In this episode, Tamsin speaks to her colleague Steve Martin about investment and risk. When interest rates are high, why should we consider investing in the stock market or bond market?
Steve Martin
Steve Martin established Smart Financial in October 2008 and serves as its Chief Exec. He has around 20 years’ experience in the profession, having been a Partner and Managing Director at previous firms and is a Chartered and Certified Financial Planner (CFP), a holder of the Investment Management Certificate and is the lead trainer of CFP licence through the Financial Planning Training Academy. Steve was an active member of the Manchester branch of the IFP before its amalgamation with the CISI, holding the position of Chair from 2009 until 2014. He also used to sit on the Financial and Legal Sector Panel. He speaks regularly at Financial Planning meetings around the country and is also a regular contributor to a wide range of feature articles on financial and money management related subjects across trade, local and national press. Steve also leads Financial Planning Training Academy, a specialist training business set up to train financial advisers to become accomplished Financial Planners and the Change The Future TM Programme which is the leading, 'Coach the coaches" programme for Financial Planners.
https://smartfinancial.co.uk/
Tamsin Caine
Tamsin is a Chartered Financial Planner with over 20 years experience. She works with couples and individuals who are at the end of a relationship and want agree how to divide their assets FAIRLY without a fight.
You can contact Tamsin at tamsin@smartdivorce.co.uk or arrange a free initial meeting using https://bit.ly/SmDiv15min. She is also part of the team running Facebook group Separation, Divorce and Dissolution UK
Tamsin Caine MSc., FPFS
Chartered Financial Planner
Smart Divorce
P.S. I am the co-author of “My Divorce Handbook – It’s What You Do Next That Counts”, written by divorce specialists and lawyers writing about their area of expertise to help walk you through the divorce process. You can buy it by scanning the QR code…
Transcript
(The transcript has been created by an AI, apologies for any mistakes)
Tamsin Caine 00:06
Hello, and welcome to the Smart Divorce podcast, series eight. And in this first episode, I'm joined by my colleague, Steve Martin, who's going to talk everything investing. Once you finalise your divorce, it is not uncommon for you to have a lump sum, or a share of a pension that is to be invested. So Steve's going to go through everything about investing, everything about risk, and why you should invest your money rather than leaving it in cash. So let's jump right in. So today, I am joined by my colleague, Steve Martin, and we're going to talk today about investing. And you may wonder what that's got to do with divorce. But once you've received your settlement, and you have a lump sum, or you have a pension share, you're gonna want to do something with it, rather than holding it in a bank account. So Steve, is happily joining us to talk all about investing. And he holds the investment management certificate, which is why I've asked him to come and join us today to talk on this.
Steve Martin 01:22
I did wonder. Thank you Tamsin, thank you for having me on.
Tamsin Caine 01:27
Thank you for joining me, there is method in my madness. So I guess the starting point is for people who haven't looked after money before or who haven't been involved in investment decisions, why would you invest?
Steve Martin 01:44
I think at its very, most simplistic the idea of investing is about it's about sort of sacrificing, now for something in the future. So it's almost like a delayed gratification idea. So I need to put money aside now. And as I say, sacrifice my lifestyle, no, because I no longer need some money in the future. And the reason that we would invest in the way that we would understand investing, as opposed to simply putting money under the pillow in a safe, you know, in a bank deposit box, or, or in a, you know, just in a normal bank account, is usually because if if we're going to meet that sacrifice now, it would be nice to think that it bigger when we go to use it at some point in the future. So the basic principle of why would we want to invest is to get a reward for the sacrifice that we make now, by having more resources available to us at some point in the future.
Tamsin Caine 02:40
Okay, I got that. So the question that's asked me a lot at the moment, because we've seen interest rates go up over the last sort of nine months or so. And is, well, investments might go down. If I put my money in a deposit account, I can get for four and a half percent, maybe even five, it's a little while since I looked
Steve Martin 03:09
Just to be funnily enough, so yeah, you can get, you can get five on sort of maybe three, six months notice accounts, four and a half on instant access as an elite July time.
Tamsin Caine 03:22
So why would I not do that?
Steve Martin 03:24
A number of reasons, the most important being the even if you can get 5%, even if you're prepared to put the money aside for three or six months, and you don't need access to it, the 5% return that you get on your money you would then pay tax on. So if you're a basic rate taxpayer, your 5% is taxed at 20%. sooner, my math is decent. That means that you're going to get for that you actually get to keep which in the face of it, you think, Okay, that's great. I've got 4% more next year than I had this year. The only trouble is the inflation is higher than that to inflation is the reduction in the spending power of our money. So what we can buy with a pound this year, will not buy us the same amount of stuff next year, because of inflation. So inflation is so it didn't check, but somewhere around seven ish percent at the moment. So therefore, actually, what you're doing over that year, is guaranteeing that next year, that piece of money that you've set aside will buy you less than it buys you today. And if you think about what I said originally, what's the point of investing, it's about rewarding the sacrifice that you make by not spending it now so that you have more resource available to you to spend in the future. So it looks like a good idea to get those cash rates. Actually what you're doing is making your money less valuable in spending terms next year than it is today. Which isn't a great idea.
Tamsin Caine 04:57
Oh no, no, that sounds that sounds pretty sensible. So, the other thing that I hear often commented is investing is really risky. It's, it's really, it's really worrying, I could lose all of my money. And either, if I decide not to put my money in cash, maybe I'll just go and buy some property instead. So guess there's two bits to that question. There's the No. What's the risk? Bit? You know, how do I deal with that? And, and then there's the property thing, which most people in the UK understand investing in property, they can reach out and touch the bricks?
Steve Martin 05:42
Okay, well, let me answer the first bit and then forget the second. But you can ask me, again, because I think even your first bet has to there's two parts to that as well. So risk is a subject is an enormous subject, in fact, but fairly sure somebody's not very far from me on our video, call that a master's right into investment risk. And so risk in real life means do I want to climb a tree? Or not? Because I might fall out? Do I want to skydive? Do I want to drive my car really quickly? Do I want to start a business and leave my salary job? risk risk has got such a huge amount associated to it. And normally, in normal life, it's the risk of something pretty catastrophic happening. But I've just used it, why doesn't it really just kind of cheating, it's a play in there in one of those describer games, and then actually just seeing the word. So in normal life, the consequences of some of these decisions could be could be huge, you know, we went relatively recently to the Eiffel Tower. And there's that kind of guide lady regaled us of this story of a chat about 100 years ago, who decided he would jump off that middle level with a blanket, because you reckon that that was going to make them fly, they, for me, that was a super high risk decision, because needless to see, he's dead, and he was dead immediately. And apparently, because of the way the human body works, he actually had a heart attack on the way down, because the body worked out that was going to happen, so he'd had a heart attack before he's even having a great and, and I can't remember how high it is, but I think it's about 350 steps up. So I don't know, let's assume it's 100 metres or something. That won't be as much as that it's not all that far in the body has gone up with this thing, is you're gonna hit the ground near the city, then go again. So that is risk, you know, in the most preposterous are the same six. So if we take that general sense of what we feel as risk and how we how we react emotionally to the idea of risk, I mean, risk would be a simple The thing is, you know, letting your 16 year old kids go out with their friends in the town on the United States or Manchester on a on a Saturday night without being supervised, positively frightening. As a as a concept. So it's a really wide subject, but to bring it bring it back to investment risk differently in investments than it does in in the rest of the world. So there's two and the point of this whole story is there's kind of two groups of investments, some things where risk is a time issue, and, and some investments where risk is a bone of failure risk of losing everything. And the distinction that we would probably use as professionals is the difference between investing and speculating. So I could go to the bookmakers and put 10 pounds on a horse, and it could win at 10 to one, and I made 100 quid, yay. But the probability of that won't win, in which case I lose all my money, that is not investing that's speculating. So if it works, fantastic if it doesn't work, disaster, and speculating is something that we don't want to do, as part of an objective of taking the resources that we have at the moment and trying to make them have an increased spending power in the future, because there is a genuine risk of catastrophic and complete loss. And I think this is fair. For a lot of people. This is where the problem comes, the information isn't clear as to what is investing and what is speculating. So just to give some kind of common examples, but all is speculating. If you invest in cryptocurrency, you're speculating. If you invest in NF T's which for our younger audience, they might know what they are. I only know because my younger audience or you My children have told me what they are. So they Have some things happening that it's speculation. But on the on the other side, there are investments or investments where risk we can think about differently. So just stay with speculation for, for a sec, just just for a second. For me, the distinction between the two things is, we are speculating, if there isn't a genuine reason as to why the decision that we've made will increase in value. And that whilst we have it, we get some sort of return from it. So we're rewarded for holding the thing. We're not just waiting for some magical outcome in the future. Okay. So again, if we take cryptocurrency, as an example, I could buy bitcoin, or Ethernet or dodge coin, or whatever, and the time I hold it, nothing happens, I don't get interest, I don't get rent, I don't get dividends don't get scared, it's nothing, literally, nothing happens, I'm holding it, and I'm crossing my fingers that somebody in the future will buy it from me for more money than I bought it for. And as a result of that, nobody can make a financial model with any validity. That suggests why that should go up in value. And I can bore the pants off you with stories of this. But there's a very famous story from the 1700s, where people were speculating on poppies, and they bought them. And they kept buying them and it kept selling them, the prices kept going up until the day they did. And then the last person was left holding the baby. They lost all the money, because suddenly everybody realised why why are we spending this money on pockets. So therefore, in this speculating category, we've got things like cryptocurrency, as I said, we've got your NF T's, are waiting. help you out here. What other kind of example gambling on horses.
Tamsin Caine 12:02
That must be the biggest one, mustn't it.
Steve Martin 12:06
casinos or whatever else. And, again, there's no harm as part of a wider view of your finances, there's no harm in having a relatively small amount of money, if you like betting on the football results. So you're like going to the casino or you're like going to the horse is for a little bit of money to be allocated to that. But the trick is you have to allocate it on the basis it's lost. So when you still have an option, leave or go to Chester races sometimes, and I would go with 10 pounds to lose on every race. And that was my mentality, I was going to give the bookmaker 10 pounds on every race. And if he or she happened to give me some money back, it was nice that would go towards dinner. After we'd been in the races, I wasn't going there expecting to do anything other than lose 60 or 70 pounds plus food. Yeah. And the same goes for whether you you know, whatever else that is, if you you know if you've got some super hot tip, and you think that I don't know, let's say a year ago, somebody told you that video was going to be the future and you wanted to buy that one thing or buy on the basis that the money's lost to you. If that happens to go up in value, you can brag a bit at a dinner party or to your mates doing the same thing goes for crypto, if you've got 100 pounds that you want to gamble on, still go for your life. But don't gamble with the money that's designed to support and fund your lifestyle and your family's lifestyle in the future. Because that is actually what you're doing. So if we go to the other side, oh, gold, silver commodities, those are in that category as well. So you buy gold and hold gold and whilst you own it might be able to wear it on your finger or rent your neck or something. But it doesn't give you anything, you get no return. In fact, usually when you own gold, you have there's a cost associated, whether it's a security box at the bank, or whether you have it held in a vault or something, somebody has to be paid to, or even if it's just an insurance policy for your house, there's a cost associated to owning this thing as opposed to a return coming from it. Whereas if we go to the other side of that, even bacteria building society or bank example, bios, the bank's got your money, it's giving you a return. As I said before, the return that you're getting will be less than inflation. So it's not ideal, but it's still invest in sort of, because you're getting a return on the money. The money's doing something. So the broad kind of category of things that we would consider as investing would be cash would be property, and we'd be companies would be shares. And there's also a thing called bonds, or gilts, which is kind of where you lend money to companies or governments. And they give you a return as well. So that's the key distinction I want people to take away investing is something where you're getting a return whilst you're doing it. Speculating is where you're waiting on an outcome at the end as feel in to either make money or lose money, and you can make an awful lot of money or lose an awful lot of money. But whilst you hold that thing, you don't get any return for your money. So it can't be an investment by by my definition, enemy. So if we go into the investment stage, so if we start to think about investing as cash, these Bhandar, Gil things property and equities, when we invest in any of those things, they will give us a return. And they'll give us a return dependent on lots of different factors, but we'll get a return, we'll get a reward for actually owning it. So if you're in a property and you rent it out, you get, you get a return, you get rent, if you want shares in the company, and they make profit at the end of the year, the Distribute dividend, so you get a return for, for holding it. If you lend money to companies or governments, they pay you an interest rate for the use of your money. And suddenly in the bank, if you put money in the bank, as we know, we get an interest rate for for doing so. So we're now talking about investment. So the as I say, the most important thing, therefore is to understand the difference between investing and speculating. So we know stay in the investing category. And then start to think about risk. What does risk really mean? Or risk in an investment? Things? Is one of two things really, it's either a timing issue, or an income issue. What do I mean by that? So from a timing point of view, if you invest in any of those four things, cash, lending money to companies and governments property or equities. If we go back and look in history, it shows us the value of these things always go up. Always. And I can, I've got some data that I can give you, I think it's useful, but they always go up in value. The trouble is, they don't show up in a straight line. And here's the really annoying thing. The higher the return, the less street lighting, the returns that you're actually getting. So the highest the best returns that we get from investing, non speculative investing is investing in companies. And if we go back over 100 years, the return on investing in companies in the UK has averaged 12% per annum, and in global companies 13% per annum. However, we don't get this perfect straight line. And this is where people start to feel risk. Because whilst we have averaged 12, or 13% per annum over 100 years, some years the, the value of those companies will be up enormously. And some years they will have fallen enormously. So when I talk about timing being the issue, the risk that you have is that if you're not able to wait out that Titan, then you might have less money than you started with. However, I spoke to a lady recently, and we had a conversation about this idea of investment time horizon. Horrible jargon, okay, but basically the idea of meaning, how long am I going to invest my money. And she said, I think I'm going to think I'm investing it for one to three years. And she's in her late 50s. They said, You know, you don't invest in money for 40 or 50 years, depending on how long your your investment time horizon is the rest of your life. She's retired, she's got capital, she's got a couple of other bits and bobs going on. But her investments are there to deliver an income for the rest of her life. That income for her needs to keep pace or grow faster than inflation. So if we put that money into cash, we feel because the money will always underperforming patient inflation will always be higher than bank account rates. And then bank accounts, as we talked about our taps, they I don't want that to say misleading, all investments will be taxed unless they're in a tax advantaged structure. It's not an apples and pears thing. But the rest of the investments are likely to produce a return that's greater than inflation after tax, whereas bank accounts are likely to produce a return that's less than inflation. So we need to think about this idea of investing. And we need to understand the variability of returns and start to think about that rather than thinking about it in as risk in absolute terms. That's not too complicated.
Tamsin Caine 19:23
No, I think that I think that sounded, that sounded fairly straightforward. One thing to touch on so you mentioned about the loans to companies and loans to governments. So they're called bonds. Yeah. And there are numerous things in our world that are called bonds that aren't necessarily the same. That same thing, which I know is why you've said their loans to governments or companies when we're talking but I just thought it might be useful just to touch on the fact that they often called bonds. And there's lots of other things called bonds as well.
Steve Martin 20:07
Yeah, you're totally, you're totally right. There's lots of different things called bonds and the mean, they do mean completely different things. As I said, the bonds I'm talking about is fair. If you're a government, you can't go to RBS and ask for a 250,000 pay mortgage. Because what you're wanting to borrow is probably 3 billion. So and when you're a large company, so if you're a Tesco or Vodafone, or whatever else, same principle applies. You can't go to the bank and say, Can you lend me multiple million pesos, because that's something not possible. So what these institutions, as I say, either governmental or big companies do is they go to the investor market, and say, We would like to borrow a billion pounds because we need to fund I don't know our house building is too late. See, the government says I need to find the HS 200 got enough money, I want to borrow it. And here's my terms, I would like to issue and 100 Pain chunks, I'd like to issue a piece of paper that says I owe you 100 pounds to you, the investor gives the government underpayments, they give you a piece of paper back saying I owe you 100 pounds. And whilst I got your 100 pounds, for, for example, the next five years, I will pay you an interest rate of 4% per annum, or 6%, or 10%, or 2%, whatever. And so you give the government the money, you get your interest payments, as agreed by the terms, and then at the end to give you your capital back. And the rate that you get for these things, is effectively a negotiation between the person that wants the money, and the person that's going to give them money. I don't mean that on a one to one basis, we don't sit down with the chancellor and say, I've got 100 quid, what are you going to give me on my money, it's kind of as the market as a whole. So they would go to the market and see if we were to put if we were to ask for a billion. And if we were to offer a 5% rate payable over seven years who would buy it. And you know, the big institutional investors might say, no, no chance unit to make a higher rate than that. And you know, so it kind of ends up being being done like that. And again, the way that we access these things is usually through funnels rather than buying them individually, because it's too difficult and too costly to buy them individually. So usually what we would do for ourselves for clients is that we would buy them through funds, so that somebody else is doing that kind of negotiating on your your behalf. But again, we want to, we would want to make sure that those funds are as low cost as possible. Because we don't want to give any of your return away to somebody else unnecessarily. And so the idea is something that you know, most people be able to understand that I give you money, you give me an interest rate for a period of time, then you give me your money back. But we would use a fund to, to access that rather than trying to access ourselves.
Tamsin Caine 23:14
And so a funds where lots and lots of people, all club, club staff and just quits together or whatever that amount is and they would somebody would look after that negotiation on their behalf, as you said,
Steve Martin 23:27
yeah, it's a little bit like a wholesaler. So if you go to something like macro, for example, macro buys, stuffing huge volume from the manufacturers, and then still selling to retailers, who might be corner shops or restaurants or whatever else who are then going to sell it on to somebody else. So funds like a macro because they come wholesaler, in that sense that they can buy huge amounts of stuff at a very low, a relatively low price. And then the retailer's I us can buy little bits of that benefiting from kind of the buying power of the wholesaler. That's the idea
Tamsin Caine 24:06
up and so similarly to what you've just explained, with funds and funds, we would do a similar thing for shares. So so why would we do that for shares? Why wouldn't we just go and buy a share in Tesco, or Apple or Microsoft?
Steve Martin 24:26
I think there's a couple of reasons. The first one is that called that wholesale the seal, retail kind of concept that if people buy them individually European individual trading costs every time you do that, so you pay to buy the share up to up to sell the share. So it's partly that, although to be fair, in 2023, those costs are really low. If we go back 20 years, those buying and selling costs would have been really quite expensive. The much, much bigger issue and we could talk about this for days is about trying to diversify our risk. Again, we're into jargon. But basically what we're trying to do is make sure that we are not entirely dependent on the success or failure of a small number of companies. And so instead of buying Tesco the research and all the kind of economic research from the past shows us that the expectation that we would have, what rate of return would we get on our money doesn't increase or decrease if we buy one company, or if we buy 1000 companies, that we might be right, we might be wrong, but the expectation of the return doesn't change. The risk associated reduces enormously, because we're not dependent on the success or failure of one company, one CEO. One adverse comment to journalist as we've seen with NatWest recently, you know, the value of not waste has plummeted in the last week or so due to the friarage stuff. Because it's just one company that famous examples in the past of there was a BP pipeline, I'm sure lots of people will remember that blew up and poured oil into the Atlantic. And the value of BP dropped enormous. Lee, Enron's a famous company in the past where it became apparent that actually, it had been overstating its profits overstating its turnover. So if you buy one company, you have a real risk that something that a hasn't happened yet, or B you don't know about could happen and huge speed negatively or positively impact the return of suppliers. If we buy 1000 companies through a fund, again, through this wholesale kind of idea, then economic theory tells us we have the same expectation for increasing value over the long term. But we've known in the In my example, if we own BP, then we have a really negative experience for one out of 1000 companies, as opposed to one out of one company, if we bought that. And again, just a little history on that, very commonly in the past, and UK, stockbrokers would build what they call dividend portfolios. So there was lots of retired people, and especially there was, unfortunately, there was lots of widows who had investment portfolios previously built by stockbrokers. And they were invested in a relatively small number of well known UK companies to return to talk in mid 2000s here and for a long time in the past, when the credit crunch came in 2008 are the what's it called the great financial disaster are some there's all sorts of different themes. But when the world had a horrible time, in 2008, that specific set of companies because there was in general, only 10 to 20 of them, were disproportionately harmed by what was going on in the world, relative to the rest of the 1000s or 1000s of companies that you could have invested in. So for people who had made those kinds of investment decisions, the the suffered disproportionately to people that had invested in our wider suits. So in a very simple sense, we're trying to avoid being in a situation where something that nobody could have imagined, has an unnaturally big impact, big negative impact on the companies that we've invested in. And the way that we do that is to spread the money around as widely as possible. So that we minimise the impact of any one company or one sector, or one current, one country or one currency, having a bad time, and therefore massively impacting our, our money and our futures.
Tamsin Caine 29:10
Okay, that makes sense. So, where does property fit in to this, I guess, more than anything, you know, most of us in the UK own own our own homes. And it's it's not the same as that all across the world. But it is the case in in the show. And so as I said before we get it we go we understand property, I can, you know, fire by the patch on the corner, I can reach out and touch the brakes. I know it's there. If I invest my money in the investment funds that you've just described, that feels more scary, because I can't reach out and touch it. And I don't necessarily understand it thoroughly. You all know exactly where my money's going? So sure, why would it be a better idea to do that, rather than buying a house and letting it out.
Steve Martin 30:13
So I think if we, if we talk about it feeling more scathing, and that's an entirely natural response to something that's unknown. So if you've never invested in companies before, either directly or through this kind of wholesale fund idea been talking about, it's natural that you're going to have a have a reticence of fear, because you don't understand before you'd ever bought any property, you would sort of be in the same place. So we, there's a disconnect between the level of knowledge that people have, and that manifests itself in uncertainty, which is perfectly reasonable. So one of the things that people can do is educate themselves. So you can actually I mean, there's, you know, the internet's full of it, and you will probably got some resources that we can make available to people that they can have a look at as well. But you can learn and understand a little bit more about it, so that you start to feel a bit more comfortable. And again, if you were to invest in in that basis, you know, that kind of diversified bases, you can still go and touch things, you know, the most valuable company in the world. Unless things have changed in the last few days as Apple, you can go and touch Apple Stores, you can go and walk inside, and you can see people buying stuff you can see the what's it called Steve Jobs successor, and forgot totally forgotten his name. Tim Cook, Tim Cook, coming out and announcing the up, you know, the iPhone 15, or whatever, you know, these kinds of things are going on, you can see businesses advertising, so once you start to understand the big companies that you're involved in, you can actually start to get more of a feel for why do they make money? What is it that they do that makes money and therefore start to feel more comfortable about it? But in the kind of broader sense why? Why might we not just chalk all our money into property, because that's something that feels safe. And we understand, I think, for the last 15 years, that's been something that's been quite difficult for us to explain to people, because interest rates have been low margins for rent. So the difference between the rent that you receive, and the interest rates that you need to pay on your debt have been large. And certainly five plus years ago, the taxation environment was reasonably benign, reasonably friendly towards that. And there was that kind of sense of what will always be there. I think where we're at now, we've had six interest rate rises, I think
Tamsin Caine 32:46
it feels like a lot.
Steve Martin 32:50
Feels like a lot, doesn't it? So, you know, if we were to go on, you know, into the press and have a look, which in general, I would very much encourage you to never do, because it's usually full of nonsense, and not very helpful. But you will see continuing stories about buy to let landlords leaving the buy to let space. And it's for lots of reasons, partly their cost of borrowing. So their mortgages have gotten much, much, much more expensive than they had before. It's not an absolute, but there are less buy to let mortgages on fixed streets than that are residential. I saw some statutes. That said something like about half of buying to let mortgages are fixed rate as I think it was something like 80% of residential work were fixed. So you don't get that kind of locked in protection, you certainly don't get five or 10 year mortgages, very often in the buy to let space that can fix your mortgage rate. So for a lot of people know that a lot of buy to let landlords who are in a situation where the cost of servicing their mortgages is less than the rent that they receive in from their tenants. So you are now at this moment for a lot of people wanting to buy to let property has moved from being an investment to speculation. And the reason I say that is that yes, you are still getting rent in as a as a return. But the costs of servicing your mortgage have gone up sufficiently that if they live in that you may actually be funding the property to keep it alive. So your entire success or failure is dependent on the change in price in that in that property in the future. So as I say for the last 15 years, it's been quite a difficult story because everybody was thinking well interest rates are going to be lower forever. Rates are going to only ever go up. There's a big gap in between the I can capitalise and, sorry capitalise on strong words but I can benefit from it. and it can provide me an income. So the last year has shown that just because we're we had been in a period of calm doesn't mean that a period of trauma isn't going to correlate. So for a lot of people, now, they're going to have to sell these properties, because they can't afford to service them. And you think, Okay, that's all right, but my property have gone up in value. But again, if you're looking at the price at all, you'll see at the moment property prices are coming down, because unfortunately, the two things are related, the more expensive it is for me to buy your property, because of the mortgage, the less money I'm able to pay for it. So so we're in this perfect storm, in a sense that the cost of owning your bike to like properties going up significantly because your mortgage is going up. But the capital value of your property is falling down, because everybody else is having the same experience. So they can't afford to buy that property. From you. We've had clients as you know, in our business, who in the late 90s, when there was a massive property crash had a property portfolio that was worth somewhere in the region of 5 million pounds. And eventually, when they managed to sell out, they just got out where they've gone bankrupt. But the whole thing was lost. And other monies was lost in in doing that. And this wasn't somebody who bought, you know, an extra property or two extra properties to generate some money, it was as close to being a full time job as it so this was somebody who genuinely understood what they were doing. So it is not a risk free option. And property prices, again, if we look back over that huge time period, on average have gone up by something like 6%. So when I say the early are UK companies are going up by 12% global companies, their team properties are going up by about six, everybody less than is going to go Steve, that's nonsense, my property is going up so much more than that. And that's it. Yeah. And that's fine. But your individual experience doesn't necessarily represent the property market as a whole. And it all depends on timing, I can tell you, I bought a property in South Manchester in 2006. And I sold it this year. And it gone up in value less than inflation, which irritated me enormous. As you can imagine, only
Tamsin Caine 37:28
imagine.
Steve Martin 37:30
So the capital value was less so the spendable value of that property. When I got the money back this year, I haven't even sold it was less than what I bought in the first place. And that was in leafy South Manchester that wasn't in an attractive place to, to live. And I said to these days, why? Why is this happening? It just that just doesn't make any sense to me. And, and this was before the worst of the usually increasing stuff, potentially, maybe last year, so that I must be getting all because I can't remember every relatively recently, but before the works of the Morgan sanctuaries. And basically what he said is that the the view of the buyers inside Manchester have changed, they no longer they no longer see where that property was, is being sufficiently premium over the alternative areas to pay in excess. We don't when we bought that property that was it was very clear that this was kind of a premium area. And people would happily pay more money in order to be able to buy into that nobody could have predicted that was gonna happen 1516 years ago. So over that period of time, it was a house that we lived in for most of the time. And, you know, as you know, we now live in Spain. So we don't live there all the time. So we made some money out of renting it. But then when we sold it actually, the capital returns, so the growth in the value of our investment was less than inflation. So as as a return, that will probably wasn't massively similar to putting the money in the bank. But we've had some rain on that rent we pay tax. And again, I touched on this briefly, and I don't want to do it in too much detail. But if you look into it more that are less and less tax benefits associated with owning property than they used to used to be, well, basically anything that you spent money on to improve the property or anything and your mortgage, you used to be able to offset against your rent for tax purposes, you can't do that anymore. So if we're going to look at trends of you know, on a bigger picture, and that's kind of what we have to do, because everybody for as much as I can tell you that story about my property. I could also tell you a story about the property that my wife bought 20 years ago and we sold before we bought that property and it doubled in value in about four years. Yeah, so I'm not trying to distort the story, but I just want you to it's important that you understand that you can do the right thing by in the right place by what seems like a sensible property of a four bedroom house adjacent to two highly regarded state primary schools, they'll didn't make more money than inflation over over a 10 or 15 year plus period. But the markets were going against it and the the reduction in buy to let landlords the especially in Scotland, the ever increasing difficulty in removing tenants from your property, even if they don't pay rent, there's been a kind of an extension of some of the COVID rules around this that have just perpetuated. So it's getting harder and harder to make money, or buy to let properties. And the one thing, even when people do make money they usually ignore is their own title. So as you know, Tamsin, I am absolutely handless when it comes to jobs around the house, Bill, if the plumbing breaks, I need a plumber. If there's something wrong with electrician, electricity, I need an electrician. If the kitchen is refitting I need a kitchen. No, there's virtually nothing that I can do within the property. So actually, I become a reasonable benchmark for for this are a case study, at least, that a lot of the returns that people get in the properties, if they were truly honest about it, is actually a payment for their labour. So they bought the property, they wrecked the kitchen, they put a new kitchen, and they painted and decorated it themselves. So they are friends, they don't cheat. He paints the carpets and they laid the carpets, etc, etc, etc. Nobody keeps a log a timesheet for the time that you've spent doing that and builds that in to their calculations. Now, if you're a painter, and decorator or a trades person, and you can write up your trades, people needs to come and help you. And you're happy that you're a nine to five job is that and your side hustle effectively is to do this and get all this work done, you might be happy with that treat. All I want you to be clear, is that a decent part of the return that you get is a reward for your network of trades people, rather than actually the property market per se giving you that return. Because if you're absolutely hopeless like I am, and you have to pay market price for all of those things, the return is significantly less so you're actually getting a reward for work. They my argument in many cases would be that I am better spent at work, working and trying to earn money through what I'm actually professionally qualified to do, rather than trying to earn money in a second job, that I'm hopeless.
Tamsin Caine 42:47
That sounds fair. We are coming to the end of our time together. But I'm just aware that there is one aspect that we haven't touched on yet, which is commercial property. Okay, so how does that differ? From what we've just talked about in terms of residential property?
Steve Martin 43:10
I'm sure commercial property is is very different. Actually, commercial property is valued almost always, as a multiply at a rate should we think about what and that's both from a surveyor point of view, but also a trading point of view. So people will buy commercial property based on x times the rent that that property generates, because actually, in that case, they're buying the rent, rather than really buying the capital. commercial properties, again, completely different people will stay in long term leases. So there isn't that risk that your tenant leaves or whatever. It's predominantly businesses that are going to rent that property. And so a lot of the kind of social protections that governments put in place to private tenants, doesn't apply to commercial tenants. There's a few other things to bear in mind. Not always, but a lot of the time commercial property investment. So debtless people are actually buying the thing outright. there for the yield, but sorry, I've just gone jargon again, the return rent that they get. They actually get all that there's not that they're having to pay mortgages and stuff like that. The other massive differences, commercial property leases almost exclusively place the entire burden of responsibility for maintenance and repair on the tenant. So if I want a commercial payment system, it's worth a million in payments, and I got a rent of 60,000 pounds per year. I get my 60,000 pounds a year. If something happens with the roof, the tenant fixes if it needs, paint them decorate, the tenant deals with it. The council tap out there or they read the tenant pays for it. To be fair, you're by too late. property, the tenant will pay your case at times as well. But every all of the costs are paid by the tenant. And the majority of leases will stipulate that when the landlord gets the property back, it must be in exactly the condition it was when it was when it was laid out in the first place. So if you've been in, you know, if you're in the tenant, you've put some partition walls or done various things, you've got to knock all of that down, and have it replaster, repainted, re whatever, to make, absolutely perfect. So all of that bit that I was talking about before, but by me being having zero skills, and other people having skills but not recognising the time that those skills were were being used doesn't apply in commercial property. So when we're in that sense, it's the combination of much longer leases. So if you have a building that was late to government, or getting the kind of big companies, it's not impossible that you would have a 25 year lease, and because all of the costs associated with it are borne by the tenant, you can actually work out exactly almost to the penny, how much return are you going to get on the property over that period of time, and then you could guess or hope that it goes up in value, but at least you're guaranteed a return for the time that you that you hold it. And again, commercial premises is, yeah, it's very different in the way that it works. There's a less likelihood of huge increases in value through us, you know, kind of a supply and demand issue. But there's also risks with that, in that sense, as well, that if you go into town centres, or shopping centres, or wherever else, properties kind of come in and go out of favour. And you know, you'll see a lot of the commercial property. Landlords at the moment are struggling because the tenants are struggling. So if they're struggling, sometimes you end up with reducing rents and that kind of stuff. But again, because of this basic investment mindset that says I'm going to buy you something or a shed or something, I'm going to get a return on it. Actually, the capital variations in the in the value of the property become less, less important, and everything becomes a little bit more, a little bit more predictable. As a result of which we can then go and look at data over an extended period of time to give us an idea of what normally happens if you make commercial property investments, in the same way that we can get data on what normally happens if you have these bonds or gilts where you lend money to governments or to companies, and what normally happens over a long period of time, if you invest in the biggest and the best, and you know, the best known companies in the world, so so we can build models. And we can create an understanding of what we expect, when we're investing, we cannot do that and speculating. Because it's run into boom, or bust therapy.
Tamsin Caine 48:10
Now seems like a good place to end this unless there's anything that you think I haven't asked you that I should have asked,
Steve Martin 48:17
I suppose the only thing would be that from these are not binary choices, or binary options. So when you're investing money, again, those four types so we can put money into a bank account, or what we would call invest in cash, you can have these bond or go where effectively you're getting a return for lending your money to government or to a company, property, commercial property that you can invest in over the longer term and and companies. What we would routinely do for our clients is have a combination of these things put together for some money in cash, some money in the in the guilt, some buying stuff, some money and commercial property and some money in equities. And the way that we make those decisions, it is based on a number of things, but at its most simplistic. The two drivers are how comfortable can you get where the ups and downs that the investing market brings? And how much do you need to grow the money that you've got in order to do the things that you want to do in the future? life easy for us when those two things match. So if your acceptance of ups and downs is consistent with this sort of return that you need in the future, then that's super that makes life quite easy. But often we find that there's a there's a imbalance between those things. So we just need to have a conversation with people to say well, what's more important to you, and expectation that you can achieve what you're setting out for the future, or the comfort factor on a daily weekly monthly basis that that you're used to. So the historically most common portfolio would be something like 60% in companies and the other 40% made up in property, buying skills and cash that's defined as the classic, balanced portfolio. So just important that people understand that it's not, it's not black and white, you can put these things together in a way that works for you. And the only last thing and just quickly, I forgot to say about residential property is kind of in the context of that a lot of the fear that people have around investing in companies is the fact that the prices change on a daily basis. Because on a daily basis, things are being bought and sold. With property, the price is actually changing on a daily basis, you just don't know it, because it's not being bought and sold. If we looked at the value of the biggest companies in the world, every five or 10 years, you will find there's much less ups and downs in those prices, then you would do if you were looking at it on a daily basis. And that's how we tend to look at property, you're my property story or talking about 15 years plus, I don't know what the values were in between, I'd be really grumpy if I thought that it doubled in value at some point I've noticed, because it's not actually being traded, we don't know. So there's a false statement of a reduced amount of risk associated with a property because it's not being bought and sold every minute of every day. So we apply the same kind of thinking around well, you know, what, an all property always goes up in the long term. And in most cases, it's true. You know, even in my rubbish scenario, it still went up, it didn't go up in terms of inflation. So in real terms, it became nice value, but it didn't go up. It Same thing goes for companies that the trouble is that companies are valuable to take in by second. So it feels more risky, because we're actually seeing that, that variation, I guarantee you that if I had gone to get if I'd been forced to sell that property in April 2020 or June 2020, when COVID had started, I'd have got a lot less money than I got for it. I also think I'd probably sold it the year before that, I would have got a lot more money. But I might be wrong. Because I'll only ever know when somebody actually parts with their money to buy it from me so. So those two things just to think about the property doesn't have that straight line return either. It just feels like it because it's not being bought and sold every day. And that when you when you build yourself an investment portfolio, it's a combination of the things that we've been talking about. It's not one thing or or the other.
Tamsin Caine 52:41
That's fantastic, Steve, thanks for joining me today. That was brilliant. And hope you'll keep listening to the next episode which will be out in a fortnight I hope you enjoyed that episode of the Smart Divorce podcast. If you would like to get in touch please have a look in the show notes for our details or go into the website www.smartdivorce.co.uk. Also, if you are listening on Apple podcasts or on Spotify and you wouldn't mind leaving us a lovely five star review, that would be fantastic. I know that lots of our listeners are finding this is incredibly helpful in their journey through separation, divorce and dissolving a civil partnership. Also, if you would like some further support, we do have Facebook group now. It's called separation divorce and dissolution UK. Please do go on to Facebook, search up the group and we'd be delighted to have you join us. The one thing I would say is do please answer their membership questions. Okay, have a great day and take care!
Transcribed by https://otter.ai