Business Matters – Issue 28

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Taking the bull market by its horns

Bear markets – a period where equity markets fall – are an inherent part of investing. They’re the risk that we take on as the price for achieving better returns, which would be significantly lower if it weren’t for bear markets.

Pre-pandemic, investors had enjoyed over a decade of virtually uninterrupted progress. Although no one could have predicted Covid itself, it was only ever a question of what would trigger a market reset – and when.

Although inevitable, bear markets can pose one of the greatest challenges for investors. This is not because of the (hopefully temporary) losses, but the rash decisions we can make during this time.

The noise of daily market fluctuations can be deafening, and even the most level-headed investor will sometimes be tempted to check their portfolios more frequently. Many can even find the urge to make short-term trades irresistible.

Reasons to be cheerful?

Are we saying goodbye to the bear? Current sentiment suggests we’re now moving into a bull market – often defined as a 20% gain from a bear-market low, which the S&P 500 hit last month.

While some are waiting to see if this bull market has legs – especially with more rate hikes expected this year – now could be the perfect time for investors to prepare for a new bull run or even invest in the market, if you have the spare funds to do so. After all, history suggests a correlation between the speed and depth of a bear market and how quickly the market recovers.

Bear with it

At Wellesley, we always champion the timeless, golden rules of investing.

This means being in it for the long haul, with a goal or plan to guide us, and acknowledging that there will always be times when markets are more volatile. Think about these events in the context of your long-term investment strategy. A key factor of this is compound interest, which allows your money to grow exponentially over time, a bit like a rolling snowball.

Hindsight is a wonderful thing, and history shows that, over the long-term, markets have produced strong returns despite wars, recessions and pandemics.

Investing in different asset classes – i.e. spreading your money across a selection of asset types, countries and sectors – can help moderate some of the risks, meaning your investments stand a better chance of achieving more consistent returns.

The proof of the proverbial pudding is this graph, which shows how each asset type has performed over the past decade. As you can see, there are plenty of ups and downs among all of the assets, both in the short and long term. For example, US equities topped the charts in 2020; however, in 2022 it was languishing in seventh place. What’s more, between 2015 and 2022, commodities jumped from the bottom of the chart (2015) to second place (2016) and then back down to the bottom again (2017), before leaping to the top spot in 2021 and 2022.

It’s true: no-one can predict which investment is going to produce the best returns year after year, and the best-performing investment in one year can often turn out to be the worst-performing investment the next. Being dependent upon the performance of one company can leave you exposed to societal changes and global crises.

Of course, it can be difficult to sit tight as your investments fall in value. But to quote Corporal Jones: ‘Don’t panic!’.

Judgement call

While the potential opportunities of the bull market apply to your personal finances, they’re also relevant to your business investments. Think about your corporate pension scheme, and choose funds carefully for your staff. Remember your expectations when you first took out the scheme may no longer add up, and the portfolio of underlying investments may have since changed. There’s therefore no time like the present to ensure your corporate pension strategy is in the best possible position for your team.

What’s more, if your business is booming, you may be keen to maximise this success. As taking a lump sum out of a business or taking money out via dividends, salary or pension payments all have tax implications, you may wish to consider investing the money over the medium to long term.

Following changes to corporate accounting bases, your company may have to value the investment annually and so pay Corporate Tax on any increase in value. Therefore, the investment you choose should meet two objectives. Firstly, it should have the potential of providing a better return than a deposit account in order to beat inflation, as well as provide superior investment returns over the medium and long term. Secondly, the investment should be structured so that Corporate Tax is only payable on encashment of units and not annually on any increase in value.

An equity unit trust is one solution that meets these objects – allowing you to invest in a broad range of stocks, shares and other assets without any Corporation Tax liability within the fund. They are ‘collective’ investment funds, pooling your money with that of other investors.

Provided the investment is not made into unit trusts that are ‘debt based’ – defined as holding 60% or more of investments such as interest-bearing cash deposits, government gifts or corporate debt – tax liabilities on gains will only arise on full or partial encashment. In other words, the value of the unit trust remains as its original value in your company balance sheet.

A common mistake is to ‘sit on’ cash and overestimate how much cash your business will need. Indeed, SMEs could be missing out by not shopping around for a better rate for their excess cash – the reserves not required for the day-to-day running of the business. How much you decide to withdraw depends on your plans for the future, both personal and for the business, and how much risk you’re willing to take when it comes to cash flow.

It’s prudent to discuss your plans with an adviser, who can help model how much ‘free’ cash your business is likely to require and what you need to achieve your personal goals.

Time in the market, not timing the market

We don’t know when volatility will happen, which is why it’s essential for investors to have a plan in place that you can stick to over the long term. Good financial advice can help you drown out some of the noise and continue to look at the long term when considering investment decisions – both personal and business.

We can also review your investment goals alongside the current opportunities – helping you take the bull market firmly by its horns!

Let’s start a conversation: 01444 244551.

Past performance is not indicative of future performance.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. Equities do not provide the security of capital which is characteristic of a deposit with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

SJP approved 28/07/23