No downside to forward planning

With markets trading half-heartedly and newsflow decidedly limited, one of the festive period’s most attractive features is the time it affords to consider strategies for the year ahead.

Of course, this is not an activity limited to financial affairs: all week, people have been deciding what they’re going to do with the garden next year, whether they want to move house, or go on holiday earlier than usual, but for the time being, we’ll concentrate on investment, an area which, for many of us, is just as important.

Actually, I’ve been mulling over my investment plans for a few months now in a deliberate attempt to avoid being reactive, although this begs the question: why should we try to follow a master plan at all?

I suspect it derives from our propensity to save. After all, unless you’ve inherited wealth, it takes a long time to accumulate savings. It follows that we like to feel assured that subsequent investments are as thoroughly researched and as potentially rewarding as possible.

Economists maintain that by saving, we abstain from present consumption in order to enjoy greater consumption in the future. Saving, they suggest, is undertaken by families and individuals for a variety of reasons, most of which are linked to future provision. Although many economists define investment as ‘capital formation’ and maintain it can only be done by businesses, let’s not split hairs. Most of us save not to stuff cash under a mattress, but to make it work for us – or at least we should, even if that means foregoing current consumption.

Most investment strategies for 2013 and beyond are, naturally, determined by prevailing economic conditions which, many commentators suspect, may get worse in the medium term (another indefinable period beloved by economists) before they improve.

Despite retailer’s optimistic pre-Christmas predictions, consumers mostly avoided spending money until the sales arrived. Yet whenever they did spend, it appears that using plastic remains the norm.

I noticed this when, in typically blokish fashion, I bought my wife’s Christmas present on, ahem, Christmas Eve (sales assistants are obviously used to this and always smile and make a point of wrapping gifts before you’ve even asked). Anyway, having made my annual pilgrimage to a department store, I then pulled my wallet out to pay and handed over cash. “Oh,” exclaimed the sales assistant, “you’re the first person we’ve had in today who has paid with cash.” I was in Marks & Spencer at midday on 24th December.  

Why is using plastic still the norm? Property is my short answer: despite a flat residential market, the perceived value of our homes make us feel rich - artificially so if there’s a thumping great mortgage to service. Furthermore, there’s not much evidence of folks foregoing current consumption if my experience is a guide, though statistics appear to indicate a gradual fall in consumer spending.

Like many investors, I’ve tended to spread my investments broadly between equities, unit trusts, property and retail bonds in recent years. These will remain core to my plans, though I also intend branching out, investing more frequently in gold and investment trusts.

Several investment trusts have caught my eye this year, thanks mainly to their comparative stability and steady dividend flow. One has raised its dividend every year since 1966 and I like to think it will continue. Trusts benefit from being allowed to retain up to 15% of their income in a revenue reserve; accordingly, when dividends are abundant, they set cash aside to see them through more difficult times, hence the steady flow.

By contrast, gold may suffer from occasional short term volatility, but I’m prepared to take a long term view, an approach determined largely by a much bigger player in the gold market: China.

The world’s most populous country wants to move a sizeable proportion of its dollar-denominated reserves into gold. At present, around 2% of its $1 trillion reserves are gold-based and China plans to increase the percentage to between 5%-6% by 2020. The long-term effect on gold values appears obvious. Has it taken me the whole of the holiday period to come up with that? Not really – you should see what was jettisoned. Happy New Year.

posted on 29 December 2012 17:48 byPJS