Mistakes to avoid in stock market volatility
Investors are getting hit with scary news and stock market volatility they haven’t seen since the beginning of the COVID-19 Pandemic. There are a few significant and problematic topics in the news headlines ranging from Russia invading Ukraine, the ongoing global COVID pandemic, and inflation, to name a few. These negative headlines could lead you to make some costly investing mistakes. If you are a day trader or speculate on the hottest stocks of the day, you should likely make major adjustments to your investment portfolio based on short-term news. On the other hand, if you invest for long-term goals like retirement or financial freedom, making significant adjustments to your financial plan based on daily news will greatly reduce the odds of reaching your various financial goals. Doing nothing may seem counterintuitive, but it is often the best course of action for those with a well-thought-out financial plan and diverse investment allocation. If you had a crystal ball and knew what the stock market would do every day, timing the market would be easy. The reality is that no one can successfully time the stock market consistently over time. You just need to be right too often. While a bear market is never fun, it is far from a crash wiping out the vast majority of the value of your portfolio. If you have been investing over the past few years, you likely have only lost some of the impressive gains you made during the recent stock market run-up. Stock market correction and bear markets are a normal part of the stock market cycle and do not mean we are heading to the next great depression or repeating the financial crisis of 2008. Warren Buffett famously said, “Be fearful when others are greedy, and greedy when others are fearful.” If you wait until all the news headlines are positive, you will have likely missed months, or even years, of positive stock market returns. When times get tough, you may be tempted to go to cash or stop contributing to your investment accounts until things calm down or the stock market has left a correction or bear market. But there will always be a reason to be negative. Trying to time the stock market is a fool’s journey to the poor house. You just can’t do it, and if you are just buying investments with every pay-check or automatic contributions, you will continue to buy stock on sale and get the long-term benefits of compound interest. The best general investing advice I can give is to set up automatic contributions to your investments, so you buy when times are good and bad. Have a diversified portfolio that is consistent with your financial needs and goals.
Planning for inheritance tax
While inheritance tax accounts for only a small amount of the overall tax paid to HM Revenue & Customs – around just 1% – it is a very emotive tax in that it impacts the people we care about. Latest figures show that HMRC’s receipts of IHT have risen from £5.3bn in 2020-2121 to £6.1bn in 2021-22. This increase is only partly explained by Covid-related deaths. Perhaps the most concerning increase in IHT is due to the nil rate band having been frozen until 2026. This, combined with rocketing house prices, is pushing more families into the scope of IHT. The good news is that relatively simple planning can save a significant amount of IHT. The bad news is that simple planning undertaken without sufficient tax and legal advice can result in unintended tax consequences. The most straight forward form of IHT planning is giving one’s assets away. Forty per cent of the value of surplus cash and assets will go to the taxman (after nil rate bands) if nothing is done. But if the intention is to pass on assets to the next generation, it would be wise to consider taking this step during one’s lifetime. Gifting during a lifetime does have complexities. These some of the most common:
- The 7-year rule: If you give away an asset, you need to survive seven years for the gift to be fully exempt from IHT. Surviving three to seven years will reduce the IHT due on the gift. This is called a potentially exempt transfer (PET).
- The gift needs to be absolute: If an individual gives away an asset but still retains a benefit this could be ineffective.
- Proving gifts have been made: Ensure sufficient records are kept so that executors or personal representatives can identify lifetime gifts. On death, it will be the executors who must provide details of such gifts to HMRC. An absence of information can result in additional tax being paid. The records kept do not need to be onerous, but sufficient information should be documented to evidence the timing and nature of the gifts.
- Be wary of other taxes: If an asset is given away that would have otherwise triggered capital gains tax if sold, for example a holiday home, then it is likely that CGT will be payable at the time of the gift. In the eyes of HMRC, if you give something away, you owe tax as if you have sold the asset at market value despite receiving no cash. As well as CGT, in certain instances stamp duty land tax will also be due if a property is involved.