Time For A Little Caution

I appreciate that last week’s blog regarding changes to pensions and annuities in the Budget was a little technical and on the long side, but if you managed to gain a little more understanding of how simple annuities (and mortgages) work and why that knowledge will still be very useful, then it was worthwhile.

This week’s blog will definitely be easier on the brain, but I want to look at other changes in the Budget concerning additions to the list of eligible investments that can be made in an ISA. To quote from the Budget itself, ‘ISA eligibility will be extended to peer-to-peer loans…..the government will also explore extending the ISA regime to include debt securities offered by crowdfunding platforms’.

I will be producing a guide to the different classes of investments very soon and that will include some information on peer-to-peer loans and crowdfunding. But for now I want to emphasise a point I made in an earlier blog ‘The Wrong Trousers‘.

Having extra types of investment that offer a yield is fine, but when making an investment you need to be able to read its label and understand it, or know someone who does. Simply because an investment appears to offer a high income, say over 7%, or a tax break or both doesn’t mean it’s a good choice.

And the environment at the moment appears falsely benign as governments continue to print money to buy their own debt (QE) and therefore lower the interest payable on that debt. But the resulting cheap money means there’s a lot of dosh out there seeking out more and more risk for less and less return – and the yields on some junk investments are back to where they were before the financial crisis.

In short, it’s time to exercise a little extra caution, whatever the asset class.

Next week I’ll review Michael Lewis’ latest best seller ‘Flash Boys’ – which is actually a well written book about the development of electronic trading in the States and its implications for markets as a whole. I grant you that isn’t the most natural subject for a best seller, but Sony has apparently aleady acquired the film rights.

The topic is of particular interest to me as I was involved in developing electronic trading in its earliest incarnation in Tokyo. We didn’t have much ‘flash’ speed back then as we had to transfer information via ‘floppy’ disk – and there was far less controversy than now. In any event ‘Floppy Boys’ doesn’t have quite the same ring to it.

Risk note:
Clients are reminded that the values of some kinds of investments can fluctuate over time; that past performance is no guarantee of future returns; and that it is possible to get back less than what you invested, especially in the early years.
This blog is based upon our initial understanding of the Spring 2014 Budget, but proposals may be modified or delayed by legislation.
Please therefore treat this content as general guidance only, and seek personal advice on specific issues.