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 Complexity Conundrum

Posted on August 30, 2017 by - Estate Planning

As I had a conversation with a client today, I came to realise just how complex some areas of legislation have become in recent years.

It seems that there is a trend for adding new elements to existing legislation or ‘retro-fitting’ old rules to fit current circumstances.

The problem with both approaches, is that it leads to rules that are confusing and complex and which are often not really fit for purpose.

A great example is Inheritance Tax. Where as before, we had the ‘usual’ £325,000 nil rate band which I think many people had become reasonably comfortable with, we now have the new ‘Residential Nil Rate Band’ which is a great example of things being bolted onto existing legislation.

This new allowance looks innocent enough on the surface – a further £175,000 of IHT exempt assets sounds good to most people – however when you start to dig a bit deeper, things are not quite what they seem.

For a start, the new allowance only applies to a select number of people, namely those who own a home worth more than £350,000 (as a couple, £175,000 for a single person) and whom have children. This alone rules out a reasonably large portion of the population. Add in the fact that the allowance starts to taper down on a 2:1 basis when your estate exceeds £2m and many types of trusts commonly in wills are also excluded from claiming this allowance, and we end up in a situation where it is thought only around 5% of the population will be eligible to claim. There are many other nuances which are beyond the scope of this article, but which muddy the water even further.

Now on the one hand, you could argue that this is a political masterstroke – the government achieved the headlines of a £1 million IHT allowance and the media seemed happy. On the other hand however, it has introduced a huge amount of additional complexity into what was already a far from simple area of financial planning.

Perhaps one day policy makers will realise that sometimes it really is better to rip up the existing rule book and start again – then again they may not!

Until then, we will do our very best to cut through the complexity on behalf of our clients’ and to present solutions which are as clear and easy to understand as possible.

 

Can’t We Just Leave Things Alone?

Posted on May 10, 2017 by - Taxation

The continual tinkering with various tax allowances, reliefs and rates is getting a little tiresome. While I am all for positive change and simplification in this area, the opposite has been true over past years.

The biggest example of these changes is perhaps the £5,000 dividend allowance, which was only introduced last tax year and is now proposed to be reduced to £2,000 from April 2018. To further muddy the water, these proposed changes have been omitted from the finance act to ‘slim it down’ so that it could be passed before parliament dissolves before the election.

As such, we are left in a strange ‘limbo’, where we don’t know what the dividend allowance will be next year. Given that investment planning is a long-term game, it seems a little unfair to me to introduce an allowance one minute, reduce it the second and then back away from that reduction minutes later still.

These types of allowances do drive changes in people’s investment behaviour. For example, many people have been holding assets in ‘general investment accounts’ rather than investment bonds in the hope of making use of these new allowances. Given the changes, this strategy may not now be appropriate and investment holdings may need to be restructured yet again.

While I appreciate the need for the government to increase tax revenue, it would surely be better to set a lower allowance in the first instance, which could be retained for the longer term, rather than continually tinkering.

Here We Go Again!

Posted on May 1, 2017 by - Uncategorized

So it seems that we have yet another general election, just 18 or so months after the last one! It seems only yesterday that we were voting on the UK leaving the EU.

The assumption, of course, is that we will end up with a larger Conservative majority than we currently have and this assumption would seem to be pretty sound based on the polls conducted to date.

If the last few months have taught us anything however, it is that the polls cannot always be relied upon. In a world where the UK is leaving the EU and Donald Trump occupies the White House (both events which commentators felt were laughable when first proposed), it would take a brave man to say that a Conservative win at the election is a sure thing.

In terms of the markets, once again, it seems that the preferred option will be the expected Conservative win and this will be largely priced in already. Anything other than this expected outcome however could see some more significant market reaction.

I would caution expending too much energy worrying about this however. If the aforementioned surprise events have taught us anything, it is that, even when we do have political surprises and upsets, the predicted market turmoil very often does not materialise and in the above two cases, quite the opposite has been true.

The only thing that is for sure is that we live in fascinating political times and I will be watching the election results with interest come the 8th June.

The Buckingham Gate Investment Committee stands ready to hold an extraordinary investment review meeting if the circumstances dictate.

2016 – A Year in Review

Posted on December 20, 2016 by - News, Review

As 2016 draws to a close, I always take the opportunity to review what has happened in both my business and personal life, but also to consider what has happened in the wider world around me. In this latter category, 2016 has been eventful to say the least.

The year started typically enough, we had an oil price scare and fears over growth in China, however none of that is unexpected across the course of a typical year ‘in the markets’.

What came as more of a surprise, was the Brexit vote in June. I don’t think I will ever forget that morning, turning on the TV to see that what no one thought could happen, had happened. That day was also memorable for me on the basis that I was stuck in London that night searching for a hotel at short notice because of issues with the trains (another item that has made headlines far too often in 2016).

What I found even more surprising however, was how the markets reacted with relative calm to the events unfolding. Yes, there was a few days of volatility (which is only to be expected after any major event like Brexit, especially when no one really expected it), however the markets soon recovered and went on to set record highs in many places.

As if Brexit wasn’t enough, we then had the unexpected election of Donald Trump. Again, the markets seemed to react positively and many market have continued to set new highs in December.

The million dollar question is ‘what happens next?’. I think if 2016 has shown us anything, it is that no one really knows. ‘The markets’ had predicted doom and gloom of epic proportions if Brexit OR Trump happened, let alone both of them, yet 2016 has been one of the more positive years for some time now.

My other often cited bug bear of 2016 has been the increasing intensity of panic inducing headlines in the media for increasingly small events. ‘Billions wiped off the UK stock market’ was a recent news headline, on a day when the FTSE 100 fell by less than 0.5%!

While 0.5% of the FTSE does happen to total billions of pounds, a rise or fall of 0.5% each day is so commonplace on the FTSE 100, that this is not really news at all. As such, my advice remains to take what you read, watch and listen to with at least a small pinch of salt.

As 2016 draws to a close, I also reflect on how lucky I am to do the work I love each and every day. I would like to take this opportunity to thank all of our clients, contacts, professional connections and suppliers for working with us in 2016 and beyond. I would like to wish you all seasons greetings and a happy and prosperous 2017, whatever the year has to offer us!

Some Thoughts on The US Election

Posted on November 9, 2016 by - Uncategorized

There was an unusual sense of de-ja-vu as I woke this morning. I would usually avoid the temptation to check my smartphone, at least until after breakfast, however today was slightly different…

It would seem at the time of writing all but certain that Donald Trump will be the next president of the United States. This is yet another one of those political events that would ‘never happen’ seemingly unfolding right before our eyes.

The pollsters seem to have gotten it wrong, yet again (I do wonder if we might now stop paying any attention at all to the polls).

No doubt, attention will soon turn to the markets and the impact that this decision will have. The media will jump on top of this story and I should imagine it will be a matter of seconds before the words ‘turmoil’ and ‘panic’ are rolled out.

Of course, we had very similar news, not so long ago, with the Brexit decision. This feels much the same (with the exception of the flooding the night before preventing me from getting home to hear the news!). While I have no doubt that what follows will be a few days of volatility and uncertainty, please do remember that what followed the two days of market falls following the Brexit decision, was arguably one of the strongest stock market rallies we have seen in recent years.

Despite the ‘doom and gloom’ predictions of almost every media outlet or so called ‘economic expert’, the recovery in the markets since the Brexit vote has taken almost everyone by surprise and only goes to highlight the lunacy in trying to predict the future direction of travel.

As I wrote after the Brexit decision, the uncertainty is often the worse part. Now that we know the outcome, the markets will quickly react and come to terms with the news, and they often realise that the panic of the first few days was ‘overdone’ and the market subsequently recovers.

While the past is of course no guide to the future, it is just a reminder that things are not always as bad as they first seem.

Added to which any well diversified portfolio should contain some of the ‘safer’ assets where money tends to flow to in these volatile times such as bonds and property, which may actually benefit from any falls in stock markets.

As I write this, my train into London has just been cancelled due to a line fault. At least it’s ‘business as usual’ on the railways!

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.