Coveting the shiny stuff – Gold
By Gareth Horsfall
This article is published on: 7th September 2016
Dear Readers, please forgive me for I have sinned. It has been quite some time since my last post and during this time I confess I have been having impure thoughts.
I have been dreaming that the UK did not vote to leave Europe. I have been dreaming that Sterling had not fallen 12% against the Euro since June 23rd and that pasta was not now 10% more expensive in the UK, I have been having impure thoughts about low(ish) inflation in the UK and not rampant price increases after BREXIT. Lastly, I have been dreaming that interest rates would rise and not fall further into negative territory, basically charging customers to hold money with them.
Forgive me for my sins and lead me not into new temptation…………GOLD
There is a lot of talk going around at the moment about gold being the best investment to hold and certainly since BREXIT it has proven its case. However, gold has some signifcant shortcomings alongside other forms of investment. Essentially, it is of pretty much no use and it does not produce any yield. True gold has some decorative and industrial uses but demand is limited and doesn’t really use up all of the production. If you hold a kilo of gold today it will still be a kilo of gold at the end of eternity (taking into account any chance events which may affect the gravitational effects on earth).
THE INVESTMENT CHOICE DILEMMA
PILE A
Today the worlds total gold stores are approximately 170,000 tons. If all this gold was melded together it would form a cube of about 21 metres per side. Thats about as long as a blue whale. At $1750 per ounce, it is worth about $9.6 TRILLION.
PILE B
Warren Buffet, who is not a fan of gold as an investment, is famously quoted as saying that with the same amount of money you could buy ALL US cropland (which produces about $200 billion annually), plus 16 Exxon Mobils (which earns $40 billion annually). After these purchases you would still have $1 trillion left over. (You wouldn’t want to feel strapped for cash after such a big spending spree, so best to leave some spare cash lying around)
So the Investment choice dilemma is who, given the choice, would choose PILE A over PILE B?
In 100 years from now the 400 million acres of farmland would have produced an immense amount of corn, wheat, cotton, and other crops and should continue to do so. Exxon Mobil will probably have delivered back to shareholders, in the form of dividends, trillions of dollars and will hold assets worth a lot more. The 170,000 tons of gold will still be the same and still incapable of producing anything. You can cuddle and hug the cube, and I am sure it would look very nice but I don’t think you will get much response.
So, taking all this into consideration, you would be forgiven for thinking that gold really doesn’t have a place in anyone’s portfolio. I think you would be wrong.
Gold may not produce any yield, but with people in Asia, especially China and India, gold is very popular. In addition, it is also proving very popular for nearly ALL central banks around the world. Are all they all going mad, or do they have specific reasons for holding gold?
Well, despite Warren Buffets’ musings above, gold has to be seen in todays world as another form of money as central governments continue to print more traditional money, uncontrollably, and the paper currencies that we use in everday life become more and more worthless.
We must remember that the history of gold is that it rose, on its own, as a tradeable form of money in the world. No one has been forced into using gold as a form of money, whereas paper money is controlled by the state and has never been adopted voluntarily, at any time.
So this is where Waren Buffets argument falls down, because actual money in itself has exactly the same characteristics as gold. Its value! (Gold has some minor commercial uses, but its true value is in its store of value). Therefore, it should not be considered an investment, but actually another form of money/currency. In its basic form it is a form of barter and exchange.
Unlike paper money which can just be created without limit and at next to no cost, gold is both scarce and expensive to mine. It takes 38 man hours to produce one ounce, about 1400 gallons of water, enough electricity to run a large house for 10 days, upto 565 cubic feet of air under pressure and lots of toxic chemicals, cyanide, acids, lead, borax, and lime. (Just writing this makes me feel sick about the environmental impact of mining gold).
So, in summary the problem with the PILE A and Pile B scenario is that it assumes that gold is a form of investment, whereas in reality it should be considered another form of money.
For 6000 years gold has been an effective store of value.
The correct comparison that should be made is gold versus cash. Imagine a gigantic pile of cash. This pile of cash would be as equally inert and equally unproductive as gold, in itself.
The only way you could earn anything from gold or cash, in this case, is by depositing it with a bank and earning interest, at which point you relinquish your ownership (it becomes the property of the bank) and you then become an unsecured creditor to the bank itself, i.e if the bank fails it has the legal right to take all your gold and cash. Sound familiar? It might be better to hold true gold in a safe at home!
The question is whether you invest directly in gold or the gold mining companies themselves?
Timing the markets
By Pauline Bowden
This article is published on: 29th August 2016
Staying the course
Every market cycle has both up days and down days. Often, a few very good days account for a large part of the total return. Staying the course ensures that investments will be “in” the market on the good days. Some people try to time market movements by selling stocks when they think the market is about to decline and by buying stocks when they think the market is about to rise. Resist being a market timer. By trying to time the market, you potentially miss out on market rallies that could substantially improve your overall return and long-term wealth. Thus, what’s most important is not timing the market, but rather time IN the market. Staying the course when confronting difficult markets may prove very rewarding in the long run. Consistently predicting which days will move in which direction, though, is virtually impossible and can be very costly.
Diversifying your portfolio
Diversification may reduce the overall volatility of your entire portfolio, thereby helping you achieve greater long-term returns. It is important to remember, however, that diversification does not protect against loss in broadly declining markets. Like markets in general, different investment styles come in and out of favour in Cycles Rather than trying to predict which investment is likely to be the best performer in the future, investing in a well-diversified portfolio can help you to seek returns whilst managing for volatility. Diversification strategies may be especially important in a volatile market environment, when sector rotations and market fluctuations happen continuously.
Parkinson’s Law
By Victoria Lewis
This article is published on: 24th August 2016
Are you familiar with Parkinson’s Law? Originally it stated that “work expands to fill the time available for its completion.”
Parkinson’s Law is the title of the book written by Englishman Cyril Northcote Parkinson in 1958 and today, the more recent understanding of the law is a reference to the self-satisfying uncontrolled growth of the bureaucratic apparatus in an organization.
The Law is also applied to money and wealth accumulation: expenses always rise to match income. Parkinson’s Law can explain why many people retire poor and why some people succeed, whilst others fail.
The law says that, no matter how much money people earn, they tend to spend the entire amount and a little bit more. Their expenses increase in line with their earnings. Many people earn today several times more than they were earning at their first jobs. But somehow, they seem to need every single penny to maintain their current lifestyles. No matter how much they make, it is never enough.
The key to financial success – break the (Parkinson’s) law
Parkinson’s Law explains the trap that most people fall into. This is the reason for debt, money worries and financial frustration. It is only when you have sufficient willpower to resist the urge to spend everything you make that you begin to accumulate money – the perfect environment to help you achieve financial independence.
Reduce your outgoings
If you ensure your expenses increase at a slower rate than your earnings, and you save or invest the difference, you will become financially independent in your working lifetime (and retirement).
Measure the difference between your earnings and the costs of your lifestyle, and then save and invest the difference. You can continue to improve your lifestyle as you make more money.
Take action
Here are two things you can do to apply this law immediately:
- Imagine that your financial life is like a failing company that you have taken over. Stop all non-essential expenses. Draw up a budget of your fixed, unavoidable costs per month and resolve to limit your expenditures to these amounts. The aim is to make sure that your ‘company is making a profit’.
Carefully examine every expense. Question it as though you were analysing someone else’s expenses and look for ways to economise. Aim for a minimum of say, 10% reduction in your living costs.
- Resolve to save and invest 50% of any increase you receive in your earnings from any source. Learn to live on the rest. This still leaves you the other 50 percent to do with as you desire!
Known Unknowns
By Derek Winsland
This article is published on: 16th June 2016
Individual investors may face many “known unknowns”—that is to say, things that they know they don’t know. The UK’s referendum on EU membership is one of them, confronting people with a large degree of uncertainty. But as we’re witnessing, it’s not just the investor that’s afflicted by this Known Unknown condition – the markets are really uncomfortable as evidenced by the fall in the value of the pound.
We have though been here before; perhaps not having to make decisions that could affect our financial stability for years to come, but as the chart below shows, major global events that have impacted on our lives to a greater or lesser effect. Through all of them, the markets have shown a remarkable resilience over the longer term and that is one of the most important lessons the individual investor can learn.
You see, it’s not necessary to “make the right call” on the referendum or its consequences to be a successful investor. Our approach is to trust the market to price securities fairly; to take account of broad expectations of future returns.
In arguing for the status quo, the “remain” campaign is able to point out familiar characteristics of membership.
The “out” campaign, however, is based on intangibles that can only be resolved after the result of the referendum is known. It is impossible for any individual to predict the implications of these unknowns with certainty.
But this is no cause for concern. While the referendum is imminent and its implications are potentially vast and unpredictable, it is not necessary for individual investors to make any judgement calls on the outcome. We have faced many uncertainties in the past—general elections, market crises, recessions, wars—and throughout all of them, the market has done its job of aggregating participants’ views about expected returns and priced assets accordingly.
And while these events have caused uncertainty, volatility and short-term losses and gains, none of them has altered the expectation that stocks provide a good long-term return in real terms.
We have a global view of investing, and we know that the market is very good at processing information that is relevant to future returns. Because of this view, we don’t attempt to second-guess the market. We manage well-diversified portfolios that do not rely on the outcome of individual events or decisions to target the expected long-term return.
These events are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news. Past performance is no guarantee of future results. MSCI data © MSCI 2016, all rights reserved.
Research has demonstrated time and again that the best returns are achieved through ‘Time in the Market’ and not by trying to ‘Time the Market’; in other words, stay invested rather than guess the best time to invest and disinvest.
If you would like more information on our investment philosophy, please ring for an appointment or take advantage of our Friday Morning Drop-in Clinic here at our office in Limoux. And don’t forget, there is no charge for these meetings.
Tax-Efficient Savings & Investments in France
By Spectrum IFA
This article is published on: 24th May 2016
Some of you reading this article have just completed your first French income tax return. Well done if you achieved this without difficulty – ce n’est pas facile!
Whether you are new to France or not, the annual tax return is an opportunity to take stock of your financial situation. In particular, if you had to declare interest from bank deposits (including ISAs), dividends from shares (even if these were reinvested), and perhaps also gains from financial assets, then your tax and social charges bill will be higher than necessary. No-one likes paying taxes and so now is a good time to consider alternative tax-efficient savings and investments, if you want to avoid reduce your future tax bills.
For short-term savings, France has a range of tax-free accounts. The Livret A for deposits up to €22,950 and the Livret Développment Durable (LDD) for deposits up to €12,000, both paying interest of 0.75% per annum. For households with taxable income below certain limits, there is also the Livret d’Épargne Populaire (LEP) for deposits up to €7,700, which pays 1.25% per annum. You have full access to your capital in these accounts at any time.
The interest rates for the tax-free accounts are set by the French government, taking into account average short-term interest rates and inflation – both of which are very low at present. Realistically, the current tax-free interest rates could be lower, however, even the French say that it would be political suicide for the government to reduce these rates now! Whatever the tax-free rates are, however, these are better than comparable standard deposit rates for other accounts with instant access. Hence, the tax-free accounts are very useful for depositing cash that you need for an emergency fund, or to meet other short-term capital needs. The accounts do not create any tax issues and earning some interest is better than none at all.
For medium to long-term savings, the most popular type of investment in France is the Assurance Vie (AV). This type of investment is very tax-efficient as there is no income tax or capital gains tax on any income or growth, whilst the monies remain within the AV. Annual deduction of social charges is also avoided, except when investing in fonds en euros, which are offered by French banks and insurance companies.
When you do take a withdrawal from the investment, part of this is considered to be a withdrawal of capital and this part is therefore free from any tax. For the taxable element, you can opt for a fixed withholding tax rate, in which case the insurance company will take care of the necessary deduction, declaration and payment of the tax and social charges. Alternatively, you can opt to declare the gain through your annual income tax return, in which case the company will not make any tax or social charges deductions and will provide you with notification of the amount that you need to declare. The taxable gain will then be added to your other sources of taxable income and taxed at marginal rates.
Over time, AVs become even more tax-efficient and after eight years, the gain in amounts withdrawn can be offset against an annual tax-free allowance of €9,200 for a couple who are subject to joint taxation, or for ‘one-person households’, the allowance is €4,600.
Millions of French people use AV as their standard form of savings and investment and many billions of Euros are invested in this way via French banks and insurance companies, which offer their own branded product. In addition, there is a much smaller group of companies that are not French, but have designed French compliant AV products, aimed specifically at the expatriate market in France. These companies are typically situated in highly regulated financial centres, such as Dublin and Luxembourg. However, before choosing such a company, it is important to establish that the company has complied with all the formal French tax registration procedures, so as to ensure that you will receive the same tax and inheritance advantages as the equivalent French product.
Some of the advantages of the international product, compared to the French product, are:
- It is possible to invest in currencies other than Euro, including Sterling and USD.
- There is a larger range of investment possibilities available, providing both access to leading investment managers, as well as capital guaranteed products and funds.
- Documentation is in English, thus helping you better understand the terms and conditions of the policy.
- The AV policy is usually portable, which is particular benefit if moving around the EU, since in many cases, the policy can be endorsed for tax-efficiency in other EU countries.
AV is also highly beneficial for inheritance planning, both as concerns freedom to leave your financial assets to whoever you wish, as well as providing valuable additional inheritance allowances for your beneficiaries and I will cover this in a later article.
Everyone’s situation is different and any decision to invest in assurance vie should only be considered as part of a wider review of your overall financial situation, as well as your plans and objectives for the future. Hence, if you would like to have a confidential discussion with one of our financial advisers, you can contact us by e-mail at limoux@spectrum-ifa.com or by telephone on 04 68 31 14 10. Alternatively, drop-by to our Friday morning clinic at our office at 2 Place du Général Leclerc, 11300 Limoux, for an initial discussion.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of the investment of financial assets or on the mitigation of taxes.
The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter.
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Overseas rental property – have you thought about this………?
By Gareth Horsfall
This article is published on: 13th May 2016
Financial markets are very quiet at the moment. From my view point the financial world appears to be almost at stand still.
The world appears to be awaiting the UK vote on whether to leave Europe or not!
In the meantime, life goes on and whilst the UK celebrates the Leicester City win of the Premier League with a Roman manager, I continue to get contacted by various people asking my opinion on how they should manage their finances as residents and non residents in Italy. The majority of those people also have rental property in their home country as part of their overall financial arrangements.
A review of taxation on overseas rental property for Italian residents
The most common question I am asked is how income from property held overseas is taxed in Italy. Is it exempt from Italian tax because tax has been paid on it overseas first and is it subject to the same taxes as Italian domestic rental income?
I would like to dispel any myths and confirm that, as a resident in Italy, you do have to pay Italian tax on the profit from any rental income on properties held overseas.
The law for Italian tax residents clearly states that the net profit (after allowable expenses in the country in which the property is located) must be declared in the Italian end of year tax return. The net profit is then assessed as income by adding it to the rest of your income for the year and then tax paid at your highest rate of income tax in Italy (that could be as high as 43% depending on your cumulative income for the year).
Let’s not forget the IVIE tax as well which is 0.76% of the property council/cadastrale/rateable value (or whatever you choose to call it) of the property.
If tax has been applied in the country of origin, this can be reclaimed through your tax return. You are protected through a double taxation treaty as long as your country of origin has signed one with Italy.
To clarify, any rental income from properties held overseas must be declared in Italy. This is the NET income (after allowable expenses) and this net figure is added to your other income to determine at which rate of income tax it is assessed in Italy.
But wait a minute. Have you thought about this?
Now, this is all well and good but as most landlords of properties overseas discover, if they are relying on the income from the property to live on then any income benefit can quickly be diminished by additional tax to be paid in Italy.
Do you have useful relatives?
Do you have trustworthy relatives/family members in the country where the property is located? If so, then you might think about gifting the property to them (effectively signing it over to them) and getting them to send the rental income to you as a gift.
The recipient of a gift is not taxable in Italy and therefore you could have a non taxable income stream
However, before you start looking to sign your properties over to family members you need to think of a number of tax consequences of doing this. Mainly the inheritance tax obligations that it imposes on your estate, any tax considerations and administrative burdens it now places on the holder of the property (they would have to be the sole recipient of the money and the sole named owner of the property). That person would have to receive the money in their accounts and submit their tax returns accordingly. They would have to send the money to you under a word of mouth agreement and you would have to trust the other party implicitly, not to mention a number of other tax questions it may pose.
However, assuming those problems could be overcome you might find that you could have the rental income from your overseas property paid to you in Italy, without detraction of Italian tax but through a gift arrangement.
Cross border financial planning at work!
Stay invested and don’t try to second guess the market – Discipline is rewarded
By Derek Winsland
This article is published on: 6th May 2016
Individual investors may face many “known unknowns”—that is to say, things that they know they don’t know. The UK’s referendum on EU membership is one of them, confronting people with a large degree of uncertainty. But as we’re witnessing, it’s not just the investor that’s afflicted by this Known Unknown condition – the markets are really uncomfortable as evidenced by the fall in the value of the pound.
We have though been here before; perhaps not having to make decisions that could affect our financial stability for years to come, but as the chart below shows, major global events that have impacted on our lives to a greater or lesser effect. Through all of them, the markets have shown a remarkable resilience over the longer term and that is one of the most important lessons the individual investor can learn.
You see, it’s not necessary to “make the right call” on the referendum or its consequences to be a successful investor. Our approach is to trust the market to price securities fairly; to take account of broad expectations of future returns.
In arguing for the status quo, the “remain” campaign is able to point out familiar characteristics of membership.
The “out” campaign, however, is based on intangibles that can only be resolved after the result of the referendum is known. It is impossible for any individual to predict the implications of these unknowns with certainty.
But this is no cause for concern. While the referendum is imminent and its implications are potentially vast and unpredictable, it is not necessary for individual investors to make any judgement calls on the outcome. We have faced many uncertainties in the past—general elections, market crises, recessions, wars—and throughout all of them, the market has done its job of aggregating participants’ views about expected returns and priced assets accordingly.
And while these events have caused uncertainty, volatility and short-term losses and gains, none of them has altered the expectation that stocks provide a good long-term return in real terms.
We have a global view of investing, and we know that the market is very good at processing information that is relevant to future returns. Because of this view, we don’t attempt to second-guess the market. We manage well-diversified portfolios that do not rely on the outcome of individual events or decisions to target the expected long-term return.
These events are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news. Past performance is no guarantee of future results. MSCI data © MSCI 2016, all rights reserved.
Research has demonstrated time and again that the best returns are achieved through ‘Time in the Market’ and not by trying to ‘Time the Market’; in other words, stay invested rather than guess the best time to invest and disinvest.
If you would like more information on our investment philosophy, please ring for an appointment or take advantage of our Friday Morning Drop-in Clinic here at our office in Limoux. And don’t forget, there is no charge for these meetings.
So What’s Your Strategy ?
By Chris Webb
This article is published on: 30th April 2016
Investing is not a sure thing in most cases, it is much like a game – you don’t know the outcome until the game has been played and a winner has been declared.
Anytime you play almost any type of game, you have a strategy. Investing isn’t any different – you need an investment strategy.
An investment strategy is basically a plan for investing your money in various types of investments that will help you meet your financial goals, depending on your time horizon.
Each type of investment contains individual investments that you must choose from. A clothing store sells clothes – but those clothes consist of shirts, trousers, dresses, skirts etc. The stock market is no different, it’s a type of investment, it contains different types of stocks and different companies that you can invest in.
If you haven’t done your research, it can quickly become very confusing – simply because there are so many different types of investments and products to choose from. This is where your strategy, combined with your risk tolerance and investment style, all come into play.
If you are new to investments, we will work closely together to ensure you have a full understanding before making any investments. I will help you develop an investment strategy that will not only fall within the bounds of your risk tolerance and your investment style, but will also help you achieve your financial goals.
Never invest money without having a goal and a strategy for reaching that goal! This is essential.
Nobody hands their money over to anyone without knowing what that money is being used for and when they will get it back! If you don’t have a goal, a plan, or a strategy, then you are essentially handing your money over without any idea of what it can do for you!
How Much To Invest?
By Chris Webb
This article is published on: 28th April 2016
Many first time investors think that they should invest all of their savings. This isn’t necessarily true. To determine how much money you should invest, you must first determine how much you actually can afford to invest and, just as importantly, what your financial goals are.
So, how much money can you currently afford to invest? Do you have savings that you can use? If so, great! However, you don’t want to cut yourself short when you tie your money up in an investment. What were your savings originally for?
It is important to keep three to six months of living expenses in a readily accessible savings account – don’t invest that money! Don’t invest any money that you may need to lay your hands on in a hurry in the future.
So, begin by determining how much of your savings should remain in your savings account, and how much you feel you are comfortable to use for investments.
Next, determine how much you can add to your investments in the future. If you are employed, you will continue to receive an income, and you can utilise your surplus income to build your investment portfolio over time.
Together we can work at setting a budget and determine how much of your future income you will be able to invest.
With my help, you can be sure that you are not investing more than you should or less than you should in order to reach your investment goals.
For many types of investments, a certain initial investment amount will be required. This at first glance, may look out of your reach. However I may be able to reduce these entry levels.
If the money that you have available for investments does not meet any required initial investment, you may have to look at others. Never borrow money to invest, and never use money that you have not set aside for investing!
Stabilise first then invest
By Chris Webb
This article is published on: 14th April 2016
Before you consider investing in any type of market you need to take a good look at your current situation. Investing for the future is a priority but clearing up potentially bad situations in the present is just as important.
Assess your liabilities, you should do this once each year. It is important to know what is outstanding and what the time horizon to clear it is.
If you’ve set aside some money to invest, but you have outstanding debts, you are better off cleaning up the debt first!
Next, look at what you are paying out each month, and get rid of expenses that are not necessary. For instance, high interest credit cards are not necessary. Pay them off and get rid of them. If you have high interest outstanding loans, pay them off as well.
If nothing else, exchange the high interest credit card for one with lower interest and refinance high interest loans with loans that are lower interest. You may have to use some of your investment funds to take care of these matters, but in the long run, you will see that this is the wisest course of action.
Get yourself into good financial shape – and then enhance your financial situation with sound investments.
It doesn’t make sense to start investing funds if your bank balance is always running low or if you are struggling to pay your monthly bills. Your investment monies will be better spent to rectify adverse financial issues that affect you each day.