Topic: Investments

How Quickly Things Blow Over

Posted on July 15, 2018 by - Investments, News

I was reminded this week of how quickly time (and news) passes while reading through a data pack that we received from a provider on behalf of a client.

In the data pack, the provider included their most recent ‘investment commentary’ letter, which was dated December 2017.

A significant portion of this letter was dedicated to looking at the potential impact of the vote by Catalonia to become independent from Spain (yes – I just about remember that news story as well).

This was headline news for a good few weeks at the back of 2017 and everyone was considering how it would impact on the markets with some fairly disastrous predictions being made about ‘crashes’ and ‘turmoil’.

Now I can’t recall when, but obviously this story has dropped out of the news cycle now. I think it probably did so after a few weeks in fact.

What’s more, I also can’t recall any noticeable impact on the stock market or anything else for that matter. Perhaps there was, but it was so insignificant in the grander context of things that I have simply forgotten.

Either way, when we look back in retrospect at these events, they really do seem rather insignificant.

This is yet another reminder (as if we needed any more) that when thinking about our long term investments, looking at the daily news cycle does not serve us awfully well.

In fact, I would argue it does quite the opposite. These panic inducing headlines do nothing but increase our blood pressure, reduce our rational decision making ability and lead us to make worse (or even downright stupid) investment decisions.

So when we are thinking about Brexit, US trade wars or whatever tomorrows big news story is, just remember this – in 6 months time, it could well have all been forgotten.

‘You Would Have Made More If You Did Nothing’

Posted on October 10, 2017 by - Investments

I was slightly amused last night as I watched The Apprentice – You’re Fired (guilty pleasure admitted) when one of the panel mentioned that the boys team (who made a loss on the task) would have “made more money if they had done nothing”.

Now in this case it would have been true – when you make a loss in business, you may well have been better off doing nothing at all. As we all know, some businesses recover from these losses and go on to be very successful, others suffer a more unfortunate fate.

This got me thinking … the same is often true with investing.

In our ‘always connected’ society there is no shortage of new articles, information, recommendations, analysis and so on, all promising to have the latest investment tip – the latest thing to be in or out of. All of these things are encouraging us to do ‘something’, however with investing it can often be better to do nothing at all.

We all know that investing is a long term game, however, in reality, many of us are tempted to trade and tinker with our portfolios far more than is healthy. Not only does this add additional costs in the form of dealing charges and the like, it can also be damaging to portfolio performance. Losing holdings don’t have time to recover after what are often temporary falls and winning holdings can be sold too soon in pursuit of the ‘next big thing’.

Although it can seem a little, dare I say, boring, when investing, it is often better to sit on your hands and do nothing at all, letting the passage of time take care of the rest.

Now of, course this can be taken too far as well – it is important that a portfolio is regularly reviewed and analysed and changes made where appropriate, but in many cases, the best thing to do will be nothing at all.

We review our portfolios on a quarterly basis, but history has shown that on at least half of those review dates, we have chosen to do nothing at all. Some might call it boring, but the evidence shows us that this is often the method that delivers the best outcomes.

The Folly Of Predicting The Markets

Posted on August 15, 2016 by - Investments, News, Pensions

I think it is fair to say that the market reaction to Brexit took most people by surprise. While there were the inevitable few days of falls following the announcement of the result, the following stock market recovery across the globe was beyond the predictions of even the most respected market analysts and experts.

This single event is a good example of how completely futile it is to try to predict or guess the direction of stock market movements, now matter how sophisticated the models or assumptions being used.

In fact, when we look back in retrospect at predictions that have been made by analysts and financial experts, it turns out that you might just as well flip a coin to determine the future direction of travel, because these people are correct almost exactly 50% of the time.

These issues are particularly dangerous when thinking about investment planning for retirement.

I wrote last time about the significant shift in thinking required when investing during retirement. In the ‘new world’ of retirement planning, many people will choose a drawdown pension and keep their fund invested for life.

The danger here is that people get tempted to ‘trade’, rather than invest their retirement fund. I am aware of more than one case where people sold down all of the investments within their pension fund the day after the Brexit vote on the basis that the market was ‘definitely’ going to plummet.

Of course this did not transpire and these people have now missed out on the significant recovery, in which many global markets have grown by 10% or more. If we assume that many of us would be happy with an average growth rate of 5-6% per annum on our pension funds, this could mean that 2 years worth of growth has been foregone, just by being out of the market for a matter of weeks.

The irony here is that had we remained in the EU, I strongly suspect that the markets would have risen as well – a theoretical win-win situation. Of course, no-one knows what the markets might have done in the event of a remain vote, nor will we ever know.

Another good example of people trying to predict markets has been in the corporate and government bond space. Since 2009, I have heard countless people say that bonds are ‘definitely’ going to plummet or that they are ‘overpriced’. What has happened since 2009? Probably one of the strongest bond markets we have ever known, helped further still by the recent decision by the Bank of England to reduce interest rates.

The moral of the story here is that even when during retirement, investing should be seen as a long-term game. Given the inability of most people in retirement to top up their funds with earnings (once retired, for many people, what they have is what they have), it is easy to see the temptation to take rash actions to try to ‘protect’ the fund value.

If recent events are anything to go by however, quite the opposite can happen and much needed growth is missed due to being out of the market for just a few short weeks.

Income In Retirement – Consistency Is King

Posted on July 15, 2016 by - Investments, Pensions

We looked last time at the importance of reviewing your investment strategy if you intend to use a ‘drawdown’ pension during retirement and leave your fund invested for the longer term.

For many the biggest risk of using a drawdown pension, rather than an annuity, is that the fund will run out during their lifetime. Of course, none of us can know for sure how long we will live and for most the tendency is to underestimate life expectancy.

One of the most important factors in determining how long your pension fund will last, is the consistency of the returns that are generated throughout the lifetime of the investment.

Many investors will be aware of the concept of ‘pound cost averaging’, which is where a regular payment into an investment is made and you ‘buy into the market’ at different points in time. The principal here is that it is actually positive to be buying investments when the market is lower, as you will be buying more shares for your money.

This point can be illustrated using a very simple example over a 3 month period, comparing a lump sum investment purchase of £30 vs a monthly payment of £10 per month.

 

Example 1 – Shares Purchased Up Front

Amount Invested Share Price Shares Purchased Final Value
Month 1 £30 £1.00 30
Month 2 N/A £0.50 N/A
Month 3 N/A £2.00 N/A £60

 

Example 2 – Shares Purchased Monthly

Amount Invested Share Price Shares Purchased Final Value
Month 1 £10 £1.00 10
Month 2 £10 £0.50 20
Month 3 £10 £2.00 5 £70

 

As you can see, in the second example, the fall in the share price in month 2 has been positive, as more shares where purchased, when have then gone up in value, meaning we have £70 at the end of the three months, rather than £60.

The issue with a drawdown pension is that the opposite of the above phenomenon is also true. This is where more shares have to be sold to provide the same level of income. So using our above example, if we wanted an income of £10 per month, 10 shares would need to be sold in month 1, 20 shares in month 2 and only 5 in month 3. The sale in month 2 of 20 shares would really damage the total investment over time.

As a result of the above, we favour investments that produce very consistent returns during retirement. It is far better to have a return of 6% per annum consistently every year, than an average of 6% per annum, but spread over a wide variety of different outcomes (-6% one year, +12% next year for example).

This is best illustrated with another example as follows:

 

Starting fund of £10,000, £500 withdrawal made at the end of each year.

 

Year 1 Year 2 Year 3 Year 4 Year 5
Consistent Return

(5% per annum)

 £10,000 £10,000 £10,000 £10,000 £10,000
Variable Return

(average of 5%)

 £8,500 £7,575 £7,984 £7,963 £9,214
Return In Variable Scenario -10% -5% +12% +6% +22%

 

As you can see, in both scenarios, the average return is 5% per annum, however in the variable return scenario, the first years are poor, meaning that we have a smaller fund to carry forward. Despite the large positive numbers in the latter years, the second fund has still not recovered to the same level 5 years later.

Of course the above is a simple example, however it does illustrate the importance of consistency when thinking about investing for retirement.

The Impact Of The EU Referendum – Some Personal Thoughts

Posted on June 21, 2016 by - Investments, News

With just two days to go until the big EU vote, many clients have asked what my own views are on the potential for the UK to leave the European Union. I suspect what they are probably most concerned with is ‘what will the impact on the markets be?’.

I should stress that these are my own personal views on the possible outcomes following the vote. I shall try not to get too political here and keep this focused on the financials.

What is already clear, is that ‘the market’ most certainly favours the UK remaining in the EU. Just yesterday, we saw the FTSE 100 gain over 3%, just on news that momentum seemed to be shifting back in the direction of the remain camp. Despite the leave side seeming to gain an advantage in recent weeks, my view is that ‘the market’ still expects a remain vote to a certain extent.

So, what does this all mean? Well, in the event that we remain in the EU, I would not be surprised to see major stock markets jump by 3-4% on Friday. What follows is largely unknown, however one can assume that it will be more of the same status quo for the time being.

In the event of a leave vote, I suspect that the markets will fall by a similar margin, if not more severely. What is less certain is what the weeks, months and years that follow will hold for us. You see the market, just like the human brain, really hates uncertainty. Once an outcome is known however, the market (just like the brain) can adapt to this new set of circumstances and start formulating solutions to any problems.

I certainly know that this is true when facing an issue in my own business or life. When the outcome is unknown, the uncertainly can tie you up in knots, however once I know what the future holds, even if the outcome is negative, the brain goes to work on formulating solutions.

With this said, I don’t think anyone really knows what the longer term future will hold in the event of a vote to leave (the same of course could be said about remain). While various think tanks and economic commentators have created countless models and predictions, in reality, I think it is all guess work.

The EU is such a colossal ‘thing’, that I don’t think any one person or body can fully appreciate the implications of leaving the EU over the next 10 days, let alone the next 10 years.

My own view is that the UK will survive and thrive in the longer term, whatever the outcome, however in the short term, the safest bet, especially where the markets are concerned, would be remain.

The Impact of the EU Referendum – Part 1

Posted on May 4, 2016 by - Investments, News

The Buckingham Gate blog is back after a short hiatus over the busy tax year end period. Thank you to all of our clients both old and new for making 2016 our best year yet.

Many clients have enquired about the possible impact of a UK exit from the EU (or Brexit) and in this series of blog posts, we will explore some of the issues and the potential impacts on the UK economy and the markets.

Please note that while we have tried to take views from the most unbiased sources possible, it does seem that almost everyone has some ‘skin in the game’ when it comes to the EU Referendum, so it is important to filter out facts from opinions.

Given the sheer size and scale of the issues surrounding the UK’s membership of the EU, I’m not convinced that anyone really knows all the answers, however this next few weeks of blog posts will be dedicated to some of the key questions.

We start with Financial Services and the City…

We all know that London is one of the world’s financial centres and many have made the argument that this is because we offer a ‘gateway’ into Europe. Some have pointed out that London on it’s own as a financial centre may not be as strong as London within the larger EU.

In the event of an EU exit, if the latter argument is to be believed, then this could cause a lower level of investment into financial services in the UK economy and whether you like them or loathe them, banks and financial services businesses do make up a large part of the UK economy (and the UK stock market).

As I suggested earlier, most commentators on the EU referendum have something to lose or gain based on the outcome, so I am keeping my ear to the ground for independent views. The Governor of the Bank of England, Mark Carney, has, in my view, one of the most relevant opinions on the debate and he has cautioned against a UK exit from an economic perspective.

On the other side of the coin, some have argued that if we were able to break free from some of the bureaucracy and red tape that come with the EU, the City could become even more competitive on the global stage.

With regard to stock markets, there is no doubt that the lead up to the referendum and the outcome itself will move markets. It is fair to say that ‘the markets’ would prefer if we remained in the EU as this is a known quantity, so I would suggest that the risk is on the downside if we do decide to leave. There could well be a ‘relief rally’ if we do remain in the EU, however this may not be quite so pronounced as the falls if we leave.

The issue is, with recent polls at precisely 50/50 (Source: whatukthinks.org), it really is too close to call. As such, we will not be making any extreme movements in our portfolios on the basis of the EU referendum. Whatever the outcome, we remain confident that any impact on the markets will be relatively short term when considering investment time horizons of 5 – 10 years or longer.

Woodford Joins the Team

Posted on February 12, 2016 by - Investments, News, Review

In the recent meeting of the Buckingham Gate Investment Committee, we deliberated long and hard about adding the Woodford Equity Income fund to the Buckingham Gate Portfolios.

While Neil Woodford’s experience and performance in this sector is almost undeniable, the reason we had pause for thought is that the track record of the fund is only 18 months. We usually like a fund to have a 3 year track record before we would consider adding it to the portfolios.

In this case however, we have made an exception to this rule for what we feel are a number of very good reasons:

  1. The performance of the fund during it’s 18 month history is outstanding by almost every measure. We have considered no less than 12 different fund performance metrics and the Woodford fund tops the tables in all of them. The case for including the fund was compelling based on these factors alone.
  2. While Woodford Investment Management is a new venture, Neil Woodford has been managing a UK Equity Income fund with a very similar mandate for more than 20 years at Invesco Perpetual with similar success. If we combine Neil Woodford’s track record across the two funds, it makes for some very impressive viewing.
  3. Given the ‘brand name’ of Neil Woodford, he has been very successful in gathering new monies to invest in his fund, with the Woodford Equity Income Fund having over £8bn of funds under management at the time of writing. As such, the fund does not have the same characteristics as many other ‘start up’ funds. In fact, the fund is considerably larger than many other more established players.

With all of the above taken into account, we have decided to include the fund within our portfolios.

When we combine Neil Woodford’s experience in the UK Equity Income space, with that of Nick Train (Lindsell Train UK Equity Fund) in the UK Equity growth sector, we are left with a duo of the most experienced and successful managers in the UK equity sector.

It is important to remember that past performance is no guide to the future, however we do feel that there is significant value to be added by experienced managers in the UK equity space. This is in an unusual contrast with the US equity sector, where there are very few, if any, ‘active’ managers who consistently add value.

For this reason we continue to adopt our hybrid approach to fund selection, choosing more expensive active managers where we feel they can add value, and using low cost ‘tracker’ funds where they may not.

The Worst Day in …. A Day??

Posted on December 15, 2015 by - Investments, Media, News

I have been slightly amused recently by the apparent desperation of financial media outlets to run a ‘panic’ story. The problem the media outlets have is that ‘normal’ does not make a particularly good story.

‘FTSE rises steadily by 0.5% this month as usual’ does not have that much of a ring to it.

You see, we all seem to like bad news stories, ones filled with disaster and fear. Accordingly, this is what the media generally creates.

It is important to remember what the main objective of a media outlet is (that is any media outlet and not just financial ones) and that is, to get you to consume their content, visit their website, read their blogs and, most importantly, see the adverts that they place alongside that content (or pay for it up front). The main objective of a financial media outlet is not to provide you with impartial, balanced views that are likely to enhance your financial decision making. Of course, there are a range of financial media outlets out there that go from the sublime to the completely ridiculous and some do provide useful insight and analysis, however it’s important not to take one view too seriously.

Sidetrack over, back to my point. You see, over the past month or two I have been noticing a trend towards increasingly short term assessments of the markets to generate a ‘panic’ headline. ‘FTSE has its worst week in a month’ was one recent example.

Now, I’m sorry, but a month is not that long in investment terms. In fact a month generally contains 4(ish) weeks. If we assume that the markets are generally random when considered over such short periods of time, surely there is approximately a 1 in 4 chance of every week being ‘the worst week in a month’.

The past few days have been a prime example in my view. Given the recent slip in oil prices, markets have been reacting, sending the FTSE 100 below 6000. Of course, the financial media outlets reacted with horror.

The irony is, these blips tend to be (most of the time) just that, blips. Things recover soon enough and ‘normality’ ensues.

True to form, the headline yesterday: ‘FTSE has best day in over two months’!

The Insanity of ‘Predicting’ Markets

Posted on November 9, 2015 by - Investments, News

I have followed the recent commentary on the decision by the Bank of England to hold interest rates at their current lows yet again with some interest. Of particular note was not the decision to hold interest rates for the month of November (which was widely expected), but more the ‘forward guidance’ that we should not be expecting an interest rate rise for even longer than the markets had been expecting (perhaps as far as late 2016, or, dare I say it, early 2017).

As usual, various media outlets jumped on the story, commenting that even the Monetary Policy Committee or MPC (the people who actually make the decisions to change rates) actually had no idea when rates were going to rise. This came as no surprise to me at all. The MPC will make their decisions each month based on the information that they have available to them at the time. This information is constantly changing and evolving as world events, new economic reports and various geopolitical developments unfold. As such, it should come as no surprise that the people in charge of setting rates often change their minds because the information on which they base their decisions is changing constantly too.

Which brings me onto the topic of trying to predict markets. There are numerous industry ‘experts’ that voice their views on the future direction of markets and how the economy will evolve over time. Given that interest rates are such a key component of the economic activity of a country, they tend to feature quite heavily in the ‘experts’ analysis.

This begs an interesting question to me … If the people who actually have full control over setting rates have no idea when they are going to change, how do the rest of us have any hope and more importantly, how accurate can any ‘prediction’ ever be.

I recently reviewed an academic study on this topic and the results were fairly unsurprising. When we look back on previous predictions made by ‘experts’ in the financial field and see if they came true, you could just as well flip a coin. Approximately 50% of them were correct and 50% incorrect.

So which will it be, heads or tails?

We feel that a far better approach is to design a strong long-term asset allocation and stick to it, rather than trying to ‘time’ or ‘beat’ the markets because, surely if the insiders don’t know what’s going to happen, the rest of us have no hope at all.

The Impact of Scottish Independence – Part 1

Posted on September 7, 2014 by - Investments, News, Pensions

With just under a week to go before the results of the referendum, the most recent polls suggest that the contest between the No and Yes camps seems too close to call. Given the very real prospect of Scotland leaving the Union, many investors are concerned about how this will impact on them. Senior Paraplanner, Kevin Herron has written a series of articles about some of the potential issues. Today he looks at currency and regulation.

Currency

Probably the most important concern would be what currency the independent Scotland would use – despite the unequivocal rejection of the concept of a shared currency, the Yes campaign are keen to retain Sterling (either as a formal fiscal union, or as a new currency that is more informally linked to Sterling).

While this has a number of repercussions on a macroeconomic level, it will introduce a level of currency risk for investors. It is likely that any separation of currency will cause a great deal of volatility in both currencies in the short to medium term, which will greatly impact those who receive income in one currency but pay their bills in another.

Consider the example of a Scottish pensioner is receiving a pension of £100 per month which is the equivalent of £80 “McDollars” – if currency movements mean that this pension is now only worth £70 “McDollars”, how will this affect their ability to meet their daily living expenses.

One option could be that Scotland joins the EU and adopts the euro, but the recent comments from the President of European Commission, Jose Manual Barroso, suggest that this is highly unlikely.

 

Regulation and Governance

While recent reports seem to suggest that the Bank of England and Financial Conduct Authority (FCA) would retain certain elements of control if a formal fiscal union is agreed, it is clear that an independent Scotland would need to set up it’s own system of financial regulation.

If Scotland was unable to obtain membership of the European Union, how would this impact on the ability of people to obtain cross border financial advice? European legislation permits financial advisers to apply in their home state for authorisation to provide services in other EU countries.

As an independent country that is not a member of the EU, Scotland would have the same legal status as countries such as Norway and Iceland, and while it seems unlikely, it could mean that an adviser registered in England or Wales could no longer advise clients living in Scotland (and vice versa). It is probable that firms would be able to apply for registration in both territories, but the additional costs of two registrations, along with the difficulties of dealing with two regulators with different rules, may see many companies deciding to avoid these difficulties entirely.

Current investment wrappers such as NISA’s are eligible to UK residents only, so in the event of independence, would not be available to Scottish residents. While it is likely that similar types of investments would be introduced for Scottish investors, any provider looking to remain active in both jurisdictions is going to have to spend a great deal of time and money in marketing different products for each country, and ensuring that their existing customers are properly segmented as Scottish and English residents.