Sussex Retirement Planning’s investment committee met on Wednesday, to discuss the world of investments and to decide whether any adjustments are needed in light of the changing economic environment.
We agreed that there is a lot to talk about in the investment world at the moment, as is usual, but there is one issue which is far more prominent than the others. Governments are keen to move away from providing support to their economies during the pandemic and on to working out how to pay for the support provided.
That means that governments around the world will be wanting to:
- Cease their Quantitative Easing (QE) programmes (which is the 21st Century method of printing money)
- Increase interest rates
- Raise taxes
None of these are simple things to do! QE was introduced after the Global Financial Crisis in 2007/8, as a temporary measure, and it has taken at least a decade for governments to stop it (and some countries haven’t managed to stop it at all). Likewise, interest rates were reduced after the Global Financial Crisis and analysts have talked about “normalising interest rates”, without anything much happening, for the last 12 years, until interest rates had to be reduced again in the midst of the pandemic.
Raising tax is relatively easy for a government with a strong majority, which is a few years from needing to be re-elected. There’s a budget on 27th October, so expect the Chancellor to be asking you to start paying for the COVID support.
The trouble is that a strong economy is a pre-requisite for any of them to take place. It does feel like we have a strong economy at the moment, causing the current supply chain issues and high job vacancies. And it feels like there is a lot of cheap money available in the City, with that money spilling out into private equity acquisitions of many smaller businesses.
But the Bank of England and the government are walking a tightrope. And it’s the same around the world.
On the one hand, there is the risk that the economy will carry on expanding too quickly, and that inflation will run out of control. On the other hand, there is the risk that the authorities will act too quickly and slow the economy too much with tax and interest rate rises. And, some other event (like the collapse of an enormous Chinese property company) could take it all out of the hands of the authorities.
It will take exceptional good judgement, and a bit of luck, for governments to exit the coronavirus pandemic with their economies in good shape.
We’ve been through similar but not identical times in the past. And each time, the answer has been the same – do the same things, but expect to have to do them for longer for them to succeed.
Generally, financial experts will tell you only to invest if you can leave your money invested for at least five years. If you invest for less time, there is a large risk that you will end up with less money than you started with.
But, in the current environment, we feel that’s not long enough. One of the pessimists on the committee suggests that ten years should be the minimum. But our agreed view is that a minimum of seven years is the correct minimum term.
That doesn’t mean that you shouldn’t take an income from your investments in the first seven years; it just means that you shouldn’t invest for less than seven years in the expectation that you can take all of your original capital out in the first seven years, having done better than by just leaving your money in cash deposits.
Philip Wise | firstname.lastname@example.org
Managing Director and Chartered Financial Planner