Index trackers provide cheap exposure to all the shares in a given index — the FTSE All-Share index, the AIM 100 index, the FTSE 100, the FTSE 250, or overseas indices such as Japan’s Nikkei 225 or America’s S&P 500.

They’re rightly popular with certain types of investor — novices, say, or those who don’t want to spend much time managing their portfolio, or those who want exposure to particular industries or countries.

But that doesn’t mean that they’re a smart move for everyone. Most index trackers aren’t suitable for income investors, for instance. Indices include both income stocks and growth stocks, and income investors usually find the dividends on offer from growth stocks to be too meagre for their taste.

And recent days have highlighted index trackers’ shortcomings for investors keen to avoid unwelcome turbulence in their portfolio valuations — those approaching retirement, say, or looking to liquidate part of their portfolio to fund a major purchase.

Bumps in the road

Global markets have had a bumpy start to August.

Japan’s Nikkei fell 12%, before clawing some of that back in a roller coaster few days. Elsewhere, the falls have been less extreme — or at least, less extreme as I write these words.

But with European, Far Eastern and North American all showing falls in the 3–5% range, it’s clear that traders are rattled.

By what, exactly? Two things seem to have conspired to bring about this nervousness.

Rattled traders

First, some American economic statistics — chiefly unemployment numbers — have been interpreted by traders as indicating that America may be perilously close to tipping into recession.

Personally, having looked at the numbers, and considered the alternative explanations, I think those recessionary fears are overdone.

But markets, remember, are driven by sentiment rather than facts. When traders are rattled, they’ll want to liquidate their positions, rather than risk being dragged down by markets falls. Better safe than sorry, goes their argument.

Second, there’s been a technology stock sell-off: some technology stocks are down by around 30% — particularly semiconductor stocks. The UK’s ARM Holdings, now listed on NASDAQ, rather than London, is down by a third in a month, for instance.

And in recent days, the contagion has spread to more mainstream technology stocks.

Pin, bubble, prick — and burst

Essentially, what’s happened is that some of the shine has come off artificial intelligence (AI). Semiconductor manufacturers — who make the specialist chips that power AI — were first to be affected, as the hype bubble started to deflate.

In America, Nvidia, for instance, was hit much like ARM, its shares having lost 30% of their value since the beginning of July.

Then it was the turn of the companies attempting to use those specialist AI chips to actually use AI to provide AI-driven services and products — Microsoft, Facebook-owner Meta, Google-owner Alphabet, and so on. All in, the companies in this AI ecosystem are often called the Magnificent Seven — Microsoft, Amazon, Apple, Alphabet, Meta, Nvidia and Tesla.

Their share prices are all down, as investors absorb the message that AI services and products are going to take longer to deliver then hoped, and be more expensive to develop.

Concentration risk

Which is rather hammering index trackers tracking America’s broadly-based S&P 500 index — the largest 500 companies in America.

How come? Because the market capitalizations of the Magnificent Seven dwarf those of the other global behemoths in the index such as Procter & Gamble, JP Morgan Chase, Exxon, Walmart and so on.

Remarkably, the five largest companies in the Magnificent Seven make up over 25% of the value of the entire S&P 500 index. All in, the Seven account for 30% of the index. And because America’s stock market is so huge, the S&P 500 makes up around 70% of those popular global index trackers, those tracking world stock markets in aggregate.

Meaning that just seven companies — all in broadly the same industry — are powering the pensions and life savings of significant numbers of investors.

Which should make many such investors rather uncomfortable, if they’ve got any sense. An index tracker is supposed to deliver cheap diversification — not extreme concentration risk.

Make your own decisions

Here at the Motley Fool, we believe that investors should control their own financial destiny, making their own investing decisions, rather than relying on costly fund managers and financial advisors.

That’s been our ethos right from the beginning, in the early 1990s.

Betting your prosperity and retirement savings on the Magnificent Seven is great, if that’s what you want to do. But don’t get sucked into doing so by default.

The post Could popular index trackers derail your retirement? appeared first on The Motley Fool UK.

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Malcolm holds no shares in any of the companies mentioned. The Motley Fool UK has recommended Alphabet, Amazon, Apple, Microsoft, Nvidia, Tesla, and Walmart.Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

On Friday morning, as the UK woke up to the enormous scale of Labour’s victory — and the Conservatives’ resounding defeat — my inbox began filling up with press releases and media commentary.

‘How to beat Labour’s tax rises!’ ‘Which taxes will Labour increase first?’ And â€˜How to protect your wealth from future Labour tax raids’ will give you a flavour.

OkayY, I exaggerate a little. But not much. And the last headline, it’s worth noting, is actually verbatim from an article in the normally sober Financial Times.

And in none of the coverage that I saw could space seemingly be found to point out that it’s been the Conservatives who’ve been clobbering investors and ordinary people with tax rises for the last 14 years.

It was the Conservatives who reduced the Capital Gains Tax allowance to £3,000 for the current tax year, down from £12,300 as recently as 2022/23. The Conservatives who slashed the Dividend Tax allowance to £500, a mere one-tenth of what it was when first introduced in 2016. And the Conservatives who elected to freeze income tax bands for seven years, dragging millions of us into paying higher taxes.

I’m not being political here. Just even-handed.

The real agenda isn’t about taxes

I’m going to go out on a limb here, and suggest that for investors — and especially investors in the UK stock market — the real story of the election is nothing to do with taxation.

It’s to do with the economy, with the UK’s trading relationships, the UK’s various regulatory regimes, and with corporate prosperity and investor confidence.

Let’s look at each of those in turn.

The past few years have damaged the businesses we invest in

When Tony Blair’s Labour government came to power in 1997, chancellor Gordon Brown very quickly made the Bank of England independent, giving it — and it alone — control over interest rates. No longer could chancellors change interest rates at will so as to influence opinion at the ballot box.

It’s difficult to praise too highly this seemingly simple and obvious act.

Trade relationships? Propelled by the extreme right of the Conservative Party, the Tories repeatedly voted down Theresa May’s deal with Europe, and opted for the hardest possible Brexit. Small- and medium-sized businesses up and down the country have suffered ever since. Bigger ones have just swallowed the extra costs. But there are extra costs, be under no illusion.

Labour is saying that it will try to renegotiate a better deal; a more sensible deal. Similarly, the post-Brexit regulatory regime in areas where we were abruptly yanked out of sensible pan-European arrangements — think civil aviation, medicines, and various industrial standards, for instance — lacks cohesion and capability.

Corporate profitability, investor confidence, and the UK’s status as a sober and reliable place in which to do business? Exhibit A: the chaos of Liz Truss’s short-lived 45-day market-melting premiership. Exhibit B: once again, Brexit, which sundered UK businesses’ free trade with one of the world’s largest trading blocs, located just 22 miles from the white cliffs of Dover.

Promising plans

Again, I’m not trying to be political here. I’m looking at this through the lens of someone with a post-graduate economics education, an MBA degree, and a career involving time working in industry, as well as management consultancy and business journalism — and of course, a UK-focused investor.

And yes, I know, for Labour it’s early days yet. Rachel Reeves has only just delivered her Bank of England speech on bringing back housebuilding targets, overhauling the planning system, and ending the effective ban on onshore wind farms. The intention — quite deliberately — is a building boom.

But the mood music, and direction of travel, seems clear. We can expect more announcements in the days ahead. I’d like to see the sovereign wealth fund turned into reality. I’m looking forward to seeing Great British Energy delivered, which will be good for British businesses as well.

And I’m especially looking forward to seeing Labour’s talk of industrial strategy turned into reality. British businesses to this day benefit from the network of industry-specific and technology-specific advanced manufacturing centres put in place by the Department of Trade and Industry, when Peter Mandelson was in charge.

And I think that we will see all these things, because somehow, this doesn’t have the feel of a government fixated on internal arguments, but one that seems intent of delivering, and showing that it can deliver.

A re-rating ahead?

And for investors, the prize is obvious. The FTSE 100 trades on a price-to-earnings (P/E) ratio well below European exchanges, and around half of that of the Dow Jones and S&P 500.

It doesn’t require much of a re-rating for all our portfolios to look rather healthier than they do now.

Will a Labour government deliver that re-rating? No one yet knows. But so far, the signs are promising.

And right now, while we wait to find out, UK plc could be as cheap as it’s going to get. Let’s hope so.

The post Could Labour actually be good for your wealth? appeared first on The Motley Fool UK.

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What makes for a good investor?

Over the years, I’ve seen good investors, and bad investors. And an awful lot of average investors. 

From the privileged position of being a Motley Fool columnist, I’ve even been able to interview some of the good investors — investors such as Anthony Bolton, Burton Malkiel, and Charles Ellis.

And if you’re reading this, Warren, the offer’s still open.

But what is it that differentiates a good investor from an average investor? Or a bad investor?

Some quite simple things, actually.

Good investors have a strategy

We’ve all seen them. “Magpie” investors that just pick up shares on a whim — a Sunday newspaper tip, a share that someone from the golf club recommended, a supposedly hot initial public offering, and so on.

There’s usually not much more to say about the resulting mess except to note the fact that it is, well, a mess.

Better by far to have a strategy. And even better to stick to it.

What might such a strategy be?

Investing in growth shares might be one such strategy. Investing for income might be another. Investing for global diversification might be another. Investing in resources and energy shares might be another.

And so on, and so on.

Good investors choose metrics that match their strategy

How are your shares doing? Ask this, and you’ll hear some awful answers.

“Dog Star Dynadrive is up 80%!” they’ll gush. Yes, but all your other shares are down 10%.

“Not so good: the dividends are really, really poor.” But what do you expect? You’re invested in growth shares. Some of your shares don’t even pay a dividend.

“The market seems very volatile at the moment.” I’m not surprised: you’re only invested in three shares.

“My portfolio is up 30%!” Yes, but over the same period, the market is up 40%.

And so on, and so on.

If you’re pursuing income, measure — and report on — income. If you’re pursuing growth, measure — and report on — that growth. If you’re only investing in oil shares, measure yourself against the overall oil sector.

And measure yourself against the market, or against a relevant sub-sector of the market. Simply being ‘up’ is not good enough: are you beating the market, and by a reasonable amount? Otherwise, a cheap — and probably better diversified — index tracker might serve you better.

The same with income: are you getting more — or less — income than you might with a reasonably low-cost investment trust, such as (say) City of London Investment Trust?

Good investors are opportunistic

Warren Buffett summed it up best: in the long term, the market is a weighing machine — but in the short term, it’s a voting machine.

Meaning that individual shares — or market sectors, or even whole markets — go in and out of fashion, and experience buoyant conditions, or not so buoyant conditions.

So when shares go ‘on sale’, these investors are prepared to buy. It might mean some short-term pain — and often does, in my experience — but market conditions, and market opinion, eventually change.

Leaving investors sitting on assets bought at attractive prices, and income streams larger than they would otherwise be. I’ve noted before my opportunistic purchases of Shell: £12.95 in 2016, and £13.40 in March 2020. They’re now over £28. And let’s not even mention the dividends.

Good investors invest for the long term

Good investors — as opposed to traders — are in it for the long term.

They understand that investing returns compound over time. They understand that timing the market is very, very difficult, and that it’s often better just to take a long-term view. And they understand that it’s perfectly natural for the market to go up and down, and that it’s better to simply ride out such fluctuations.

They don’t expect to get rich by next Wednesday. They don’t panic and sell out when the market turns down. And — wherever possible — they buy shares that are able to withstand economic downturns and adverse conditions.

How long is ‘long term’? Longer than five years. 10 or 15, at a minimum. And because they’re investing with long-term goals in mind — retirement, or early retirement, say — they’re sanguine about an investment horizon of 20+ years.

So there we have it

Do you recognise yourself in the above? Perhaps not.

But would you like to recognise yourself in the above?

You know where to start.

The post What makes for a good investor? appeared first on The Motley Fool UK.

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• A new risk has emerged for Rolls-Royce and it could send the share price back to 1,010p

Malcolm owns shares in City of London Investment Trust and Shell. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This year, the ISA — or Individual Savings Account — is 25 years old. Introduced on April 6 1999, you could invest up to £3,000 in cash, and up to £4,000 in stocks, up to a maximum of £7,000 each year.

Inside an ISA, dividends and interest are free of income tax, and any capital gains are free from capital gains tax. Granted, ISAs were subject to inheritance tax on death — if the overall estate exceeded the inheritance tax allowance — but even that has now been relaxed, with ISAs inheritable between surviving spouses and civil partners.

Not surprisingly, ISAs have been a huge success: around 22 million people currently hold an ISA, I’m told. And with the advent of fund supermarkets and online brokerages, it’s never been easier to stuff your ISA with stocks, rather than cash. Perhaps controversially, let me add something else to that last thought. Because with the closure of many High Street bank branches and building societies, it’s also more difficult for consumers to be suckered into cash ISAs offering derisory rates of interest, often below the rate of inflation – which has to be a good thing.

But can an ISA make you wealthy? Genuinely wealthy?

Or are they merely a ‘pin money’ savings vehicle, useful for building up smaller pots suitable for house extensions, new kitchens, or that dream round-the-world cruise?

Make no mistake: ISAs can indeed make you wealthy. Dividend reinvestment in a tax-exempt investment ‘wrapper’, it turns out, is a powerful tool for wealth-building.

For one take on just how powerful a tool this can be, the folks at online brokerage platform Interactive Investor have run a calculation, imagining that someone took out an ISA on April 6 1999, subscribed the full ISA allowance on April 6 every year since, and invested in an averagely performing global investment trust.

There’s nothing remotely complicated about such trusts — there’s a range of them on the stock market — and they’re simply globally-diversified ‘baskets’ of shares. And 25 years on, our hypothetical investor’s ISA balance would stand at £849,354.

It gets better

Now, that’s not a bad return: £306,560 invested; and a pot of £849,354 as a result. Granted, not everybody has the full ISA allowance to hand at the start of each tax year, but investing in smaller tranches over the tax year would be almost as good.

Suppose you can’t afford the full ISA allowance each year? After all, it’s now £20,000. Well, the helpful folks at Interactive Investor did another calculation: someone who invested £5,000 a year over the period — in other words, £125,000 in total. The two scenarios weren’t quite the same, it looks like around £425,000 would result.

But here’s the thing: some people do have the ready cash for the full allowance each year, and do invest it each year. And, what’s more, it appears that their investments do rather better than those of a hypothetical investor investing in an averagely-performing global investment trust.

Now, that’s not a bad return: £306,560 invested; and a pot of £849,354 as a result. Granted, not everybody has the full ISA allowance to hand at the start of each tax year, but investing in smaller tranches over the tax year would be almost as good.

Suppose you can’t afford the full ISA allowance each year? After all, it’s now £20,000. Well, the helpful folks at Interactive Investor did another calculation: someone who invested £5,000 a year over the period — in other words, £125,000 in total. The two scenarios weren’t quite the same, it looks like around £425,000 would result.

But here’s the thing: some people do have the ready cash for the full allowance each year, and do invest it each year.

And, what’s more, it appears that their investments do rather better than those of a hypothetical investor investing in an averagely-performing global investment trust.

The characteristics of ISA millionaires

ISA millionaires are a genuine phenomenon: Google the term, if you doubt me. Earlier this year, online brokerage platform Hargreaves Lansdown reported having 813 on it its books. And you don’t need me to tell you that a million pounds is more than the £849,354 delivered by an averagely-performing global investment trust.

Not surprisingly, all the big brokerages and investment platforms are keen to trumpet the number of ISA millionaires that they have. Many go further, publishing the investment habits and personal characteristics of their ISA millionaires.

They tend to ‘max out’ their ISA allowances each year. They’re mostly in their seventies — although quite a few are younger. (One of Hargreaves Lansdown’s ISA millionaires is an incredible 37.) They tend to invest their ISA allowances at the start of each tax year. They began investing early in life: some even invested in the forerunner of ISAs, Personal Equity Plans (PEPs). And they tend to be buy-and-hold investors, rather than traders – two-thirds of Hargreaves Lansdown’s ISA millionaires didn’t trade their portfolio at all, last tax year. But what is especially interesting is what they invest in — and how that differs from the typical ISA holder.

ISA millionaires’ favourite picks

First, as platform AJ Bell puts it, ISA millionaires tend to have “a preference for solid, established businesses that have been doing the same thing for decades. There are no speculative, blue-sky companies in their portfolios that have a bright idea but do not generate revenue.”

What sort of solid, established businesses, exactly?

Helpfully (as with some other platforms), AJ Bell provides a list. And those solid, established businesses unsurprisingly turn out to be companies such as Shell, GSK, BP, Aviva, National Grid, Legal & General, HSBC, and Diageo.

Second, they’re more open to investment trusts than the average ISA investor. They hold fewer funds — on AJ Bell, for instance, the typical holding in funds is less than half the holding of an average ISA investor — but hold markedly more in investments trusts: one and three-quarter times as much, in fact.

Which investment trusts, exactly? Again, AJ Bell oblige: Scottish Mortgage, City of London Investment Trust, HICL Infrastructure, Alliance Trust, Scottish American, Law Debenture, and Murray International. Again, that isn’t a surprise: older investors will typically have more experience, and will have worked out that investment trusts offer very similar diversified portfolios to expensive funds, but at a lower cost.

A very genuine aspiration

So there we have it.

25 years old this year, ISAs have a proven track record in building wealth: invest for the long term, and reap the rewards. Your own ISA may not be there yet, but don’t give up. Millionaire status is possible.

The post The tax-free route to millionaire portfolios appeared first on The Motley Fool UK.

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• Here’s what fresh legal news could mean for Lloyds shares
• A new risk has emerged for Rolls-Royce and it could send the share price back to 1,010p

Malcolm owns shares in Shell, GlaxoSmithKline, BP, Aviva, Legal & General, HSBC, Scottish Mortgage, City of London Investment Trust, HICL Infrastructure, Scottish American, Law Denture, and Murray International. The Motley Fool UK has recommended Hargreaves Lansdown, AJ Bell, City Of London Investment Group Plc, Diageo Plc, and HSBC Holdings.

Now a partner at pensions consultancy Lane Clark & Peacock (LCP), he submitted a Freedom of Information request after spotting some interesting figures about mortgages in a recent Bank of England report covering the fourth quarter of 2023.

Basically, reported the Bank, people were taking out long-term mortgages that ran on past their state retirement age.

Was this a growing trend, though? Sir Steve asked the Bank for prior-year figures to be prepared on the same basis, for 2022 and 2021.

35 years old, with a 35-year mortgage

And as a recent LCP press release highlights, the answer was a resounding ‘yes’: it is a growing trend.

In fact, reports LCP, among those in the 30-39 age bracket, over the past two years there’s been a 29% increase in the uptake of mortgages that run on past retirement age.

This perhaps shouldn’t be surprising: there’s the cost-of-living crisis, sky-high interest rates, sky-high house prices, inflation that exceeds many people’s pay rises — need I go on?

And so, predictably, people — particular young people — are taking out longer-term mortgages in order to get on the property ladder by spreading their mortgage costs over a longer period, thus keeping their monthly payments down.

Where once 25-year mortgages were the norm, we’re now seeing sizeable numbers of 30-year, 35-year, and even 40-year mortgages.

Gambling with retirement

Now, Sir Steve — rightly — worries about the impact of this on people’s retirement.

“The huge number of mortgages which run past state pension age is shocking. The challenge of getting on the housing ladder is forcing large numbers of young home buyers to gamble with their retirement prospects by taking on ultra-long mortgages. Serious questions need to be asked of mortgage lenders as to whether this lending is really in the borrower’s best interests”.

Well, yes. But preventing mortgage providers from offering long-term mortgages won’t be popular, particularly in a rental environment which is also expensive, as well as capricious.

Rightly or wrongly, I suspect that longer-term mortgages are here to stay.

Parallel investing to build a mortgage-paying lump sum

Now, what is all this to do with investing, you ask?

Simple — especially if you’re a younger person with a longer-term mortgage, or you’re considering a longer-term mortgage, or are the parent or friend of someone in one of those two positions.

Sir Steve, I believe, is right when he says that people are gambling with their retirements. In retirement, you shouldn’t be worried about paying your mortgage, or being forced to downsize. And you want to be actually in retirement, rather than working part-time — not because you want to, but because you have to, in order to pay the mortgage.

The solution, I believe, lies with investment: investing regularly, every month, in a stock market portfolio designed to make sure that you can pay the mortgage off on retirement — or ideally, pay it off well before.

And better still, as I’ve noted before, carrying out that investment in tax-sheltered vehicles such as ISAs and Self-Invested Personal Pensions (SIPPs), where capital gains and accumulated dividends are free of tax.

Meaning that every penny of gain can go towards the mortgage.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Flexibility is your friend

Now, you might well be thinking: why go to all the faff of investing ‘on the side’? If you can afford to invest, why not just go for a shorter mortgage period, and pay higher monthly payments?

The answer: because people want to leave themselves with ‘wriggle room’, both to enjoy a little of life, and to allow for some ups and downs in their finances. While you have to pay the monthly mortgage, you can vary the amount of your monthly investments as circumstances suit.

And of course, adding to your investments is also a good way of dealing with any windfalls such as bonuses.

In short, in many ways it’s the best of both worlds: low monthly mortgage payments, but flexible monthly investments designed to remove the element of gambling from your retirement, and hopefully holding open the door to even paying that mortgage off early.

The post Will a longer-term mortgage jeopardise your retirement? appeared first on The Motley Fool UK.

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• A new risk has emerged for Rolls-Royce and it could send the share price back to 1,010p

You could probably fill a decent-sized library with all the words that have been written about investment over the years.

Most readers of this column know the basics — even if they don’t all apply them to their investment decisions.

Price-to earnings (P/E) ratios, dividend yields, five-year or ten-year compound annual growth rates, cash flows, price-to-earnings-growth (PEG) ratios, gearing: these are the vocabulary of investment decisions.

And such metrics most definitely aren’t wrong — even if they sometimes provide investors with a greater sense of certainty than is really warranted.

You have to start somewhere, and those are undeniably numbers that matter.

Strategy, not selection

But there’s another question that also matters, and it’s one that I rarely hear being asked.

There is, I think, a reason for this. And it’s a reason that comes back to that comforting — if sometimes spurious — sense of assurance that numbers such as dividend yields and P/E ratios provide.

For the question to which I’m referring doesn’t have a number as an answer. The response comes in the form of a ‘yes’, or a ‘no’, or sometimes possibly a ‘maybe’, when asked when you’re considering buying a particular share.

Put another way, it’s a question that’s more to do with investment strategy, rather than the fundamentals of stock selection.

So what is this question, then?

Free lunch

Quite simply, it’s this:

“Will buying this share usefully increase my diversification?”

I know, I know.

I’ve written about diversification before, from time to time.

Yet huge numbers of investors aren’t adequately diversified — or even, often, really diversified at all.

Many, I know, rarely fish outside the waters of the FTSE 100 — the London stock market’s hundred largest shares. Some focus even more tightly, restricting themselves to those big consumer-facing shares with familiar names — companies such as HSBC, Tesco, Shell, GSK, Unilever, and British American Tobacco.

Diversified? Hardly. Which is a shame, because diversification can powerfully enhance returns, while reducing risk. Nobel Prize laureate Harry Markowitz, no less, famously remarked that “diversification is the only free lunch” in investing.

Stock diversification: an easy win

There are many facets to diversification — bonds, gilts, stocks, property, gold, cash: each arguably has attractions from a diversification point of view.

But there are also problems and challenges from a liquidity and practicality point of view. Even buying a small buy-to-let apartment costs a fair amount of money, for instance – you can’t buy one-tenth of an apartment, or a fraction of a house. Gold requires safe storage, and doesn’t earn an income. Cash depreciates in inflationary times. Bonds and gilts aren’t always the most accessible things for investors to get their heads around.

Restricting the consideration of diversification solely to stocks considerably simplifies matters, as well as lowering the liquidity barrier as well as making it more practical to implement.

Different sectors, different countries

And if we’re solely talking about stocks, then two areas of diversification that matter most, I think, can be summed up as sectoral diversification, and geographic diversification.

Both are straightforward. Sectoral diversification is about the sector, or industry, in which a given business operates. Geographic diversification is about broadening your investment horizons geographically — Europe, Asia, North America and so on.

Both are good. And the beauty of geographical diversification is that often it throws in sectoral diversification as a bonus. America, for instance, has technology giants — think Alphabet, owner of Google, Microsoft, Meta (owner of Facebook), Apple, and Nvidia — that are difficult to replicate with a purely UK focus.

Asia and Europe, in turn, provide their own opportunities for additional sectoral diversification.

London is just 3%

Europe makes up just 11% of the global equity market. America, 43%. Japan, 5%. Hong Kong, 4%. And the UK? Just 3%.

So a focus on a handful of shares from the FTSE 100 is a focus on a few of the largest shares in that 3%.

Which, when you think about it, isn’t really diversified at all.

So always think about asking yourself: if I buy this share, will it add an industry or sector that I don’t already hold? And if I buy this share, will it add to — or reduce — my geographic diversification?

Remember, it’s the only free lunch in investing.

The post The investing question that many don’t ask appeared first on The Motley Fool UK.

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• How much do I need in an ISA for a £668 monthly second income?
• In just 2 years, Vodafone shares would have turned £10,000 into this much…
• Down 9%! Here are 3 dangers that are emerging for Rolls-Royce shares
• Here’s what fresh legal news could mean for Lloyds shares
• A new risk has emerged for Rolls-Royce and it could send the share price back to 1,010p

Malcolm owns shares in HSBC, Tesco, Shell, GlaxoSmithKline, and Unilever. The Motley Fool UK has recommended Alphabet, Apple, British American Tobacco P.l.c., HSBC Holdings, Microsoft, Nvidia, Tesco Plc, and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

It can hardly be a surprise that UK consumers are feeling the pinch. Nevertheless, the Financial Conduct Authority (FCA) has commissioned a survey to pinpoint quite how much consumers are feeling the pinch.

The answer: a lot. A whopping 14% of those surveyed — equivalent to 7.4 million people — had struggled to pay bills or make credit repayments in January.

Granted, that’s better than the position in January 2023, when some 10.9 million people reported similar difficulty, but it’s still an awful lot higher than in February 2020, before the present cost-of-living crisis began.

Beyond that, the FCA press release doesn’t say much. So full credit to the Financial Times for digging into the detail of the numbers, and reporting a finding that’s both pleasing and surprising.

Cut the pension contributions last

What do people typically do when experiencing severe financial pressures? In addition to looking to reduce household costs, they tend to cut back in terms of saving and investing, usually. I’ve done it myself, in times gone by.

But the FCA’s survey highlighted some rather different behaviour.

Yes, consumers were indeed cutting back on non-essential spending and reducing their energy bills. But almost no one — just 3% of respondents, actually — had stopped or reduced their pension contributions.

Reality may finally be dawning, in other words: in retirement, we’re increasingly responsible for our own standard of living. You can’t retire to a champagne lifestyle if you’ve only made beer money pension contributions.

One size might not fit all

Now, it’s admittedly dangerous to read too much into broad brush statements about ‘pension contributions’. But taking the survey finding at face value, it’s certainly welcome news.

Yet how many of those pension contributions actually gave people the investment choices that they wanted, at an acceptable cost?

For Britain’s pension industry still has — at least in my view — too many fat and comfortable firms delivering anaemic returns while charging high fees. Fees that are in many cases totally uncapped: the percentage charged might decline as pension pots mount, but the upward rise is nevertheless inexorable.

And all while providing pension savers with all too little information — or control — in terms of quite what their retirement savings are invested in.

In short, it’s great news that people are maintaining their pension contributions — but not quite so good news that they might be cutting back in terms of the other investing decisions — in respect of ISAs and brokerage accounts — that might actually deliver the financial goals that they have in mind.

Is a SIPP the answer?

The obvious question: is there a way of combining the two approaches — creating tailored, cost-efficient, personalised investment decisions, all within a pension wrapper that people will still want to continue contributing to, even in straitened times?

The answer: yes.

There is an alternative — an alternative that should be attractive to many Motley Fool readers. But sadly, all too few people are aware of this alternative.

SIPPs — Self-Invested Personal Pensions — aren’t new. They’ve been around for decades.

And the basic idea is simple: they’re a pension ‘wrapper’, into which savers can put all kinds of investments — funds, certainly, as they’d invest in when using ‘traditional’ pension products, but also individual companies’ shares, REITs, bonds, gilts, and investment trusts.

As the ‘self-invested’ part of the name indicates, you’re totally in control: you’re not paying high-priced advisers, you’re not paying the hefty overheads of storied City fund management firms, and you’re making your own investment choices.

Pension investing your way

The key advantage — apart from the potential for lower fees — is that a SIPP gives you the flexibility and ability to conceive and execute your own investment strategies.

A given share looks cheap? You can buy it. A dividend stalwart is on an advantageous yield? You can buy it. You want to increase your exposure to American shares? You can. Bonds? Gilts? Again, you can.

You’re not tied to one investing strategy, or one fund manager’s views, or the funds of one single pension plan provider: you can literally do almost anything you like.

And — generally — pay less into the bargain, in terms of fees. Certainly so, I’d suggest, as your pension pot gets sizeable.

The best of both worlds

In short, it’s a way of buying shares — and other asset classes — in a way that’s just as flexible as a normal brokerage account or ISA, but which confers retirement advantages, as well as benefiting from tax relief on contributions. What’s not to like?

In hard times, you might have to cut back on paying into the ISA – but you can have the same freedom of choice in the SIPP.

Certainly, I’ve very much appreciated that freedom within my own SIPP, opened many years ago.

Where to buy a SIPP? There’s no shortage of providers, but I’d start with the big fund and share supermarkets and low-cost brokers. There are pricier upmarket options, but the market majors are certainly a good place to start.

The post Investing freedom — but inside a pension appeared first on The Motley Fool UK.

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• A new risk has emerged for Rolls-Royce and it could send the share price back to 1,010p

Fiscal drag is pernicious. Tax bands and allowances don’t rise in line with inflation — and inexorably, people wind up paying more tax, and even get dragged into higher tax bands.

As individuals, many of us can see that happening with our own finances at present.

But pernicious though fiscal drag is, there’s something even worse: actually slashing tax allowances, as opposed to simply not raising them.

It’s exactly what has been happening with dividend tax and dividend allowances, and it’s also — as of Jeremy Hunt’s Autumn Statement of 2022 — what’s happened to Capital Gains Tax (CGT).

For investors, neither are good news. But while there are reasonable levels of awareness around dividend taxation, the unwelcome change to the CGT threshold seems less widely appreciated.

Halved and halved again

Up to 2022, the CGT allowance had obligingly ratcheted up, year after year.

And in 2022, when the Chancellor stood up to make his statement, the CGT threshold for the 2022-2023 tax year was £12,300. But by the time he’d sat down again, the threshold for the 2023-2024 tax year had been more than halved, to £6,000.

And for the 2024-2025 tax year — the tax year beginning April 6 2024, in other words — he had halved it again, to £3,000.

With the result that a CGT tax threshold that low is going to drag an awful lot of people into being subject to a tax that they’ve never paid before.

Including — potentially — investors like you and I.

You can’t avoid forced selling

Now, you might think to yourself that CGT is only applicable if you sell your shares. And that, as a long-term buy-and-hold investor, you’re not likely to sell – or at least, not sell on a scale likely to attract CGT.

Unfortunately, life isn’t that simple. Over the years I’ve seen quite a few instances of investors reluctantly selling shares in order to finance more pressing obligations.

Yes, you can sell in tranches designed to be small enough so as to not trigger a CGT obligation — but that was a helluva lot easier with a CGT allowance of £12,300, rather than a miserly £3,000.

And sometimes, that option simply isn’t available. If a company in which you’re invested is taken over, for instance, then any price appreciation in the shares may make you liable for CGT. You can’t sell in tranches to an acquirer: your shares are acquired all at once. And any gain over £3,000 makes you liable.

Government gilts?

Now, a cut in the CGT threshold to just £3,000 is going to focus minds. Maybe not straightaway, but once it starts biting people where it hurts — in their bank accounts — then we can expect investors to think about changing their behaviour.

One obvious question: might investing in other assets classes be worth considering?

In particular, various investable assets issued by the government?

UK gilts, for instance — bonds issued by the UK government — are exempt from CGT. Some products issued by National Savings & Investments (NS&I) are likewise exempt.

The big drawback? The associated interest rates can be very, very low.

Gold coins

Another idea that I’ve seen floated in recent weeks is investing in UK government-issued bullion coins — gold, silver, and platinum.

Yes, these are exempt from CGT. But do you really want your investment returns solely linked to what happens to the price of gold and silver?

You might do well. Indeed, gold has done well over the past five years; silver not quite so well.

But the faff of safely storing and insuring physical gold is a drag on returns. And opting for various paper instruments — Exchange-Traded Commodities and the like — involves paying intermediaries’ fees.

It all seems a bit uncertain, in short.

Tax-sheltered share accounts

What to do, then?

The answer is really, really simple — at least, for investors keen on equity investing. Invest as you do now, but make sure to do it inside tax-sheltered accounts.

Namely, Self-Invested Personal Pensions (SIPPs), and Individuals Savings Accounts (ISAs).

These — at least under current tax law — are entirely free from both income tax and CGT. At a stroke, then, you can breezily ignore slashed dividend tax thresholds and slashed CGT thresholds.

And, quite reasonably, you’d expect a better income return than you’d get from gilts or NS&I products. And not pay CGT, either.

What could be simpler?

The post The Great Capital Gains Tax Grab starts now appeared first on The Motley Fool UK.

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• How much do I need in an ISA for a £668 monthly second income?
• In just 2 years, Vodafone shares would have turned £10,000 into this much…
• Down 9%! Here are 3 dangers that are emerging for Rolls-Royce shares
• Here’s what fresh legal news could mean for Lloyds shares
• A new risk has emerged for Rolls-Royce and it could send the share price back to 1,010p

The financial press has been rather bullish of late. Here’s the Financial Times from 15 March, for instance:

“Stock markets around the world have hit record highs this year as investors become increasingly confident that central banks have succeeded in taming inflation without triggering a downturn.”

America’s Dow Jones Industrial Average, to choose one example, closed at 39,131 on 23 February — an all-time high. It’s slightly below that now, closing at 38,714 on 15 March — but on a five-year chart, you have to look closely to see the wobble.

How about the more representative S&P 500 — America’s five hundred largest publicly traded companies? Yet another all-time high: 5,175 on 12 March. The tech-heavy Nasdaq? Same story — with the added fillip of the impact of artificial intelligence adding to the froth.

Global euphoria

It’s the same elsewhere. Japan’s Nikkei 225 has finally — 33 years on — beaten the market bubble of 1989, to reach its own all-time high. The EuroStoxx 50? Another all-time high. Germany’s DAX? Yes, you guessed it: yet another all-time high.

And so on, and so on. Among the major markets of the world, only Hong Kong’s Hang Seng and our very own FTSE 100 buck the trend.

The Footsie, in fact, peaked at 8,004 on 17 February 2023 — i.e. just over a year ago — and has oscillated lower ever since. On its most recent dip, in the autumn, it reached as low as 7,291.

And needless to say, lots of investors feel that they’re missing out.

Chatting to a few investors in my social circle, I’m hearing of money being pulled out of London, and invested in the S&P 500 — generally in the form of ETFs, but sometimes with a few tech giants added to the mix.

London, they say, doesn’t look attractive.

Sizeable disparities

And on the face of it, they have a point.

Over five years, the Dow Jones has risen 52.2%. The S&P 500, 82.7%. Nasdaq, 108.9%.

London’s Footsie? A rather more modest 7.2%.

Switching from London to New York is a no-brainer, you might think. As with that famous movie scene in When Harry Met Sally, you’ll have some of what they’re having.

But that is to miss two rather central points.

Think before you leap

First, these are markets that are at all-time highs. Is now really the time to buy into them? It’s tempting to not want to miss the boat, of course. Momentum could very well carry things higher — and probably will, in fact.

But even so, an all-time high is an all-time high. It certainly doesn’t scream ‘bargain’.

And relative valuations tell the same story. America’s Dow Jones and S&P 500 indices have price-to-earnings ratios in the low twenties. London’s Footsie and FTSE-All Share? Less than half that.

In short, in valuation terms, America is twice as expensive as the UK.

Warren Buffett’s hamburger analogy

As usual, investing legend Warren Buffett puts it well.

“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?”

As he points out, these questions answer themselves. But now ask the question again, but in the context of stock markets and share prices:

“If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?”

Again, the question pretty much answers itself. So why do so many investors cheer when their portfolios reach new highs, propelled by soaring stock markets — making future share purchases more expensive?

Don’t look there, look here

The moral is clear. Tears shed mourning the Footsie’s lacklustre performance miss the point. Relative to the American markets — and relative to many others, too — the Footsie and FTSE All-Share indices are cheap.

If you’re hunting for bargains, you’re more likely to find them in London, than New York.

The post Don’t mourn London’s woeful performance — exploit it appeared first on The Motley Fool UK.

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• A new risk has emerged for Rolls-Royce and it could send the share price back to 1,010p

The other day, my annual tax code notice arrived.

And my personal allowance — which, as with most people, is £12,570 — is now very largely swallowed up by the state pension. (Yes — I’m that old…)

So in the coming tax year, if my total earnings and unsheltered investment income exceed a sum just over £2,000 — and they will — then I’ll be paying income tax on them.

Frozen figures create a bigger tax take

It’s no mystery what’s happening here.

The personal allowance hasn’t changed since the 2021-2022 tax year, and neither has the higher rate threshold — the point at which individuals pay tax at 40%, instead of 20%.

Nor will either of them change until 2028, successive chancellors have said.

So consequently, many more people are being caught in the tax net with each passing year, until allowances and income thresholds — hopefully — rise again.

People who didn’t pay tax at all are now paying tax. People who paid basic rate tax are now paying higher rate tax, because their pay rises have taken their earnings above the higher rate threshold of £50,270.

Economists call it ‘fiscal drag’.

Fiscal drag in action

The other day, the Office for National Statistics published some figures — well, quite a lot of figures, really — in a lengthy and detailed annual publication called Personal Incomes Statistics 2021-2022.

The date is significant: that’s right at the very start of the post-pandemic seven-year freeze in allowances and tax thresholds.

But the data already amply illustrates successive chancellors’ miserly approach raising them in the past.

There were 800,000 thousand more basic rate taxpayers than the year before. 400,000 higher-rate taxpayers. And around 70,000 more additional rate taxpayers.

And over the next few years, experts expect that those numbers are going to increase quite significantly.

Squeeze the old

Most troubling is what’s happening with older taxpayers — those individuals above state pension age.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, sums up the situation well:

“Pensioners continue to make a huge contribution to the nation’s tax bill. They now account for over 20% of all taxpayers and almost 15% of total income. One in ten taxpayers is over the age of 75 — this is up from 7% in 2011/12 in a reflection of our ageing society.”

There were 6.74 million taxpayers of state pension age. 409,000 were self-employed, and 1.2 million received employment income. Sure, some people might want to carry on working after the state pension age — me, for instance — but, like you, I know of plenty of people who have jobs on the side because they actually need the money.

And quite a lot — the majority, in fact — are in receipt of non-state pension income, from either past employment or private pensions.

Taxation in retirement

What are the implications of all this for your retirement investment planning?

For those investing through SIPPs, then your pension income is taxable, full stop. And if your state pension and your SIPP income together exceed the personal allowance, you’ll pay tax.

ISA income? Under present tax rules, ISA income is free of tax. This is very handy when you’re building your retirement ISA pot (as is the fact that ISAs are also free from capital gains tax), but is absolutely crucial in retirement.

Because otherwise, you’ll pay dividend tax — a tax that didn’t used to exist, and in my view represents a double tax-grab on corporate earnings. In fact, says Hargreaves Lansdown, this year dividend tax is expected to rake in £17.4 billion for the chancellor.

For basic rate taxpayers, dividend tax (after the £1,000 allowance) is currently 8.75%. For higher-rate taxpayers, it’s a whopping 33.75%. Ouch.

Run for shelter

The bottom line?

In my view, things are only going to get worse.

This coming tax year, the dividend allowance shrinks to just £500 — a mere one-tenth of the £5,000 it stood at when introduced in the 2016-2017 tax year. Any investment income above £500, then you’re liable for income tax.

Yet large numbers of us continue to hold investments in brokerage and investment accounts — with fund supermarkets, for instance — that aren’t tax-sheltered.

Granted, it’s difficult, as you can — under present ISA rules — only shelter £20,000 a year. Limits also apply to SIPP contributions, at least in terms of the allowed tax rebates.

We’re almost at the end of the current tax year. From April 6th, we’re in a new tax year. Over the next month or so, you could shelter £40,000, if you have it sitting in unsheltered accounts. As many of us do.

Do it today. Your retired self will thank you for it.

The post Retirees are paying frightening amounts of tax. Don’t join them appeared first on The Motley Fool UK.

More reading

• How much do I need in an ISA for a £668 monthly second income?
• In just 2 years, Vodafone shares would have turned £10,000 into this much…
• Down 9%! Here are 3 dangers that are emerging for Rolls-Royce shares
• Here’s what fresh legal news could mean for Lloyds shares
• A new risk has emerged for Rolls-Royce and it could send the share price back to 1,010p

The Motley Fool UK has recommended Hargreaves Lansdown Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.