|
The monthly update: news, opinion and comment for your financial wellbeing
|
|
|
Don't just do something - sit there
|
|
Nobel Prizewinner Daniel Kahneman, author of the best-selling 'Thinking Fast and Slow' once said, "All of us would be better investors if we just made fewer decisions."
We're used to being urged to take action, move forward and 'do something' - so why should investing be any different?
Kahneman is referring to our urge to react to crises, or events we perceive to be crises. And you only have to look at movements in stock prices during a global economic event to see how that works.
As an evidence-based investor, of course, you are doing the right thing. If you're acting on your long-term plan to accumulate enough capital to fund a dignified and independent retirement - which essentially just means that you’re adding money to your portfolio whenever you can - you're more than likely doing the right thing.
Likewise, if you’re retired, and you’re continuously acting on a long-term plan to withdraw far less than mainstream equities’ long-term historic compound return of about 10% annually, you're also likely to be doing the right thing.
But if you had reacted to a crisis such as the 33-day COVID bear market of February/March, you may very well have ended up doing damage to an intelligent long-term plan/portfolio that you would find it very hard to repair.
In the months since then, the US, Chinese and South Korean stock markets have recovered virtually all of their losses, and the FTSE 100, about 58%. The UK's slower recovery is partly due to the fact that there are very few tech stocks listed, but if your portfolio is globally diversified - as yours should be - the early blip will have done little damage.
In global stock market terms, every every insoluble 'crisis' turns out to be some sort of blip. If you're investing for the long term, the best thing you can do when things get scary is sit tight and do as Daniel Kahneman says: don't react.
|
|
Student fees - to pay or not to pay?
|
|
If you have children approaching their late teens and thinking about going to university, chances are you've thought about how to finance their higher education career.
Student loans were launched in 1998 so that students would make a financial contribution to the cost of their education. If you studied at university before then, you were probably the beneficiary of a non-repayable grant, topped up by money from your parents.
Today, students can apply for a loan to pay their tuition fees and a separate maintenance loan to help with the cost of living.
From an original cost of £1000 per year in 1998, tuition fees now stand at £9250 for the majority of UK higher education settings. The cost is paid directly to the university from the Student Loans Company.
Students are also eligible for partly means-tested maintenance loans of between £3,410 and £12,010. The lesser figure is available to students living at home in a household with a combined income over £58,222; the maximum is payable to those studying in London, not living at home and with a household income of below £25,000.
Many believe that student loans (fees + maintenance) should be thought of more as a graduate contribution - an additional progressive tax paid by those who have had the benefit of higher education. Students start repaying their loans, at the earliest, in the April after they graduate, and not at all until they earn above the current threshold of £26,575 a year (£2214 per month). Then, they repay 9% of everything they earn above that. If the loan is still outstanding after 30 years, they stop paying and the slate is wiped clean.
The Institute for Fiscal Studies reckoned in 2017 that the average student will graduate with over £50,000 student loan debt. Interest is charged too - at a whopping 5.6% from this September.
That's a scary figure for most young people - especially those from disadvantaged households who are less inclined to go to university in the first place. But even the Government realises that the majority of students will never pay this debt back. Current estimates are that 83% of students will not repay their loans in full. Which begs the question of how effective it is as a way of funding universities - although that's a discussion for another day.
The big issue for many parents with a degree of solvency and savings is...
|
|
Should I pay for my child's university education upfront?
|
|
"Are you kidding?" we hear you say, "My kids have to start their working life with a £50,000 debt while I have the money to help them? Surely it's a no-brainer?"
The answer depends on a number of factors including whether you have the disposable cash to pay up front and how much help you want to give to your offspring.
Firstly, although student loans are a debt, they're not like 'normal' debt. Why?
- It doesn't affect your credit report
- repayments are proportionate to your income
- it's paid through the payroll, so you if you're not earning, you don't repay (although interest still mounts up when you're not earning, which is why some expect women to end up owing more than men as they are more likely to take career breaks.)
- It's an unsecured debt, so you won't lose your house if you can't pay it back.
So as debt goes, it's a good one to have. And graduates are more likely to get a better-paid job than non-graduates, so it's right to see it as an investment in their future.
Most parents, if they can, will top up their student offspring's maintenance loan and provide help with living expenses, but it's often a false economy to pay their fees upfront. Why? Because it may not all have to be paid back, for the reasons outlined above.
Money Saving Expert Martin Lewis has calculated that parents could lose out big time by paying their offspring's tuition fees upfront. If your child never earns above the threshold, you could lose over £27,000. If he or she earns an average graduate income, you could lose up to £30,000.
However if your child ends up earning big money with a starting salary of over £35,000 and above-inflation salary increases, you (or they) could gain over £32,000.
Here's Martin's calculations.
So in summary, if you're pretty sure your student will earn megabucks on graduation and your money is sitting there doing nothing else - go ahead and pay the fees upfront. However, before you do, consider how you could better use that money to support them:
- Invest in a home they can live in while they're at uni (and share with friends from whom you can collect rent)
- Pay their rent for them, so they can use their maintenance loan to have a good time (to be fair, most above-average income parents will need to help out in this way, anyway)
- Pay the deposit on a house when they're ready to buy
- Help them start their own investment portfolio, learning financial responsibility and the importance of compound interest.
If you have any questions about student finance or investing for your children, feel free to ask us!
|
|
Links we like that you may like too
|
|
|
Evidence-based investing insights - part four
|
|
Our Evidence-based investing Insights series aims to distill the key principles for a successful investing experience into an easy-to-read downloadable guide. We hope you've enjoyed parts one to three, issued along with May, June and July's newsletters.
Part four is called 'The full meal-deal of diversification'. We hope you find it both informative and enjoyable to read. Let us know what you think!
|
|
|
|
