Where to invest in 2016 – 7 tips from Plan Your Finances

Where to invest in 2016 - 7 tips from Plan Your Finances

Rather than warming slowly, the 2016 market was jumpstarted – even the first few days of the year had plenty of action, including nasty market drops in China, bomb threats from North Korea, terrorist attacks, oil prices at lows last seen in the early 90s, and even some good news from US employment numbers. With the US election on its way, tensions in the Middle East, valuations at historical highs and central banks beginning to normalise interest rates, the rest of 2016 promises to be exciting. So where to invest in 2016?

First, bear in mind our usual advice:
Individual investors should focus on saving enough and investing regularly in a balanced and diversified portfolio that fits their risk profile, not on specific investments.

First, because in the long term how much you save, and in what broad asset classes (like stocks, bonds and real estate) you invest will have a much larger impact on whether you have an adequate retirement fund than a specific trade or investment you make along the way. Unless that specific trade is very big and very risky, that is. And you should not make big and risky bets with your retirement money or kids’ college fund in the first place.

Second, because even expert asset managers and economic specialists get it wrong a lot of the time. Successful investors take on moderate risks and get things right a little over half the time, year after year. In the long term it adds up, but in any given year forecasts are about as likely to be wrong as they are to be right.

7 tips to know where to invest in 2016

Get serious about your Buy-to-Let portfolio
Real estate markets in prime cities such as London and New York have already become largely unaffordable following strong recoveries since 2009. There still are opportunities to act now in secondary cities in the USA and UK, but prices are rising and returns will diminish as money flows to them.

Spain, one of the hardest-hit countries in the crisis, began recovering later. So it is still possible to invest in major cities such as Madrid and Barcelona. But move fast – prices began rising in 2015. Berlin is another option if you want to invest in a capital city without breaking the bank.

Apart from property prices, it’s a critical time if you want financing for your property investments. With the US Fed raising interest rates at the end of 2015, other central banks are likely to follow over the coming years, which means that mortgage rates will also rise.

If you have the opportunity to lock in a fixed rate, now is the time. If you are looking at variable rate mortgages, it’s also important to make sure you won’t be in trouble once rates do rise.

If you already have an outstanding variable rate mortgage, consider re-mortgaging to lock in a fixed rate. If that’s not possible, overpaying to reduce your outstanding mortgage and interest payments might make sense for you: even if rates take a few years to rise, the current low rates are unlikely to last for the length of the mortgage. Whether overpaying is advantageous for you depends on the terms of your specific mortgage – talk to a financial advisor if you need assistance in doing the calculations.

Remember also that tax relief rules in the UK have recently changed for buy-to-let properties, which makes it harder to generate after-tax rents that cover mortgage payments.

Look to emerging markets
As we said, in the short term any forecast is about as likely to be right as it is to be wrong. But we can at least say that yields or prices are high or low by historical standards, or by comparison to other markets.
While developed stock and bond markets currently offer relatively low yields, emerging markets now offer much higher yields than they did a few years ago.

For the past few years, China has begun a shift from investment-led to (lower) consumption-led growth. Not only are Chinese investments now at more attractive yields than they were before, but the lower demand for commodities such as iron ore has hit the economies of other emerging markets such as Brazil and South Africa.

Of course, the question is whether the economic situation in these countries will deteriorate even further, causing the value of investments to fall and yields to rise even more. And if they do, how long it will then take them to recover?

Stock valuations, especially in the US, are at high multiples of earnings and interest rates are very low, so we wouldn’t judge you if you said that none of the major asset classes look particularly appealing right now, despite our recommendation that you should always invest regularly, even if markets don’t look attractive.

Having said that, given that 2016 might well bring surprises, hold a little extra cash. It could come in handy if markets are hit particularly hard or an excellent buying opportunity suddenly shows up. If you have a UK ISA, remember that they now allow you to hold cash, rather than require you to be fully invested in order to enjoy tax benefits.

As insurance premiums are driven largely by actuarial factors such as life expectancies and medical service costs which aren’t closely related to the performance of financial investments, it’s a good idea to check if you have the correct level of personal insurance.

Do you have enough Health and Life insurance? What about Critical Illness Cover, Total Permanent Disability Insurance and Income Protection? Are you absolutely sure that in an unfortunate situation of illness or death, money would not be a problem for you and your family?

Review your investment funds
With recent market moves, some historically successful asset managers were caught wrong-footed. And while in 2015 some managers shone by avoiding commodities and the stocks and bonds of commodity producers, now that they have hit rock-bottom levels, their calls will be tougher – they will have to wager on a reversal or on a continued deterioration of the markets.

Also, with low interest rates, every fraction of a percent you save in fees and expenses makes a difference. Make sure the fees you are paying on investment funds are reasonable considering their performance and type of management. Active funds usually charge more than passive funds, and those investing in overseas or more exotic investments charge more than those with more traditional profiles. Shop around to make sure there aren’t alternatives with comparable strategies, better performance and lower fees.

With thousands of investment funds out there, there is no reason to stick with managers you aren’t comfortable with. Within in each asset class, review the performance of your funds, consult your investment advisor, and consider whether any adjustments are due.

Track down, review and consolidate your pensions
If you are fairly advanced in your career and have worked for a few different employers, you may be entitled to pensions from previous employers that you have lost track of. Even if the initial pension was tiny, automatic adjustments over several years mean they could have grown substantially by now. The UK Department for Work and Pensions provides a website and phone service to assist you in finding lost pensions.

Once you have all your pensions on your radar, now is a good time to review their performance, just as you do with your funds.
To make it easier to manage them in the future, one option is to consolidate them. You can consolidate them under your current pension scheme or under a SIPP – self-invested personal pension, which offers you flexibility in terms of how you invest, in addition to tax relief on contribution and no further UK capital gains or income tax.

If you have worked in the UK and contributed to a pension but are now an expat, or are looking to move abroad, a good option for you might be a QROPS – a Qualifying Regulated Overseas Pension Scheme. This is a tax-effective pension designed specifically for British expats or international workers with UK pension rights.

Bear in mind that recent “pension freedoms” introduced by the UK government in 2015 also come with drawbacks. Taking money out of your pension could still land you with a large tax bill, for instance. It is best to consult a pensions specialist to ensure that you are making the most of your pension schemes.

‘Invest’ in having a financial advisor
If you do not yet plan your finances with the help of a financial advisor, consider ‘investing’ in one. Why?
Investment options are more diverse and complex than ever. It used to be that you’d have some savings in the bank, an employer’s pension, a mortgage and a house. Back then, managing your own finances with some common sense was easy. Nowadays, the diversity of investment options and providers is mind-boggling. Should you put your money in a BlackRock Emerging Markets ETF? Buy a property in Berlin? Go for a SIPP or a QROPS? An advisor can help you navigate the choices.

Interest rates are low, so choosing the best options makes a difference. Back when benchmark interest rates were close to 10%, you’d usually make a fairly decent return on your savings regardless of where you invested, and what the exact taxes and fees were. But with rates at their current low levels, getting your investments right could well be the difference between spending your retirement years on the beach or trying to make ends meet.

Your time is valuable. We often fail to account for the value of our own time. Ask yourself – if you were to price your time just as your employer does, how much would an hour of your time be worth? Does it really make sense to spend hours struggling to find the best options on your own, or would you be better off with a specialist who has done that many times before?

Where to invest in 2016 – summary

Rather than worry about specific investments on a year-to-year basis, focus on your personal financial plan, savings and overall investment portfolio. That will matter more in the long term.

With yields at low levels and some surprises in financial markets, now is the time to work on your property investments. In your financial portfolio, hold some cash in case opportunities show up, and if you are feeling bold, have a look at emerging markets.

Double check the details of your finances and make sure you are not ‘leaving money on the table’. Look at insurance plans, investment funds, pensions and hiring a financial advisor.



Chris has 9 years’ experience as a UK pension specialist and licensed financial advisor. He specialises in helping clients make balanced financial decisions to grow their personal wealth.

Chris is licensed with Holborn Assets, an award-winning international financial advisory firm established in 1999, with 10 offices and 15,000 clients worldwide.



UK Taxes: When is capital gains tax applied vs inheritance tax when a property is inherited?

On an inherited property, when is inheritance tax (IHT) applied, and when is capital gains tax (CGT) applied?

Investment Property – Is now a good time to buy?

Investment Property, is one of the major asset classes usually included in a portfolio, along with bonds and equities. It is attractive because it provides an inflation hedge at a moderate risk level. This article covers why it's a good time to buy investment property.