MONTHLY NEWSLETTER – MARCH 2024

The Importance of Retirement Planning

• Show if you will have enough money to retire when you would like to.
• Show if you could achieve your desired lifestyle in retirement.
• Help to utilise tax allowances including Inheritance Tax (IHT) planning.
• Help to identify any potential surplus or shortfall in cash flow.
• Plan several ‘what if’ scenarios and illustrate how they would impact your goals.
• Highlight how seemingly minor changes have the potential to dramatically change your financial future

How Cashflow Modelling Works 

As your adviser, we will keep up to date with your goals and objectives and can use cashflow modelling to ensure that you are on track to achieve them. This can show if you need to save more for your retirement, ensure that the level of investment risk is suitable and if funds will be sustainable for the long-term. This will give you peace of mind and ongoing monitoring means that changes can be made as and when necessary.
Darren Fuller – Clear Senior Paraplanner

The (Technical) end of the bear

The rising markets are called bull markets and falling markets are called bear markets, but why is this?
Here are various explanations as with most things in finance! One of the most common ones is that bulls attack by throwing their heads upwards, but bears swipe their claws downwards.
Another explanation includes the bearskin trade, or the Elizabethan tradition of bulls fighting in an arena.

At the end of January, the S&P (Standard & Poor’s) 500 climbed above it’s previous all-time high – a two year round trip.

Putting your eggs in different baskets

The saying goes “Don’t put all your eggs in one basket”. The phrase sums up one of the golden rules of investing – diversification.

Diversifying your investment across many different asset classes and geographies is the best way to control risk, smoothing out the ups and downs of the financial markets.

This chart looks back at asset class returns since 2005.There has been differences in returns between the best and the worst performing assets globally, none consistently ranking top or bottom. There really is no way of being sure what will do best or worst from one year to the next, but with diversification you don’t have to guess.

 This graph is marketing material and is not intended as a recommendation to invest in any particular asset class.

Time is one of the most important weapons in an investor’s armoury. The concept of ‘compounding’ can be thought of as a snowball effect, with the idea that a small investment could grow significantly when reinvesting dividends given time.
It’s tempting to buy assets when the price is low and sell them when they are at their highest,
particularly during volatile times.

This can be a difficult as the markets are so unpredictable, and there is a risk to long term returns.
The chart below shows the historical performance of a hypothetical £10,000 global equities investment versus if the best 10 days were missed. In this scenario the return would be nearly 50% lower, thus demonstrating the importance of time and patience when investing.

Getting into bed with buybacks

When a company is profitable, it can choose to reward their shareholders, but there are other ways that companies can distribute their profits.

A company can also choose to buy back some of their shares from their investors as a reward. Companies buy some shares from investors, then cancel them, deleting the shares from existence. The remaining shareholders then own more of the company, plus there’s usually a bump in the stock price from the buying.

Share buybacks are usually viewed as a one off event when they happen all the time, but dividends are seen differently and a company who stops paying dividends gets punished by the market.

Lots of businesses choose to use buybacks, Wall Street in particular. In the first week of February 2024, US companies announced $105 billion of planned buybacks, and S&P 500 companies are expected to buy $885 billion in stock this year.
The chart below shows just how much CEOs in the US prefer buybacks to dividends.
The jerky pink buybacks line is much more flexible compared to the steady blue dividend line.

Source:S&P Dow Jones.
Share buybacks have been attracting some bad press over the last few years, this is due to a number of CEOs being paid or rewarded with shares in the businesses they are running, usually in the form of options which don’t pay dividends. This is seen as a misalignment of incentives. A CEO might prefer to do buybacks than pay dividends, so the share price rises in short order. Even worse the CEO might rather do buybacks than invest in the business!

A good example is a US company called Bed Bath & Beyond a homeware seller like Dunelm here. In the three years following Covid the company made losses and racked up debts, but it also bought back $836 million of its own shares. During that period it’s CEO was paid $47 million of which only 7% was basic salary. That CEO left in 2022 and in 2023 Bed Bath & Beyond declared bankruptcy. If done irresponsibly, buybacks can be the source of long-term
disappointment, even though they can be exciting in the short term for shareholders.

The maths – Imagine a company worth £1,000, that has £200 of cash on it’s balance sheet and has 10 shareholders with 1 share each. Their shares are worth £100 each, 10% of the business.

If the company pays £200 in dividends there will still be 10 shareholders with £20 in cash and a 10% stake in a business worth £800.

If the company uses buybacks it will pay two shareholders out completely for £100 each which leaves 8 shareholders with an equal stake in a business worth £800. The share are still worth £100 but each shareholder now owns 12.5% of the business.