial newspapers exist to provide daily analysis of current trends and allow various experts to opine about their future path. There is little downside for those prepared to make forecasts: if they happen to be right about some particularly important phenomenon, they can trumpet for all time how they called the event. Their many incorrect calls, on the other hand, will be studiously forgotten about. If we extend this reasoning to well-known hedge fund managers, those who appear to have the Midas touch, we find ourselves subject to what is known as “survivorship bias”: for the few investors with truly long-term records, there are many others who have fallen by the wayside and whose investing results have been lost in the mists of time. This gives us the impression that there are gurus out there who know exactly what is going on in the economy, but it doesn’t correspond to the hard reality of investment: most truly successful investors don’t have a strong view on macroeconomic trends, because they understand that they are unknowable and that any market timing decisions based on forecasts are fraught with difficulty.

So if we can’t divine what is going to happen in the economy, can we know anything that is of use for protecting and growing our investments over the long-term? It turns out that the most important thing for investors is the mere fact of remaining invested. JPMorgan has shown that over the period from 1999 – 2018, the average return on the S&P500 index, the most important aggregate of US shares, was 5.6% p.a. However, your return would have been a paltry 2% p.a. if you had missed the 10 best days of that period, and you wouldn’t have made any money at all if you had missed the 20 best days. Keep in mind that those returns were produced notwithstanding several gut-wrenching market moves associated with the tech bubble bursting in 2000 (which led to three years of negative returns) and the financial crisis of 2008. If we zoom out even further, the annual returns for the US stock market in the post-war period have been positive in about 70% of the years. Those are odds that you want to take.

I should add as a proviso to the above that you need to have invested intelligently, and by that I mean choosing quality asset managers that are worthy, long-term stewards of your capital and who put your interests as clients before their own. It should, of course, be a given that financial professionals put their clients’ interests first, but the various scandals over the years have shown that one can never be complacent in this regard. My job as financial adviser is to help you to choose quality investments and to make sure that you understand the basic tenets of investment and stay with it for the long-term. If you’d like to discuss your own situation further, please don’t hesitate to get in touch for a free initial consultation.

With all of the above, I don’t mean to diminish the importance of inflation, but we need to keep it in its proper context: this isn’t a problem that has suddenly come out of the woodwork! It has been there all along, working quietly in the background to chisel away at your wealth. The graph below shows the effect of different levels of inflation over a number of time periods.

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It should be clear that even modest levels of inflation can prove very pernicious – taking the example of a 2% inflation rate over a 20 year period, you will find that prices have risen almost 50%, and so if your capacity for generating income hasn’t risen commensurately, you will find yourself dedicating ever more of your resources to the bare necessities, leaving you less money available for discretionary expenditure. We are told that we have lived through a couple of decades of very low inflation, but I distinctly remember the prices of milk, fuel and train travel (between where I live and Milan) when I arrived in Italy in 2004, and the inflation rate based on these basic goods and services is in the region of 2 – 3% p.a. over the period 2004 – present day (the official value is about 1.3% p.a.). There is no need to get into a debate about how inflation is calculated – I fully recognise that some goods (like consumer electronics) have improved and become cheaper over this period, but I buy fuel for my car far more frequently than I buy a smartphone.

The effects of inflation on your economic well being often become clear only after a long period of time, so the best idea is to work out a plan right from the start to make sure that your expenses are going to be sustainable in the long-term. Doing this can be quite difficult however, as you need to factor in variable investment returns, withdrawal rates and inflation in order to see how your plan is likely to play out. Investing for a positive real return (a real return is adjusted for the effects of inflation) over time relies on taking a long-term view and, as with choosing the right investments, my role as financial adviser is to help you understand all the variables and to find a sustainable path for the future. If you worry about inflation, then you are right to do so, but I can help you in finding ways to protect yourself from its worst effects.

Please also check out my latest podcast – dedicated to citizenship, visas and estate planning, available on Spotify, Google Podcasts, Apple Podcasts and Stitcher.

Interest rates and Inflation

By Jozef Spiteri
This article is published on: 19th December 2021

19.12.21

Taking simple steps to increase and protect your wealth

Interest rates and inflation, both terms we are familiar with, whilst not always appreciating how closely the two are connected, or that both affect our immediate and longer term financial security.

When we hear about interest rates, we might think of the bank. This is correct, but let’s clearly define what the term interest rate means. For savers (as opposed to borrowers) an interest rate can be seen as a percentage-based payment which the bank (or indeed any other savings institution) pays us for holding our cash. This means that when we put our money in a bank account, the bank compensates us financially for having placed our funds with the bank. Simple, right? Inflation can be a slightly more difficult concept to understand, but it is something we experience daily. Inflation refers to the general increase in prices of goods and services over time. This happens for a number of reasons, which won’t be examined here. The important point to understand is that inflation, whether gradual or accelerating, means prices are going up.

How then are interest rates and inflation linked? Well, the connection is quite straightforward. As mentioned, the bank is paying its savings customers an interest rate, so let’s consider the actual value of that interest rate. Most likely the rate you have been receiving over recent years has been no higher than 0.5% per annum. But inflation has been averaging around 2% per annum and has increased substantially over the past year or so. What does this mean? Assuming interest at 0.5% and inflation at 2%, the money in your bank account is losing 1.5% of its value every year (2% – 0.5% = 1.5%). This means that by keeping funds idle in a bank account you are actually destroying the real value of your money. The longer the cash is left there, the more value it loses.

Now that you’ve read the above, you may be asking yourself if there is a way to avoid destroying the real value of your money. That is where companies such as Spectrum can help. After reviewing your circumstances and going through a risk profiling exercise, your Spectrum adviser can help you build a suitable portfolio of diversified assets with the aim of getting your money working harder. A typical ‘balanced-risk’ portfolio, for example, has achieved annualised returns of 4% to 6% over the medium to long term. Of course past performance is no guarantee of future returns but with sensible planning it is entirely possible to overcome the negative effects of inflation – indeed, investment success and achieving positive real returns generally rely on such planning.

An initial meeting with a Spectrum adviser is free of charge and without obligation. This means we can assess your circumstances and answer your questions. It is up to you to decide whether to take things further. We would be more than happy to meet you for a chat so we can show you how we can be of service.

Inflation in Italy

By Gareth Horsfall
This article is published on: 8th December 2021

08.12.21

I don’t think this E-zine can go by without writing about inflation and the impact that Covid has had on the rising cost of goods and services. I don’t know about you but I am starting to see prices rise in Rome, particularly around food. I was shocked to find pears in the supermarket at €5.49kg the other day. Also, when I travelled to the UK at the end of October car hire prices were through the roof, partly fuelled by Brexit I imagine, but crazily expensive. I was also talking to a friend who owns a company making the sun curtains that you see on balconies and terraces in Italian cities. She was telling me that their raw material prices had risen 30% in the last few months. Lastly, there is the impetus of all these housing bonuses at the moment which means that both tradespeople and building materials are in short supply, and when things are in short supply, prices only go one way!

In the US there has been a lot of rhetoric about a ‘transitionary inflation’ which will pass once the world’s supply chain gets back to normal after Covid, when goods and to some degree services as well will start to circulate as they did pre-pandemic. But, I think it is plain for all to see that this is now going to be a bit longer than we first suspected. Even if Omicron turns out to be a much weaker variant and have very little impact on our health, government intervention in trying to stem the infection rate could mean that further travel restrictions are on the cards.

This all has the effect of making it more difficult for raw materials to find their way to factories, production of goods themselves (nothing gets made when people are at home), distribution, administration, shipping etc. The list goes on.

When you bring everything together it means that supply side issues are likely to remain for some time and that has had an effect already.   I was talking to someone at Prudential International last week and they were telling me that their indicators were showing a 6% inflation rate in the UK and 4% in Europe. The general rate in the USA likely to be much higher, into double digits.

This has a serious effect on our savings and for any eagle eyed observer, you may have noticed that your government (Italy or otherwise), even faced with these inflation figures have not started to raise their central bank rates yet. Why?

The answer is very simple. Inflation erodes savings but it also erodes debt and since 2008, what have most governments around the world been creating copious amounts of? ….you got it, debt! So, if they can hold interest rates low for as long as possible, whilst getting a 6% annualised reduction in their debt, then that is good for them. But it is horrendous for savers and people on fixed incomes!  

I always give the example of a table that is worth €1000 today. At a 6% annual inflation rate it will cost €1060 next year. If my savings have been squandering away in a bank account at 0.5% interest, then my €1000 is now worth only €1005. My money is no longer worth what it was last year and my ability to purchase the same amount of goods and services has diminished considerably. Imagine if that were not a table but a prescription drug?

Inflation is a serious issue for many people and there is a simple way to calculate the compounding effect of this over time: The Rule of 72. Simply divide 72 by the rate of inflation and you will find out how many years it will take to halve the value of your savings. At 6%, your €1000 will be worth €500 in just 12 years. Frightening given how quickly inflation can take off and difficult it can be to bring it under control.

Don’t get caught out! Where you can, invest for the long term. I understand it comes with risks, but the long term risk of not having enough money to pay for a retirement, schooling for children, or even healthcare expenses is significantly more problematic.

And on that happy note, I am going to leave you for this E-zine. I am sure that you are all now starting to think about your 2022 tax return and how you can use those €s worth of tax savings! But, before you do that, run out and order your turkey before the prices rise too high.

As always, if you would like to speak to me about any of these issues you can contact me on gareth.horsfall@spectrum-ifa.com or message/phone me on my cell +39 3336492356.

Inflation: food for thought

By David Hattersley
This article is published on: 30th November 2021

Governments use a variety of measures to calculate inflation figures, but in the main consider about 600 items that are in popular demand. Hand sanitizer has recently been added to the list as an essential item. But, it will also include TVs, clothing, smart phones, new gadgets etc. If one strips out something that is considered by some as non essential or has no need to be replaced, then within an individual’s budget the cost of food will take on greater significance.

Within the food chain costs are going up. Farming and breeding have been badly hit by increased production costs; electricity has gone up by 270%, tractor diesel 73%, fertilizer 48%, water by 33% and seeds by 20%. Growers have to pay more just to cultivate and pick their crops. In Galicia dairy farmers who produce 40% of Spain’s milk are being “strangled” by soaring production costs, estimated at 25% by the Union of Agrarians. Bad weather, such as the recent “Gota Fria”, can also have a negative impact on crops. The complaint from farmers is that whilst supermarket customers are paying more for their milk, the Food Chain Law has not been applied, i.e. “no link in the chain may charge less than what it costs to produce.”

Distribution is also part of the food chain. The majority of Spanish truckers are self employed, but have been unable to offset their increased costs of diesel plus the future cost of automated motorway toll roads. A three day strike has been called for 20th-22nd December.

So perhaps a perfect storm of reduced supply and increased demand will, if you excuse the pun, “add fuel” to the inflationary upward spiral. This is perhaps lessened in Spain, as it is relatively self sufficient in relation to food supply and is a major exporter. It is worse for countries that are not self sufficient and need to rely on Spain’s exports and alternative supplies from across the globe.

To many of my retired clients who remember the UK in the 80’s, inflation has again become a concern. I have been able to help them find some financial protection against this for their savings, in particular those that held surplus cash in banks in excess of an emergency fund. Each client had their own attitude to risk which does vary, hence the need for regular reviews. I have access to Spectrum’s preferred investment partners who can provide a multi asset and globally diversified tailored solution.

We do not charge fees for reviews, reports, recommendations or future service meetings. Should you wish to contact me to explore your needs further, please feel free to do so either via the web site or directly using the contact details below.

Understanding inflation

By Occitanie
This article is published on: 6th September 2021

06.09.21

Following the summer break, welcome to the latest edition of our newsletter “Spectrum in Occitanie, Finance in Focus” brought to you by your Occitanie team of advisers Philip Oxley, Sue Regan, Derek Winsland, together with Rob Hesketh now consulting from the UK.

Following our last newsletter on the subject of inheritance planning, we thought we would turn our attention to the significant column inches in the financial press currently devoted to the growing risks of inflation.

What is inflation?
Inflation is essentially the decrease in the purchasing power of your money as a consequence of a sustained increase in the price of goods and services. Therefore, in an environment of rising inflation, unless your income increases at a similar level you may not be able to maintain the same standard of living.

Inflation is typically measured using a wide variety of items that many people would typically purchase. For example, the Office for National Statistics (ONS) is continually monitoring the price of about 600 goods from around the UK. These monitored price increases are weighted based on popularity and value. Also, the items measured are under constant review with hand sanitiser having been added since the onset of the pandemic.

What is happening to inflation now?
Inflation has been rising at a pace in recent months and this level of higher inflation is predicted to remain in the short term, and possibly the medium term. In France, the UK and the US, inflation increases since the beginning of the year can be seen below:

	January 2021	July 2021
France	0.6%	1.2%
UK	0.7%	2%
USA	1.4%	5.4%

What causes inflation?
There are several economic theories behind the causes of inflation, the primary ones being the following:
 i) Demand Pull: This occurs where demand for goods and services outpaces supply and consumers are prepared to pay more for some items. This scenario is often experienced in circumstances where an expansionary economic policy is present – often evident where there are low interest rates, which encourages borrowing, or recent tax cuts resulting in additional funds in the pockets of consumers.

ii) Cost Push: Often caused by a shortage of supply and/or increases in the costs of production, such as the price of raw materials or increased labour costs which are passed onto the consumer by way of higher prices. A simple example of this is when the price of crude oil increases, this is passed onto consumers at the pumps in the form of higher petrol and diesel prices.

For many businesses, labour costs are a large component of their cost base. When the economy is growing strongly and unemployment is low, labour shortages can arise and companies may be prepared to pay more to secure skilled, well-qualified employees. These costs can also be passed onto the consumer in the form of higher prices.

iii) Increase in the Money Supply: I am sure some of you will remember the 1980’s, a time during which Mrs Thatcher dominated the political scene in the UK and a bedrock of her economic principles was monetarism (the theory or practice of controlling the supply of money as the chief method of stabilising the economy). This economic theory was underpinned by the principle that excessive growth in the supply of money was the primary cause of inflation. In more recent times, Quantitative Easing (QE) has been a policy employed by central banks to stimulate the economy, firstly following the 2008-9 financial crisis and again since the onset of the Coronavirus pandemic. This policy involves central banks purchasing government bonds and other financial assets which injects large amounts of money into the economy to stimulate growth and this could certainly be one of the factors behind increasing inflation rates this year.

Why does inflation matter?
If you know anyone who lived in Zimbabwe in the years 2007-2009, they will tell you why. Inflation peaked at close to 80,000,000,000% meaning prices were doubling every day and there were scenes in the news of people using wheelbarrows to carry their money around! The central bank published bank notes of ever-increasing value and at one stage it was reported that a loaf of bread cost the equivalent of $35million!

A colleague of ours who is based in Italy, professes to have a 100 trillion dollar note issued by the Reserve Bank of Zimbabwe in his office.

Of course, this is an extreme example (although not unique), but there are multiple reasons why governments and central banks become a little jittery when inflation starts to increase beyond their targets, not least because of inflation’s tendency to be self-perpetuating. For example, inflation is increasing therefore workers demand higher pay increases. Higher pay increases lead to businesses clawing back these extra wage costs in the form of higher prices for their goods/services. Consumers notice that prices are rising and demand higher pay increases and so on. This is a little simplistic, but hopefully illustrates the point.

In the past, governments and central banks (often through interest rate increases) have acted quickly and decisively to try and control this inflationary process. Currently however, governments and central banks seem a little more relaxed about the matter – at least in the short term. One of the many reasons for this is down to the pandemic-ravaged economies around the world which are recovering, but still fragile..

How long will this period of higher inflation last?
This is a difficult one to answer.

Here is what two of our investment partners say on the matter:
“We do not agree with theories of runaway inflation, currently a hot topic among market commentators. To summarise briefly, the main reason for the spikes we are seeing today is that prices were abnormally low a year ago, and the rate at which they have risen since has been exacerbated by COVID-related dislocations in spending, employment, production and logistics. We believe – as US Federal Reserve Chairman Jerome Powell has been at pains to note – that unusually high US inflation will be transitory. But it’s worth clarifying what we mean by transitory. We don’t mean that inflation will be back on target by year end. Instead, we see it peaking in the next month or two, before falling back toward 2% throughout 2022.” Julian Chillingworth, Chief Investment Officer, Rathbones – 7th July 2021.

“Lower for longer’ was a term used to describe the post-credit crunch interest rate environment, a period in which interest rates languished near 0%. The promise of rates being lifted as the global economy strengthened never really materialised: rates stayed lower for much longer than originally planned – a decade – and then came Coronavirus. We’re now seeing a similar story take shape, this time on the subject of inflation. The Central Banks reiterate that accelerating inflation is ‘transitory’ and not a cause for concern, but it’s the Manager’s advice that investors prepare themselves for a different truth entirely: inflation is going to be higher for longer.” VAM Funds, Monthly Market Outlook – July 2021.

And from other sources:
“Higher Inflation Is Here to Stay for Years, Economists Forecast.” The Wall Street Journal, Headline on 11th July 2021.

“The ‘inflation is transitory’ argument is starting to wobble…the debate about temporary or problematic inflation will continue for months and will grow more heated.” Greg McBride, Chief Financial Analyst at Bankrate.com

Is it possible to protect your savings from the impact of inflation?
Yes – to some extent.
If you chose to keep all your savings in bank accounts in the UK, France or elsewhere the chances are that any interest you will receive will be a very small fraction of 1%.

If your cash is in a French bank account, balances up to €100,000 per person, per banking group (€200,000 for joint accounts) are protected. In the UK, cash deposits are protected to a limit of £85,000 per person, per banking group (£170,000 for joint accounts).

These guarantees undoubtedly provide some comfort in relation to the security of your funds, but over time the effective value of your savings will diminish, and this will occur more rapidly in a higher inflationary environment.

For example, if inflation were to average 2.5% for the next 10 years, £100,000 of savings today, would be worth only £78,120 in today’s terms, in 2031. To consider this in a different way, for £100,000 to keep pace with inflation, in 10 years’ time it needs to have grown in value to £128,008. This erosion of value is even more marked over longer timescales.

The simple truth is that there is no certain way of keeping up with or indeed beating inflation, without accepting a degree of risk. Thus, we have a choice, leave our savings in a bank account, and accept the certainty that inflation will erode our wealth if we don’t do something about it, or talk to someone who has the expertise to invest money in a manner that will give the possibility of a positive return within the parameters of your personal objectives and appetite for risk.

It is advisable to hold at least six months of your average monthly outgoings as a contingency fund for unexpected needs. With bank interest rates and inflation at their current levels, it makes sense to look at alternative homes for the excess cash over and above your ‘emergency fund’.

As most readers will know we at Spectrum are big advocators of diversification and the multi-asset approach to investing. We place our trust in our preferred investment partners to look after our clients’ money to help them achieve their financial objectives. Their investment teams are constantly monitoring the global economic, environmental, and political factors that may affect portfolios and act accordingly to produce the best outcomes for clients.

Whether you are a cautious investor or an adventurous investor, or somewhere in between, we are here to discuss the most appropriate investment solution for you. So, if you would like a review of your situation, please don’t hesitate to give us a call.

What next?
If you would like to discuss anything we have covered in this month’s newsletter, please do get in touch at Occitanie@spectrum-ifa.com or contact your Spectrum adviser directly.

We would love to hear from you with any comments and/or questions, as well as suggestions as to future topics for discussion. Finally, please feel free to pass this on to any friends or contacts who you think might find it interesting.

Top three financial tips for expats living in Spain

By Chris Burke
This article is published on: 22nd July 2021

22.07.21

Hola

This month we are covering the following Hot Topics:

UK financial advisers are not legally able to advise EU based clients anymore
The important ‘rule of 72’ for investing
Spanish state pension inflation worry

UK investments & pension law changes
Many UK based financial advisers can no longer legally look after anyone resident in Spain or the EU due to Brexit legislation, most having already written to their clients informing them of this. However, it’s not all bad news; most UK based investments including ISAs are not tax efficient in Spain/EU, with many having to be declared annually and tax paid on any gains, EVEN if you don’t access the money. This does depend completely on your circumstances and I help people analyse their personal situation, managing their UK assets or arranging for them to become Spanish compliant moving forward.

For those with UK private pensions in drawdown, every few years to receive this money you must have a UK accountant rubber stamp this to continue. So again, you will need to find someone locally to do this for you, which we can help with.

If you have any questions or need help in respect of UK based assets, please get in touch for a free, no obligation chat/review of your situation.

Send me your questions

The rule of 72 and poor performing investments
Implementing an investment strategy is not where your investment plan finishes; it is where it begins. Without regular reviews and maintenance there is a strong risk you will finish up with much less than you should have had. Many financial advisors here in Spain are mainly remunerated when taking on a new client, not on the performance of their investment. This is where I/Spectrum differ.

One of the many key aspects of investing is to keep a keen eye on the ‘rule of 72’, which is knowing how long before your money should double in its value. To work out the ‘rule of 72’ for your investment you use the following simple formula: divide the number 72 by the average annual interest you are receiving/likely to receive and it will tell you how many years it would take for you to double your money. So, for example, if you were averaging 4% interest per year it would take around 18 years (72/4 = 18 years), at 5% around 14 years and 6% around 12 years. To put that into a real-life scenario, if we use a starting point of €100,000 and invested over a 25 year period this amount of money would give you:

4% €266,583
5% €338,635
6% €429,187

To put that into context, historically inflation makes your costs double every 24 years, so if your money is not well ahead of that, in real terms your monies are just keeping their present value.

Therefore, it’s imperative you really are seeing your investments growing and working for you. If they are not, I suggest you seek a second opinion and find out how you can have these optimised, because it will make a big difference to you further down the line. The main reasons for investments failing are high maintenance costs and investments that give the financial adviser a ‘kickback’. Many people don’t always understand why their investment funds are growing but their portfolio isn’t as much, and this is usually a starting point to look at.

I work in a different way, making sure it also works for the client by not using this method, but on a transparent fee basis using the best investments & platforms for the clients; not using investment funds that give the adviser more commissions, in essence.

Contact me to make an appointment via the phone or zoom

Spanish state pension inflation worry
Back in 2011, Spain used to have a surplus state pension fund of €66 billion. This could be looked at as ‘well, at least they had a surplus; most countries have never had one’. Just before Covid started in 2019, it was €16 billion in debt. Now the state pension system, like many others, works on the principle that current workers pay for those who are retired now. The key point here is, from a percentage perspective, Spain, compared to others in the EU, has one of the highest proportions of its GDP (total country income) contributed to its state pension, at around 12%. The average ‘replacement rate’, which is the percentage of workers final salary income that they receive in retirement, was at 72% in 2019*, whereas the average in Europe is 45%. They receive, as a percentage, much more on average for their state pension compared to their earnings than their European counterparts. This is great on one hand, however this really is a great burden on Spain to provide that level of state pension to the people.

The only way Spain can carry on providing state pensions is to “increase the retirement age even higher and decrease the amount people receive” says Concepcion Patxot Cardoner, a University of Barcelona professor, as quoted by Bloomberg. That and start to move people towards saving into their own private pensions. However, this last option and the main plan moving forward is going to be difficult to achieve in a culture where only around 26% currently save into a private pension. Compare that to the UK where the latest survey showed 65% of people contribute.

If you also take into account Spain’s tourist industry (before Covid), which is the second largest in the world employing about 2 million people and accounting for about 11 percent of the country’s GDP, you can see that things are going to need to change drastically to balance the books given the current crisis.

What does all this mean? Well, to you and I, it’s even more important that we have a plan in place, whatever that is, to make sure we have provision in retirement. I am here to talk through this with you, using professional analytics tools to help take one of the most important planning aspects of your life and break it down, step by step, making it:

Specific to you
Measurable
Achievable
Realistic
Targeted

If you would like to talk through your situation with someone consultative and knowledgeable, don’t hesitate to get in touch.