INVESTMENTS...ARE YOURS SAFE?
INTRODUCTION
In 2003 K. A. Lincoln predicted that this economic crisis would happen so he devised a defensive financial strategy for investments, to protect himself and his clients, from the worldwide economic collapse he foresaw. He launched this ‘Safety First Strategy’ (SFS) in 2006 - after stock markets had recovered from their post 9/11 lows.One of our aims for this website is to tell as many people as possible about the SFS so they can benefit from the work Kim has done.
In the website you will find a great deal of explanation about of the causes of this crisis, because we feel that it is important for visitors to understand what is really going on in the world and that the problems we are experiencing will not just magically disappear, as in previous recessions, and that even if the root and branch changes to the money system are made now, it will still take a long time to turn the economy around.
Essentially the SFS is a simple solution and it has already helped many people sleep soundly in their beds.
As the media is bursting with comment and opinion on what the various ‘experts’ believe to be the best investments at this time, we have decided join the debate.
In this section we discuss the prospects for the main types of asset that make up the investment funds used in products like Endowment Policies; Stocks & Share ISAs; Unit Trusts; Investment Trusts and Insurance Company Investment Bonds and Pensions. We also review ‘With Profit’ and ‘Managed’ funds as they are commonly the funds of choice in people’s pensions, mortgage endowment policies and other savings schemes.
If you have come straight to this section without first reading any of our key articles; (i.e. ‘Greed is NOT Good’ and ‘Predictions for 2009) we briefly summarise below what we think is likely to happen with the economy and investment markets so you can see where we are coming from and how seriously we regard the potential problems we face:
- 25% unemployment (7.5 – 8 million). The present level is 6.5% (2 million)
- 1650 for the FTSE 100 – with little or no prospect of recovery – ever.
- An end to speculative investing but a boom in employee owned companies.
- Average house price falls of 40% from their 10/2008 peak.
- Deflation (price falls) of 20% over the next 5 years.
- 0% bank base rate and 0% interest on most savings accounts.
No one truly knows what humans will do when they are overwhelmed by the forces of fear, panic and greed. Therefore it is difficult - if not impossible - to say with any degree of accuracy how long this crisis is likely to last or what the outcomes for the economy and investments will be. What we can say is that the SFS was designed specifically to safeguard wealth from the sort of events we are witnessing now.In the last ten years we have had the dot com bubble; 9/11; the property bubble and more recently the commodities bubble. We have seen ‘irrational exuberance’ on a gargantuan scale and levels of greed and stupidity at the highest levels that beggar belief. AIG, once the world’s largest insurance company lost $62 billion in the last quarter of 2008 - the biggest loss in corporate history and the world banking system is teetering on the brink of collapse. What tragedies will befall next is any ones guess. These are tumultuous times indeed!
GOVERNMENT BONDS (aka GILTS)
- Gilts are fixed interest securities issued by the UK government and therefore guaranteed by the taxpayer. Gilts and cash are the only two major asset classes that have weathered the financial storms.
- We consider certain types of gilts to be the safest of investments in these deflationary times.
- The increase in new gilt issues to fund the ballooning the public sector borrowing requirement, has put downward pressure on gilt prices, but we believe that this will be offset by a wall of money that is likely to hit the gilt market soon.
- The Bank of England’s (BoE) policy of ‘quantitive easing,’ is having a positive effect on gilt prices now that it is spending its £150bn budget on gilts and other securities, in a bid to boost the money supply. With this policy the BoE plans to force the price of gilts up. Higher gilt prices reduces gilt yields (interest) enabling the government to borrow more cheaply as it can offer lower interest rates on future gilt issues.
- We believe that a ‘bubble’ in gilts is likely to occur when the base rate and stock markets have fallen to their lowest points and enough private and institutional investors acknowledge that this economic crisis is much more than a short term ‘correction’ and that we are in fact witnessing the collapse of the ‘fractional reserve’ banking system and all the ‘towers of Babel’ that have been built around it.
- If/when this gilt bubble occurs our plan for clients invested in our ‘Safety First Strategy’ is to sell their gilt holdings at what we judge to be the top of the market and then buy them back again once the price has fallen to a sustainable level. In this way income will be boosted - in absolute terms - and clients will also benefit from an increase in their wealth. The directors of K A LINCOLN > INVESTMENTS have invested all of their own money in gilts via the’ Safety First Strategy’.
- Gilts provide a guaranteed level of income – up to 2055 - with easy no penalty access to your money.
- Gilts provide tax free capital growth potential because they are the only investment not subject to Capital Gains Tax.
- Gilts benefit from an unlimited guarantee of security - provided by the taxpayer - against default. With most cash deposit account - except National Savings and Northern Rock - the Financial Services Compensation Scheme limit is £50,000 per person, per institution.
- In summary our prognosis for this asset class is extremely positive because taking everything into account we do not know where income seekers can get a better deal.
NB: Even though gilts are one of the safest investments they are not completely risk free. Therefore we strongly advise you to visit our ‘What are Gilts’ page for more information.
CASH
- We define cash as money held in current/deposit accounts from authorised deposit takers, like bank and building societies, where your capital cannot fall in value and is subject to the £50,000 per individual, per institution guarantee, provided by the Financial Services Compensation Scheme. Cash held offshore or with foreign banks is usually subject to different compensation schemes. Cash held in a deposit account is not classed as an investment and is therefore not regulated by the FSA.
- There are many different types of deposit account but most of them are of the variable interest rate variety where the deposit taker can alter the rate payable at will and is under no contractual obligation to pay interest. Fixed rate accounts are beneficial when base rate are falling but access to your money is usually restricted.
- As bank base rates have plunged to almost zero, savers have been severely punished.
- Competition for savers cash between lenders has stopped interest rates hitting the floor; but even so, the best rates for non branch based easy access accounts are only around 3%. The majority of accounts pay less than 1%. We expect the best rates to fall to around 2 - 2.5% soon. We do not see a return to much higher rates in the foreseeable future.
- A survey carried out in January 2009 revealed that most savers thought they are getting more interest than they were because they had not kept up with all the base rate falls after June 2008 when the base rate was 5.75%. Most people thought at the time they were asked that they were getting about 4% on their savings, when in most cases the actual rate was less than 1%. The lesson here is to check what rates you are getting now and repeat the exercise every month.
- National Savings and Northern Rock deposit accounts benefit from an unlimited government guarantee against default. National Savings, however, has a credit balance limit on all its different accounts.
- For those reliant upon their savings income, some gilts offer a viable alternative to cash because: they have an unlimited government guarantee against default; their interest rates are fixed and comparable with the best easy access deposit accounts; there is no investment limit and there is the potential for a capital gain, which is free of capital gains tax!
- In summary our prognosis for this asset class is mildly positive provided that savers do not exceed the £50,000 limit with any provider as we think that many more banks and financial institutions – with exception of the Mutuals - will go bust
To read our comprehensive guide on how to make the most of deposit accounts savings please click here
EQUITIES (aka SHARES/STOCKS)
- As our economy melts down, the nation has demonstrated its willingness to restrict spending to essentials. People’s mindsets have changed. We are now savers not spenders and unlike the government we prefer to pay off our debts - not take on more! Our actions will result in reduced demand, massive unemployment and lower company profits. As a consequence share dividends will have to be cut causing share prices to fall.
- The FTSE 100’s ten year high was 6900 before the dot.com bubble burst in March 2000. It then fell to a post 9/11 low of 3600 in 2003 and recovered to 6732 in July 2007. We said it would not exceed 6750. We were right.
- In the first week of March 2009 the FTSE 100 had dropped to 3500 - a 48% drop from its July 2007 peak!
- We forecast the FSTE 100 falling to around 1650 by the middle of 2010 - if not sooner. We do not think that any significant recovery is likely.
- We see Stock markets becoming increasingly volatile. Daily swings of 10% or more in the FTSE 100 and other major share indices may occur as markets are driven increasingly by fear, anger and greed.
- We do not see a future for speculative investing, as investor losses and lack of confidence are likely to kill off any remaining support for the market. The number of private investors in the stock market is already at an all time low!
- We see a glowing future for companies that are wholly owned by their employees and whose commercial activities are of benefit to all without harming the environment.
- The unknowns with equities are that good firms can go down for reasons beyond their own control - like a major supplier going bust. Investors can also fall foul of firms who deliberately misrepresent their financial position in order to support their share price. This is likely to happen more and more as the economy spirals downward.
- In every recession there will always be firms who do well - like pawnbrokers. And thus if you are clever enough to own shares in these firms - having sold your other holdings at the top of market - then you will do well while others lose. In the real world, however, even the best investors make mistakes and only 5% of fund managers beat the index. Warren Buffet, the world’s richest and most successful investor lost $11.5bn in 2008 and his firm’s annual income fell by 59%!
- If you think that overseas shares look more promising you need to beware of exchange rate fluctuations as large movements against sterling can bring loses even when share prices are stable.
- We think that on average the share prices in overseas stock exchanges will fall by a similar amount to the UK.
- In summary we think that individual shares are an extremely high risk investment and investment funds that contain shares - although less risky – are still highly likely to lose you money in the months and years to come.
- ‘With Profit’ and ‘Managed Funds’ usually contain a large proportion of equities.
- In summary our prognosis for this asset class is extremely negative.
CORPORATE BONDS
- Corporate Bonds are fixed interest securities issued by companies who need to raise money. Your capital is as safe as the company who issued the bond and bondholders come before shareholders in the order of creditors.
- With cash savings rates low the 7% income that some of the ‘safest’ bonds pay looks attractive.
- As the corporate insolvency rate is increasing so is the risk of these bonds. The longest dated conventional gilts, however, offer a potentially higher total return with much less risk.
- We see Corporate Bond values falling by slightly less than equities. We do not envisage any significant recovery.
- Corporate Bonds issued by supposedly sound businesses may appear safe on the surface but how can you be sure that the companies’ balance sheet is not stuffed with toxic assets - dressed up with an AAA credit rating - as has been the case with some of the biggest banks that have failed recently. About 40% of Corporate Bonds have been issued by banks!
- To those who say that the rewards from corporate bonds outweigh the risks we say why take the risk when they are safer alternatives with higher potential returns.
- As with shares we consider Corporate Bonds to be particularly risky at this time and therefore are best avoided.
- In summary our prognosis for this asset class is very negative.
COMMERCIAL PROPERTY
- Commercial property (i.e. shops, shopping centres, offices, factories and industrial units) has had a torrid time since the credit crunch started in August 2007.
- Commercial property values are largely driven by the amount of rent a landlord can get for a given property.
- Commercial property values are down by about 40 – 50% since the market peak as landlords have lost tenants due to the recession - forcing rents down. Previously landlords were able to demand upward only rent reviews in their lease agreements - now they get what they can, because of the dearth of solvent tenants.
- We expect commercial property values to fall further as the recession deepens so new investors are likely to lose money.
- Existing investors should seriously consider their position as any recovery could be a very long time coming - if at all.
- As with all things there are exceptions to every rule so whereas commercial property funds tend to follow market trends direct investments in individual properties may not. Direct investment, however, is not for the faint of heart and outcomes could range from the highly profitable to the totally disastrous.
- In summary our prognosis for this asset class is negative.
GOLD
- Gold is the currency of last resort – the ultimate flight to safety asset. In some circles it is thought that gold is solid sunlight and therefore possesses divine qualities.
- Gold is the one asset that is accepted as payment for goods and services wherever you are in the world.
- Gold can act as a hedge against inflation - though deflation is our problem now. If hyperinflation were to break out, gold would be the place to put your money and minted gold coins would be the best form of gold to buy.
- The price of gold is highly volatile as speculation in it is rife.
- Gold is not a protected investment but physical gold can be insured against theft.
- As the recession turns into a depression the demand for and the price of gold is likely to increase.
- Gold does not generate a regular or reliable income like gilts. If you want some cash you have to sell some of your gold.
- You can hold gold in a Self Invested Personal Plan (SIPP).
- Gold is difficult to keep safe from thieves unless it is held in a secure vault or safety deposit box - but even then it may not be totally secure. Storing gold safely cost money.
- In the short term we think that the prospects for capital growth are better for some gilts than gold.
- In summary our prognosis for this asset class is positive - but we are extremely positive about gilts.
PREMIUM BONDS
- Premium Bonds are issued by National Savings & Investments which is backed by H M Treasury. This means that your investment benefits from 100% capital security.
- Premium Bonds do not pay interest. Instead the bonds you buy are entered into a monthly prize draw where one £1 million jackpot can be won each month. There are lots of smaller cash prizes too.
- There is no set investment term. The minimum purchase is £100 and the maximum is £30,000. Prize money is free of Income and Capital Gains Tax.
- Premium Bonds can add fun and excitement to our lives and should not be treated seriously as there is no guarantee that you will receive a return on your investment - though those with the large holdings often claim to do well.
- The amount of money paid out in prizes is 1% of the fund which is the lowest return level since they went on sale in 1956.
- The odds of winning any prize are 36000 to 1.
- Like all national savings products the prize pot Premium Bond is linked to gilt yields.
- As the government has embarked on a policy of ‘quantitive easing’ in order to drive gilt yields down, the Premium Bond prize money pot is likely to shrink.
- Inflation will erode the value of this investment - though deflation is our problem now.
- In summary our prognosis for Premium Bonds is neutral
MANAGED FUNDS
- Managed Funds have been especially popular with people who have Personal Pension Plans, Investment Bonds and Stocks and Share ISAs because, like ‘With Profit’ funds, they have a broad spread of investments (equities; corporate bonds gilts and cash) allocated by an investment manager. However, this balanced investment approach is not working in the current economic climate as most of the asset classes that make up these funds - with the exception of gilts and cash - have lost money.
- Managed Funds are divided into three sub categories: Actively Managed; Balanced Managed and Cautious Managed i.e. in descending order of risk. The riskiest, Actively Managed Funds, will usually contain the highest proportion of equities and the lowest proportion of gilts and cash and vice versa for the least risky Cautious Managed Fund.
- The ‘Managed’ Fund sector has fallen by 15 – 25% from its October 2007 peak with most of that decline occurring since October 2008.
- The investment management industry is spinning the line that this recession will not last long and that investment markets will recover soon. We do not agree. Our assessment is that Managed Funds will carry on falling by a further 25 - 50%. This means, for example, that someone who had £100,000 in their Investment Bond ‘Managed’ Fund in October 2007 could potentially see its value fall to £35 - 60,000 with little prospect of recovery
- In summary our prognosis for the three types of Managed Funds is generally negative - though our negativity increases relative to the risk of the fund.
‘WITH PROFIT’ FUNDS
- ‘With Profit’ Funds usually contain the type of investments that Managed Funds have but with the addition of about 10 - 20% of the fund invested in commercial property.
- ‘With Profit’ Funds are either TRADITIONAL (with a basic sum assured to which annual bonuses are added and cannot be taken away and a terminal bonus that may added at maturity) or UNITISED (whereby the unit price rises in line with the annual bonus rate – but where a ‘Market Value Reduction’ can applied when the investment returns are poor that will reduce the value of the investment if surrendered at certain times).
- We have stopped recommending ‘With Profit’ Funds as they lack transparency and because we are no longer convinced that insurance companies have the best interests of their policy holders at heart.
- We do not think it is currently possible to manage a With Profit Fund, using the balanced spread of investments approach, without losing money. This is evidenced by the fact that With Profit annual bonus rates have been low for a long time now and most insurers are applying substantial Market Value Reductions when people surrender their policies. They are doing this because the equities, corporate bonds and commercial property that make up the greater part of these funds have fallen in value.
- We believe that prospective investment returns range from poor to appalling and that most of the insurers who operate these funds will not survive. Therefore, with some notable exceptions, investors who stay invested are likely to lose money.
- Most of the endowment policies that insurance companies sold are either of the ‘Traditional’ or ‘Unitised’ With Profit variety. Endowments policies sold by banks on the other hand were mainly UNIT LINKED and therefore invested in ‘Managed’ or other equity rich funds.
- In summary our prognosis for this type of fund is that we have serious reservations, because we believe that most insurers will fail, taking their ‘With Profit’ funds with them. And, for the policies of those insurers who remain, the question is: will even their best Traditional ‘With Profit’ policies be worth keeping - given the poor prospects for the economy - or would it be better to transfer the proceeds to where a return can still be made?
OTHER IMPORTANT POINTS TO CONSIDER
Before surrendering an insurance policy or cashing in any investment you should first check to see if you will incur a financial penalty and/or forfeit any guaranteed or other benefits such as life cover. The costs of leaving one scheme and entering another – if you are planning to switch investments – should be assessed so that you can make an informed decision as to the viability of the proposed transaction, before going ahead.
If you are not sure from your policy documents what you may lose, you should contact the company you bought the investment from or your normal financial adviser - if you have one. If you do not have an Independent Financial Adviser and you are thinking of switching an existing investment/s into our ‘Safety First Strategy’ or other investment you can Contact us and our Managing Director, Kim Andrew Lincoln Cert PFS CeMAP, will do what he can to help you.
In fact we will be happy to help you with most types of investment business on a limited advice or full advice basis – subject to certain conditions. Please go to Our Services section for more information.