Building Blocks: Which asset class can secure your financial future?

Building Blocks: Which asset class can secure your financial future?

For several decades received wisdom has told us that property investment is the best way to watch your wealth grow.

There’s something powerful about investing in a tangible asset you can touch, see and control. Contrast this with purchasing shares in a conglomerate that is intangible, but can – entrusted to a financial expert – earn an exciting return for you.

If you decided to fund a property portfolio 25 or so years ago, you’re probably mortgage-free by now. In addition, Schroders has calculated your investment might have more than “quadrupled”.

The quotation marks matter. Property investors often fail to consider the ‘cost of liquidity’. This wouldn’t be a problem if your bricks and mortar were legal tender; you could buy your weekly shopping with a brick.

Sadly, you can’t. Rather you must sell your property, and the gain could be subject to Capital Gains Tax (CGT) up to a whopping 28%. You’ll also need to pay brokerage and legal fees before you receive the cash in your bank account ready to be spent.

Property investment now comes with a warning

Property investors do so not just for growth but also consistent monthly rental income with the expectation it will continue into retirement. Due to the low cost of borrowing for the past 20 years, which has given strong net yields, it has been a reasonable expectation – until now.
Many people are becoming saddled with bigger mortgages – and unhappy tenants – alongside the current dip in property prices. Analysis by The Telegraph stated an average landlord paying the higher rate of tax face losses when the bank rate reached 2.75%. In an uncertain economy the dream of property ownership can fast become a nightmare.

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Alongside the low-interest rate era coming to a crashing end, we are in an environment of high inflation and low wage growth, with the cost-of-living crisis resulting in a 98% increase in rental evictions according to Property Reporter.

Meanwhile, the buy-to-let industry continues to plagued by government intervention – most recently the policy paper A fairer private rented sector. Ministers are often perceived as being ‘anti-landlord’; whether restricting the amount of mortgage interest deductible as a business expense; the 3% stamp duty surcharge; meeting new energy-efficiency standards; or other areas of governance and compliance.

In a nutshell, landlords must professionalise and see their property investments more as a business than an investment. Which begs the question, have they got time to manage a business alongside their day job? Probably not.

It’s fair to say those once-popular property investment weekend diplomas may be suffering from a dearth of delegates today.

Spread risk to cement financial growth without property

Highly successful families who have built generational wealth do not merely invest in physical property. It’s among the worst asset classes you can pick, if it’s the only thing you invest in.

There are better solutions – and they require sensible investment. That means keeping pace with inflation at the very least, and maximising your returns relative to your risk appetite, while also ensuring tax efficiency.

It’s fundamentally important to diversify your wealth across asset classes, sectors, geography, and even company size. Globalised investment funds spread risk in such a way that your wealth wouldn’t be totally undermined by economic shockwaves, as it might be with a single asset class approach – which could happen in a property price crash.

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It’s just as important to make use of the plethora of tax wrappers to hold your investments: see my earlier comment about the ‘cost of liquidity’. 

Consider this: you invested £500,000 into mainstream securities – stocks, bonds, commodities – then markets dropped 35% in a single year; your investment is now worth £325,000. Should you panic and decide to cash in, attracted by high 5% interest rates, you would have materialised the 35% paper loss. It’s only a loss if you sell.

Some time later, the markets recover. The number of shares you originally owned are now worth £500,000, but you only have £325,000 plus some interest to buy back in.

The key lesson to long-term investment is, “Don’t panic”; acknowledging that’s easier said than done, especially if you’re reaching a point when you need to extract capital.

Wealth management changes to suit the modern world

The longer you invest the greater the chance you have to ride economic volatility and maximise your investment. Ongoing private client advice matters greatly as it can prevent rash decisions, such as selling your investments during a downturn.

The traditional model of financial advice, revolving solely around financial instruments and overlook legal issues, is changing. The market is also being successfully automated: we’re working on assisting in this space with the My Finances app.

Yet with greater levels of wealth comes more financial complexity, so private client advice continues to matter. It will be some time before AI and other technology obsoletes it.

Sound financial and legal planning is key, focused not on returns but instead optimising the preservation of wealth, while maximising opportunities for tax-efficient liquidity.

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In an environment increasingly devoid of face-to-face human interaction, many wealthy people and their potential beneficiaries still need help with their financial affairs, and empathetic, technically robust, tailored solutions matter more than ever.

To paraphrase a popular school song it’s always wise to build your personal fortune on rock, but using that firm foundation to then spread your risk is how you’ll reap the greatest rewards.

Mohammad Uz-Zaman

Mohammad Uz-Zaman

Mohammad Uz-Zaman is the Founder of ADL Estate Planning and a Chartered Private Client Wealth Manager. He has worked in financial services for over ten years, is an associate member of the Society of Trust and Estate Practitioners (STEP) and a former senior adjudicator for the Financial Ombudsman Service.
Mohammad works with business owners, property developers, and non-UK domiciled/non-UK residents who have UK-based assets. His clients tend to have at least £500,000 and require strategic investment advice. Mohammad is an expert in structuring clients’ wealth during their lifetime and beyond.
Financial literacy is one of Mohammad’s passions, enabling his clients to become more involved in the decision-making processes of wealth management, and understand how to maximise the value of their money.

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