Investing in equities could bring opportunities for dividend income and capital growth, but with the risk that dividends might disappoint and share prices fall, writes Simon Crinage of JPMorgan Asset Management
Equity markets have steadily appreciated in value, and returns for equity investors have shot ahead; there are big economic questions to which answers may only begin to emerge in the coming months.
Could the US be on the verge of a trade stand-off with China, and what might be the effect on world trade – and corporate profits – of any protectionist measures by the Trump administration? How might Brexit negotiations affect the outlook for business in the UK and the rest of the European Union?
Millennials are at risk of being the first generation ever to earn less throughout their lifetime than their predecessors
Faced with macroeconomic uncertainty, making the right investment decisions will be a matter of judgment. Facing up to investment risk will be important.
This is an area where millennials – individuals born from about 1984 onwards – could learn a lot from their older counterparts among the Baby Boomers and Generation X.
Comparisons between age groups in the UK are startling. A report by the Resolution Foundation (‘Stagnation Generation,’ July 2016), commenting on wealth inequality between generations, suggested that millennials are at risk of being the first generation ever to earn less throughout their lifetime than their predecessors.
Analysis by the Centre for Economic and Business Research (‘The Big Squeeze, December 2016) showed an increase in the wealth of the over 55s in recent years. Data from the Office for National Statistics (ONS) (‘Wealth and Assets Survey,’ October 2016) show that older people are increasing their share of total household wealth and assets in the UK with those aged 16-44 falling behind.
Why greater returns may come from investing
There are various reasons for this wealth gap. Older generations have benefited from rising property prices, whereas fewer young people have made it on to the property ladder.
Many older people enjoy pension rights under defined benefit schemes, with guaranteed pensions based on final salaries and years of service: most millennials will have to make do with defined contribution pensions.
These are disadvantages that millennials will find hard to overcome. But where they can match older generations is in the area of saving, investing and risk management.
Wealth matters in both the short term and the longer term; asset ownership is a source of stability and reassurance. Wealth can be accumulated over time by investing sensibly.
But for all types of investment, overall risk can potentially be reduced by diversification – spreading investments over a range of different assets
So what are the lessons in investment and risk that millennials could learn? First, it is prudent to save something, whenever and whatever possible. Second, although saving in the form of cash is risk-free (although inflation erodes its value) it doesn’t provide much of a return. Bigger returns can come from investing savings.
Investing involves risk, because returns are not predictable since the value of investments and any income from them may go down as well as up and investors may not get back the full amount invested.
Some investments are more risky than others, with greater volatility in annual returns.
Individuals have differing attitudes to risk. Some prefer higher-risk equities, with the prospect of larger returns; others prefer the lower risk in fixed income products.
But for all types of investment, overall risk can potentially be reduced by diversification – spreading investments over a range of different assets.
Diversification as an ISA solution
The wisdom of diversification is simple: the yield from some investments may be disappointing, but others will outperform expectations.
Investing in a diversified portfolio should mean that taken as a whole, with outperformers and under-performers offsetting each other, returns should be in line with expectations. But of course diversification does not necessarily guarantee investment returns and does not eliminate the risk of loss.
Diversification soared in popularity among the pre-millennials from the early 1990s, with private investors opening share dealing accounts, or investing in unit trusts, investment trusts or exchange-traded funds, all at a reasonable cost.
The Individual Savings Account (ISA) is another innovation of the late 1990s that millennials would be wise to consider.
Up to £20,000 per year can be invested through Individual Savings Accounts (ISAs). Investments held within an ISA are free of income tax on dividends and interest earned, and free of capital gains tax – tax breaks that improve overall investment returns. Of course, there are unavoidable taxes such as stamp duty, which is payable at 0.5% on share and fund purchases.
Different types of asset can be put into ISAs: many choose to wrap their ISAs around investments in unit trusts and investment trusts, giving them a stake in large diversified funds which invest in assets that are selected to provide regular income, or capital gains, or a mixture of both, to suit the preferences of their investors.
Income funds, for example, provide investors with regular income from the dividends and interest earned by assets in the fund, plus the gain from any increase in their market value.
Millennials may not enjoy all the advantages available to previous generations for wealth creation, but they would be wise to consider investing their savings, and potentially managing the risk through diversification.
Investments can provide regular income and capital gains over time, and have the potential to provide their owners with stability and reassurance through life.
This document has been produced for information purposes only and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P.Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. Both past performance and yield may not be a reliable guide to current and future performance and you should be aware that the value of securities and any income arising from them may fluctuate in accordance with market conditions. There is no guarantee that any forecast made will come to pass.
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