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Preparing your finances for the unexpected

We can all agree that these are highly unusual times. A year ago, no-one would have predicted the state of disorder that people, governments, businesses and markets find themselves in today.

Brexit was expected, coronavirus wasn’t. 2020 has thrown some particularly difficult challenges our way.

At any time, however, you need to plan for what you know while trying to protect yourself as best you can from life’s surprises.

Investing in volatile times
Global coronavirus concerns are impacting markets in an unprecedented way, making things extremely uncomfortable for investors. Is this a bad time to invest? Should you hold your nerve if you are already invested? Unfortunately, there are no simple answers, just good investment principles.

Whatever the market is doing at any given point, the most sensible approach is to have a well-diversified portfolio and invest for the long-term rather than trying to ‘time’ the market.

Financial markets are inherently unpredictable and do move radically and swiftly in times of uncertainty.
With hindsight, these movements are often disproportionate and when more positive news emerges, the market can also move swiftly upwards and at a pace that is usually too quick to react to. Even experienced investors cannot get this right all the time.

Wise investors are aware of how emotions affect our actions. As markets peak, we may feel excited and be tempted to flood into the market. But this is often the worst time to do so, as markets are likely to be over-priced. Conversely, when markets dip, investors often feel panic and the fight-or-flight impulse urges us to exit the market. This would lock in your losses. For new investors, this may be an opportune time to buy shares.

Certainly, from previous events such as the dramatic 1987 and 2008 market falls, we can see that short-term negative reactions are often later reversed by a strong longer-term recovery. While it may feel uncomfortable to stay invested when markets fluctuate, this discipline usually produces better returns over the longer term.

Investing in a low interest rate climate
Of course, this is also a time of prolonged ultra-low interest rates worldwide. In the UK, you have to go back over 11 years, to January 2009, to find rates over 1%.

As a result, funds in savings, ISA or deposit accounts are failing to keep up with inflation, let alone beat it. At times like this, achieving better returns than bank deposits means widening your investment horizons to consider ‘riskier’ assets. However, this approach will not suit everyone. In any case, it is crucial to factor in your personal appetite for risk.

As we have already seen, you can help reduce risk by being invested for the medium to long-term, but it is also essential to have a well-diversified portfolio. The key is to spread investments across different regions, asset types and sectors to limit exposure in any one area, using a strategy matched to your particular situation, goals, timeline and risk appetite.

Tax planning for Portugal
While Portugal can be a highly tax-efficient home, much depends on how you structure your wealth and assets.

Portugal residents can, for example, unlock significant tax advantages for capital investments. But many UK expatriates overlook such opportunities in favour of retaining UK assets. This approach may become less tax-efficient when the Brexit transition period ends and the UK government gains more freedom to tax citizens abroad. With much still unknown about Brexit, it is sensible to explore Portugal-compliant alternatives before things potentially change.

Estate planning for Portugal
Even after Brexit, you can override Portugal’s ‘forced heirship rules’ by applying the law of your nationality to your estate instead through the EU regulation, ‘Brussels IV’. Beware that, while this would ensure your legacy is distributed according to your written wishes, this can have unwelcome tax implications.

Although Portuguese inheritance tax (stamp duty) is relatively benign, it is possible to restructure your wealth to minimise tax for chosen heirs – and even ensure they receive your legacy when you want them to – so explore your options.

With a careful strategic financial planning review – that considers your investments, tax and estate planning together – you will be best placed to prepare for what’s ahead, both known and unknown. Cross-border financial planning is complex and needs to be designed around your specific circumstances and wishes, so take specialist advice.

All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice. These views are put forward for consideration purposes only as the suitability of any investment is dependent on the investment objectives, time horizon and attitude to risk of the investor. The value of investments can fall as well as rise, as can the income arising from them. Past performance should not be seen as an indication of future performance. Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals should seek personalised advice.

By Mark Quinn
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Mark Quinn is a Partner of Blevins Franks in Portugal. He holds a Bachelor’s Degree in Finance, a level 4 Diploma in Financial Planning (DipFA) from the Chartered Insurance Institute (CII) and is a Chartered Financial Planner. |