Welcome to our third AWML Quick Note. Following a volatile and mostly risk-off quarter in the markets, this letter has a lot of ground to cover. We aim to shed some light on the events that shaped cross-asset returns in the July-September period and explain how they affected clients' portfolios. Let’s dive in.
3Q2021 witnessed a China-led decline in Asian and Emerging Markets Equities, while the US Dollar reigned supreme, and Japan Co outperformed.
Following a very positive first half of the year, global equity markets hit the brakes while geographical diversification proved once again to be a reliable ally for investors. The spectacular implosion of the Chinese Real Estate Conglomerate, Evergrande, which at its peak boasted a market cap of $54billion (currently less than $5billion), raised concerns of a Chinese-equivalent “Lehman moment” and subsequent contagion to the Chinese banking system, with assets in excess of $50trillion, and global markets.
Welcome to our first AWML Quick Note, a series of occasional quick research and analysis pieces into current or historical topics affecting today’s financial markets, investments, and what they mean to your money.
A recent review of my own defined pension benefits revealed something very disturbing indeed. Said revelation was that my Wife (and partner of 23 years) is not actually entitled to the usual 50% spouses’ pension in the event of my death.
I am a deferred member of the scheme in question and the scheme rules state very clearly that to meet the definition of “Spouse”, both of the following criteria must be met:
- The member had to have been married to the claimant Spouse AND
- The member had to have been living at the same address as the claimant Spouse at the time of becoming a deferred member of the scheme
Our situation only met with one of the criteria. This effectively means that in the event of my death, fifteen years of hard earned pension benefits disappear.
“Between the optimist and the pessimist, the difference is droll. The optimist sees the doughnut; the pessimist the hole!” – Oscar Wilde.
2020… What a year it was! Now that it finally is behind us, the question of what to expect of 2021 grows ever more pressing. As we digest Q1 2021 market outlooks and read through last year’s summary and analysis, we are impressed by how contrasting pundit’s predictions are. Nonetheless, it comes as no surprise given how polarised 2020 was. In 2020:
- The Chinese economy was expected to grow by 1.9%, and the Shanghai Composite grew by 38%.
- The American economy was expected to decline by 4.3%, while the S&P500 and the Nasdaq100 grew by 16% and 43%, respectively.
- The British economy was expected to fall by 9.8%, while the FTSE100 declined by 14%.
- The American Money Supply (M2) expanded by 25%, to +/19.2Trillion USD, while the US Budget Deficit was expected to be of 3.8Trillion USD in 2020, all while Gold increased by 25%
AIG have recently replaced their old Critical Illness cover with a new and improved version known as Term Assurance with Critical Illness Choices. The goal is the same – to offer cover to customers in the event that themselves or a loved one develops a critical illness; is diagnosed with a terminal illness with a life expectancy of 12 months or less; or passes away.
What is different with the new offering is in the wording of the product name, “choices”. Customers will automatically get the standard cover which will cover them for the core critical illnesses. This is great for those that want a lower cost critical illness cover, but for those that want additional benefits, they can customise their policy to suit their needs and budget. The options available at an additional cost are enhanced critical illness cover, children’s cover, waiver of premium and total permanent disability.
“Risk comes from not knowing what you’re doing” – Warren Buffett
Investing was never easy. As humans, we are naturally risk-averse, and losses hurt us more than we enjoy equivalent-sized gains. You probably did not need to read this to suddenly become aware of it – this is encrypted in our brain and teams of psychologists and economists have gathered plenty of empirical evidence proving it.
This self-defence mechanism has been useful in our collective survival, but prosperity and recognition reward the wise risk-takers, innovators and entrepreneurs. To put it simply: avoiding risks allows us to survive but knowing when to take risks allows us to thrive. What constricts us from taking more potentially rewarding risks? Lack of knowledge – we fear what we do not know!
Today we’re going to talk an extremely important, yet rarely addressed topic – how do you maximise your retirement income, without substantially increasing the likelihood of depleting your assets? For a long time, finding an answer to this problem could be compared to finding the Holy Grail of financial planning. Worry not, as I might have good news today.
During most of this article, I will avoid diving into the details and technicalities, as my goal while writing this article is for it to be readable by the ‘average individual’ as much as possible. Furthermore, I always thought that the intricacies of financial planning and investing to be more appealing to financial planners, like myself, and that clients like simplicity – the more, the merrier. It’s also worth noting that the only reason why we’ll be using US data is that there’s more information readily available. We’ve done some testing, and the results are pretty reliable across different countries.
From a retiree perspective, I find that their goal is simple, and it usually manifests itself in four simple questions:
- Do I have enough to retire?
- How much is enough?
- Will my income be able to keep up with a rising cost of living (inflation)?
- If the market were to fall by, say, 30% tomorrow? How would that change my situation?
The world economy is facing a big challenge as the coronavirus outbreak causes a drastic drop in financial markets across the globe. This has a direct impact on pension investments and pension holders may be concerned about the value of their pension fund, and how this may affect their retirement savings.
You may also be asking yourself what the most appropriate course of action is at the moment. Should you continue your regular contributions? Should you take a pause, and wait for all this to be over before resuming your monthly payments? Or should you just keep to cash savings as this pandemic is the perfect example of how volatile financial markets can be when put to the test?
Whilst it may seem a bizarre time to be thinking about investing money, the words of perhaps the worlds most savvy investor (Mr Warren Buffett) should not be ignored.
For those that have not heard Mr Buffett’s mantra, it goes along the lines of “When others are being greedy, be fearful, when others are being fearful, be greedy”.
The recent collapse in global stock markets brought about by fears of the economic impact of Covid-19, has already provided investors with cash the opportunity to buy into the market at heavily discounted prices.
The crisis is still in it’s early stages and it is reasonable to assume that further investment opportunities will present themselves over the coming, days, weeks and possibly months.
Whilst the utopian situation would be to invest at the bottom of the market, there is one fundamental problem all prospective investors face and that is calling the bottom. It is not possible to predict either the utopian timing or pricing.
Given recent circumstances, we would like to reassure clients that we will be conducting business as usual.
All staff are well equipped to work from home and all client meetings can be conducted through phone or video call.
We will continue to provide all services including life and critical illness insurance, pensions and investment advice.
The Abacus Wealth Management Team