I know there are many of you reading this who took the advice of the doomsayers at the start of the summer and cashed-in everything, only to see the markets rising as if there was not a care in the world; but I guess with what happened in August you’re rightly sitting back now with some contentment.
Of course, hindsight is great and in the recent past of 2007/8 there was a credible alternative to being in equities and that was cash, as returns, especially if you had the nerve and ability to roll over three month deposits on the money market, would yield a real return, i.e. the interest you received was above the rate of inflation.
We now know that being invested in cash damages your wealth. With even the best deposit rates on offer and depending on how much you manage, it may mean that you have to run a spreadsheet to keep track of which bank or building society is “looking after”the £85,000, just in case it goes bust and you have to claim up to the compensation limit.
The counter argument to all this is that with the FTSE 100 down nearly 7% over the past 20 or so trading days, losing purchasing power of around 4% on your cash by having it sit, in a bank account doesn’t seem too bad after all.
Obviously, there is only so much one can suffer, and while away from the office during the summer I did something quite unusual with my wife. We, of course, waited until the children were in bed, opening a chilled bottle of wine, getting some olives and cheese we settled down and discussed what we should be doing with our ISA portfolios.
As regular readers of this column will know, this is an area that excites me, alongside pension planning, so you can either read on or just turn the page, but I could tell after Kathryn sank two rather large glasses before my first sip, she was thinking how lucky she was being married to an accountant and financial adviser.
I started by recalling how we had accumulated our portfolios, by initially having a plethora of plans, then consolidating them onto a fund platform and more recently, when the rules changed, transferring our cash ISAs from our bank onto the same platform, so the amounts were definitely worth managing.
Almost reaching for my glass, I was then diverted by the fact there were no olives left, but assumed that the anticipation must be making Kathryn hungry as well as thirsty, so I continued.
With the limit on pension contributions now being capped at £50k per annum and the ISA annual limit for this year being £10,680, I told her that more and more people aretaking the product seriously, so that’s what we should do, to which she nodded, lowering her head for what seemed a few minutes, which was obviously a sign of respect. I then decided that perhaps a lengthy discussion about the direction of our family ISA portfolio maybe wasn’t what Kathryn wanted on holiday, even though I could talk about this all night, so I concluded: “It’s all going to be about income generation for us going forward!”to which she again nodded and we settled down in silence, as Newsnight had just started.
As it’s unlikely that interest rates in the UK will rise in the next couple of years, looking at funds generating income streams that can be paid out tax free is going to be one of the best strategies for many.
Stating the obvious, but the higher a fund distributes, the higher the risk you accept in terms of credit quality, currency risk for overseas punts and sensitivity to rising interest rates or underlying sovereign risk, as seen in most European countries of late. I’m assuming that by contributing over the next 15 years to such funds they won’t create enormous amounts of capital growth, but it should give me an income flow that supplements retirement income and most importantly is tax free.
So the question that many of you will have now is how will I achieve this income nirvana? Here are my fund choices, but remember that these may not be suitable for you and your risk profile and objectives, so after doing your own research and if you are unsure, do get some financial advice.
Fidelity Income Plus 4.22
Investec Monthly High Income 6.22
JO Hambro UK Equity Income 4.21
Newton Asian Income 5.43
Newton Higher Income 7.15
I haven’t quite decided as to what % weightings this portfolio will have just yet, but if I invested equally across these funds, the current historic yield would be 4.54%, although with a target of around 5.5%, I’ll be doing some complex financial calculations prior to pressing the buy button and of course holding final discussions with my wife.