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Tips on how to avoid ‘FOMO’ investing

Archive for February, 2019

Tips on how to avoid ‘FOMO’ investing

Wednesday, February 20th, 2019

We’ve all experienced FOMO at one point in our lives, or to give it its full name; fear of missing out. It’s the feeling you get when there’s an event taking place that you can’t attend. It’s the “But, what if?” when considering whether to turn down an opportunity. It’s the anxiety that is all too common when we want to agree to something but are over-committed.

In an age of social media and 24 hour news cycles, where there’s a missed opportunity or the promise of ‘the next big thing’ right under our noses, it’s impossible to avoid FOMO without becoming a hermit. (We’d hazard a guess that even the most ascetic cave-dwelling philosophers wonder what they’re missing out on!)

There’s no shame in experiencing a fear of missing out, it’s how you act on that feeling that makes all the difference. How often do we step out of our slow-moving supermarket queue to join what seems to be the fast-track only for it to grind to a halt as we watch our old queue fly past us? The same is often true when we switch lanes in the motorway. Getting your shopping home a few minutes later is hardly the end of the world, but when we apply the same principles to investing, the results can be much more severe.

Chasing a star performing fund is always going to be a risk. Trying to perfectly time your moves in and out of markets is extremely difficult, and even the greatest investors out there get it wrong more often than they get it right. The temptation that comes from FOMO is to make knee-jerk reactions and focus on the volatility of the markets, looking at the daily ups and downs. This can lead to irrational decisions. Your returns are not going to be a perfectly straight line from the bottom left to the top right of a graph, but that doesn’t mean you should jump ship and change lane at every inevitable up and down along the way. Patience is key to a sound investment philosophy and although it can be very tempting to try the quick-fix, if it sounds too good to be true, it usually is.

One way to counter any FOMO concerns is to have a properly diversified multi-asset fund. In the words of Harry Markowitz, pioneer economist, “diversification is the only free lunch in finance”, so don’t put all your eggs in one basket.

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What does a pensions dashboard mean for you?

Wednesday, February 20th, 2019

The development of an online pensions dashboard has been given endorsement from the government and looks as though it will get official approval in 2019. So what is a pensions dashboard? Keeping track of your pensions can be a real challenge, in fact there is currently over £5 billion worth of unclaimed pensions, sitting untouched. The idea of the pensions dashboard is to provide people with a one-stop-shop to access information about multiple schemes and see how much they have available to them. Ultimately, the more informed we are about our pension situations, the better the decisions we can make regarding our retirement.

This isn’t the first time somebody’s had this idea. In fact, the plan to introduce some form of pensions dashboard has been around for a while, but there have just been logistical issues in making it happen.The Financial Conduct Authority first approached the government in 2016 and issued the challenge to make a pensions dashboard available to consumers by 2019. With so much data to collect and so many different organisations involved, it’s not been an easy thing to implement but the end is in sight.

Pensions expert Ros Altmann welcomed the news that the Prime Minister has given official endorsement of the the development of pensions dashboard, stating that it will “help people keep track of all their pensions in one place,” and calling it an “invaluable tool in planning for later life.”

She also acknowledged, however, that there were still some hurdles to overcome. As older legacy pensions are not currently recorded electronically, the task of uploading all of that data will take a considerable amount of time and money. The auto-enrolment pension records, which only began in 2012, could be transferred to a central database relatively easily. This would provide a dashboard for younger workers, with legacy records being gradually updated at a later date.

An incomplete dashboard, however, may come with its own challenges entirely. Tom Selby, senior analyst at AJ Bell, voices his concerns. “The biggest danger is that people make poor decisions based on incomplete information – this situation must be avoided or the long-term damage to individuals and trust in pensions generally could be huge.”

Selby suggested that an incomplete dashboard could be a danger to the dashboard itself. “In the age of instant online banking, people rightly have high expectations of financial companies. A half-baked dashboard risks being discredited from the start.”

There will be a non-commercial dashboard hosted by the Single Finance Guidance Body, although financial services companies will also be permitted to host their own dashboards.

In the meantime, if you think you might have pension pots that have fallen by the wayside, there’s an easy tool to track them down at no cost. All you need to do is get in touch with the government’s Pension Tracing Service – you can find their details at https://www.gov.uk/find-pension-contact-details. If you have any other questions on this topic, do get in touch with us directly.

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What is the Innovative Finance ISA?

Thursday, February 14th, 2019

Innovative Finance ISAs (IFISA) are a little-known type of ISA that can see great returns. Here’s a summary of what they are and how they use P2P lending to secure steady rates of growth:

P2P lending

P2P lending stands for peer to peer. It’s founded on a pretty straightforward idea: you lend your money to individuals or businesses using a P2P platform as a middleman. Because the interest rates on loans are considerably higher than on savings accounts, they are often an attractive option. With P2P lending, you can expect returns of between 3% and 7% depending on the account you choose.

The IFISA

Three years ago this coming April, the government introduced the IFISA. This allows consumers to invest part or all of their £20,000 ISA allowance in P2P lending. On the surface, the IFISA seems perfect. It’s a tax efficient way of achieving high returns with relatively low volatility.

However, so far the IFISA has been a bit of damp squib.

In the 2017-2018 tax year, £290 million was invested in IFISAs, with an average of £9,355 per person. This might sound like a lot of money, but when you compare it to the £69.3 billion invested in adult ISAs the same year, it pales in comparison.

Industry surveys point the finger at a lack of awareness about the IFISA. Just 6% of Brits are aware of them. Whereas 75% were aware of traditional cash ISAs and 40% knew about stocks and shares ISAs in the same research.

Part of the issue is that P2P platforms have taken a while to bring their IFISAs to the marketplace. Almost three years after their introduction, only 36 IFISA products are available with regulatory delays cited as a reason for this slow uptake by major P2P platforms.

People who are already aware of P2P lending are far more likely to invest in IFSAs. More and more people are investing in IFISAs and it’s thought that much of this growth has been driven by existing P2P investors converting their existing accounts into IFISAs.

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What is a partial transfer?

Thursday, February 14th, 2019

You may have a defined benefit pension and be aware of pension transfers but not have heard of partial transfers.

A partial transfer is a pension option that allows you to cash in a portion of your retirement fund, while still retaining the rest as a guaranteed income. They are a way of accessing your defined benefit cash without taking on the risk of a full transfer and, for those with very large pensions, they can prevent you from exceeding your lifetime allowance.

Yet the vast majority of pension trustees do not offer these transfers. According to a report by The FTAdviser in March 2018, only 15% of schemes offered partial transfers.

Some trustees may be put off due to the complex administration involved. Helen Ross, actuary and investment consultant at XPS Pensions Group, however, sees no reason why offering partial transfers shouldn’t be the norm. “People are given binary options between either security or flexibility and there is nothing in between. Providing partial transfers is beneficial for businesses too, as it makes things simpler for consumers and it’s cheaper to do in the long run.”

With the reforms to the pensions market that we’ve seen in recent years, the doors have been opened to great freedom and choice for consumers accessing their pension pots. That comes with lots of opportunities but also bears the risk of people running out of money earlier than planned – particularly when performing a full defined benefit transfer. Mary Stewart, head of corporate solutions at LV, says, “we strongly believe there is a role for partial transfers to allow DB scheme members flexibility over their retirement options, while maintaining the certainty and security of a regular income.”

Members of pension schemes need to have access to the options and information to make good decisions about their retirement and personal finances. For some, a partial transfer may be what’s needed. If you think that may be the case for you, ask your scheme administrator if it’s a viable option and discuss it with your financial adviser.

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Why the panic about cryptocurrencies?

Thursday, February 14th, 2019

With cryptocurrencies being a relatively new phenomenon, it’s understandable that those who are yet to learn the ins and outs might approach them with a sense of scepticism. After all, any financial undertakings should be approached with a certain degree of caution, and with a solid understanding of the processes and the risks that come along with them.

With traditional currencies, since the departure from the gold standard, we rely on governments and central banking authorities to assign value to the denominations we use for trade. It’s a system that has worked for us up until this point with no need for an alternative, and it works because we trust in the ledgers keeping track of our transactions by banks across the world.

Where people generally feel at unease with cryptocurrencies is that the ledgers which track our transactions are replaced by a decentralised, anonymous, digital blockchain. Central banking authorities and governments are replaced by advanced algorithms which act as guarantors for the money. In theory, this isn’t anything new as we’ve happily put our trust in such algorithms to keep our chip and pin cards and our passwords secure in the past. Using independent blockchains, separate from a central authority which can hold a monopoly, allows transactions to take place not only more quickly, but also more cost efficiently.

Cryptocurrencies are no different from traditional currencies in that there are people out there who take the opportunity to commit fraud. One particular highly publicised example was from Australia in 2017, when AUD $2.1million losses were reported as being due to cryptocurrency fraud. Although this number is not to be discounted, the total losses attributed to fraud overall were AUD $340million so, in reality, less than 1% of all reported fraud was related to cryptocurrency.

We’re hardwired to fear change and be sceptical of new developments, and we’re much more likely to hear about isolated incidents of fraud than the masses of generally safe transactions. That being said, if you do decide to start using cryptocurrencies, make sure you’re sufficiently protected so you don’t find yourself in the position of one of the unlucky few who fall victim to fraud.

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As a parent, could you be missing out on your state pension?

Thursday, February 14th, 2019

There’s no reason why being a parent, and particularly being a non-earning parent with commitments to their children, should put you at risk of decreasing your state pension entitlement. Currently, however, there are potentially hundreds of thousands of people in this exact position – although thankfully, there are steps to take so that it can be avoided.

In order to be entitled to the full new state pension, you will generally require 35 years of national insurance contributions to qualify. Those years of contributions can be difficult to accumulate if you’re out of work for whatever reason. If you don’t already pay national insurance contributions, perhaps because you’re staying at home to look after children, you are able to build up your state pension entitlement by registering for child benefits, as long as you’re a parent of children under 12.

Figures supplied to the Treasury by HMRC suggest that there could be around 200,000 households missing out on these pension boosting entitlements. If the child benefits are being claimed by the household’s highest earner, and not the the lower earner or non-earner, these potential national insurance contributions can fall by the wayside. Treasury select committee chairman and MP Nicky Morgan says; “The Treasury committee has long-warned the government of the risk that for families with one earner and one non-earner, if the sole-earner claims child benefit, the non-earner, with childcare commitments forgoes National Insurance credits and potentially, therefore, their entitlement to a full future state pension.”

With 7.9 million UK households currently receiving child benefits, there is potential for a large number of people to be affected. Thanks to data from the Department for Work and Pensions, it’s suspected that around 3% of those (around 200,000) may be in this situation. It’s worth noting that the family resources survey covered 19,000 UK households and as the estimate is sample-based, there is some uncertainty on the exact numbers of those at risk. Nicky Morgan continues, “Now that we have an idea of the scale of this problem, the Government needs to pull its finger out and make sure that people are aware of the issue and know how to put it right.”

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