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Serve up higher net returns

As anyone involved in the financial planning sector will know only too well, nervousness over investing, a desire to retain access to liquidity and a general feeling of uncertainty over what the future holds, all have a huge influence in decision-making.

And there is strong evidence that a prevalent outcome is delay and, in many cases, effective paralysis leading to increasing cash accumulations fuelled by this fear-driven inertia. But holding cash brings its own fears. Fear over the security of the cash and fear over the diminishing real value of the cash.

However, it seems that these fears are outweighed by the fear of plunging back into the markets, given continuing volatility.

The experts say that trying to time the markets is a mugs’ game but much continues to be written about whether the bottom has been reached and whether consequent buying opportunities exist and, if so, for what.

Devotees of regular investment with a relatively long investment horizon will cheerily point to the well known principle of pound cost averaging.

If nothing else, these regular investors have the pain of investment decision making removed and move along on an auto-pilot of acquisitions, which, if maintained over a long enough period, may deliver acceptable results. That’s the assumption anyway.

These regular investors are likely to point to the relative cheapness of investments currently so that if the price does improve they will have bought cheap.

Of course, the other part of a truly successful investment strategy will be to realise the value when the value is high – always easy to do with the benefit of hindsight and less so without it.

A recent article in the FT considered what the economic upheaval has done to investors’ confidence in investing (particularly in equities) and how this is informing their actions.

Special focus was given to the US experience but the findings/sentiments, I believe, hold equally good for the UK.

I know that this column is supposed to be focused on tax planning but I believe that tax effectiveness is just part of the complete investment equation, and the secondary part at that.

That is not to say it is unimportant, it is extremely important, but it is secondary. The first part of the success equation is to invest in a way that matches the investor’s attitude to risk and, within these parameters, stands a good chance of delivering the desired return.

With this in mind, I thought it worthwhile reproducing a couple of extracts from the article “Is it back to the 50s?” written by Deborah Brewster in the FT of March 25.

US stocks have fallen more than 60 per cent in real terms since the market peaked in 2000. Anyone who started saving 40 years ago, when he post-war baby boom generation was just joining the workforce, has found that stocks have performed no better than 20-year government bonds since then, a forthcoming article by Robert Arnott for the Journal of Indexes shows. These people want to retire soon and the “cult of the equity” has let them down.

To find a period that does produce an outperformance requires a span reaching back a long way, The 2009 Credit Suisse Global Investment Returns Yearbook shows that, since 1900, US stocks have averaged an annual real return of 6 per cent, compared with 2.1 per cent for bonds while, in the UK, equities have beaten gilts with a return of 5.1 per cent against 1.4 per cent. The problem is that they can perform worse than bonds for periods longer than a human working lifetime.

These are just two of the extracts and I will refer to more next week and draw some conclusions then.

However, even at this mid-point in my consideration, it is worth reiterating that reinvested income yield is a critically important part of the process of delivering value from the equity part of a portfolio and that the selection of an appropriate tax wrapper for the equities can be extremely important to delivering the best ultimate return.

Even deferring tax on reinvested dividends as they accumulate, especially if there is the potential to plan to legitimately avoid or minimise tax when benefits are finally taken, can substantially reduce the tax overhead and consequently lead to greater net return. Especially at a time when achieving acceptable pre-tax returns is recognised to be even more difficult, ensuring that as much as possible of that return is retained is particularly important.

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