What Is The Money For?

I attended a seminar recently and a very interesting question was posed for suggested inclusion in client meetings and in questionnaires. It was simply “what is the money actually for?”

A simple enough question, but one which I suspect many people may not have a simple answer to.

Money is a strange thing and it makes us behave in very peculiar ways.

It is also a very emotional thing, despite the fact that human emotion (generally speaking) leads to poor financial decision making.

You see, we often meet people who have accumulated very significant wealth. I do wonder however if people really know what the money is for.

Very often we meet people who are still working in jobs they dislike because ‘they need to’.

When we look at the numbers however we often get a different story. On occasion we find people have actually worked for too long. This is fine if you love your job, but how would you feel if you worked for 3 years longer than you needed to in a job you hated?

When we ask what the money is for, many people will say financial security, despite the fact that they don’t really have any definition for what ‘financial security’ really means.

While I fully appreciate the benefit of the emotional comfort money can bring (in fact, I did my masters dissertation on this very subject), I fear that just saying ‘financial security’ is a very easy way to avoid doing some of the thinking to truly define what is required to achieve this fabled thing called ‘financial security’.

As with the vast majority of money related goals, it is usually possible to put a number on this. We just have to do the thinking work first. For some people, financial security means having enough money to live on for 6 months – pretty easy to define. Multiply monthly expenses by 6 and there you have it.

For others, financial security might be having enough money to live on for the rest of their lives. A much more complex calculation, but with the right maths, we can still get there. Granted, you would need to build in some assumptions and you would most likely wish to add a large contingency pot on top of the final number, but the point is you still arrive at a number.

When we run the numbers in this way, we often find that people have significantly more than they need for whatever goals that they wish to achieve (financial security included) and so at this point we come back to a slightly re-worded version of the question; ‘what is the excess money actually for?’

My conclusion, is that most people don’t know. They have worked very hard to accumulate a pool of assets, but perhaps not then thought about what to do with any excess funds over and above their own needs.

This is where the conversation often turns to lifetime gifting or philanthropy – two things which have been shown to deliver the very greatest levels of satisfaction, but which people often shy away from out of fear of running out of money.

With the right planning beforehand, this needn’t be a concern and this opens up possibly the greatest and most noble thing any of us can do with our money – help others!

 

A Case In Point

I wrote last week about the market volatility we had seen and the importance of keeping a level head during times like these.

In that post, written in the midst of large market falls, I encouraged investors to keep calm and carry on. I also mentioned the potentially damaging effects of missing just the best 10 days of market growth within a 15 year period.

Although last week ended at a low ebb for the markets, things quickly started to recover on Monday and have continued to do so this week.

For those people who think that they can time the market, they would have needed to correctly predict on Tuesday the circa 7% falls that would transpire on Wednesday and Thursday. I have seen no evidence anywhere online of anyone making those kinds of predictions.

They would have also had to be brave enough to go back in late on Friday, just in time to catch the gains that have been made this week.

Especially when looking at the US market, I suspect history will confirm that some of the days this week will feature in the ‘top 10’ days list in years to come. If you are out of the market even for just these few days, you risk cutting your total return in half.

Unless you have a crystal ball, I would contend that no one would have made the decisions required to prosper in the markets over the past 10 days.

This leave us with the only reliable option – to remaining invested throughout. This means we capture all of those best 10 days. Yes, we have to accept some temporary volatility along the way. But that is all that it is – temporary volatility.

Please don’t let something as normal and expected as a bit of market volatility throw your financial plans off course.

Keep Calm & Carry On

Keep Calm & Carry On. Sage advice in times of market stress.

Countless research has shown that missing just the best few days of returns in the market is enough to significantly dent your total investment return.

Research by Fidelity has shown that if you had your money invested in the FTSE All-Share from the end of June 2003 to the end of June 2018 (15 years or approximately 5500 days), you would have earned a very nice 8.9% annualised return. Not too bad by any standards.

If you miss just the best 10 days of performance (out of those 5500) then your total return falls to just 4.6% per annum.

Miss the best 20 days and it falls further still to only 2% per annum.

If you miss the best 40 days of returns (again to stress, out of a total of 5500) then you actually get a negative return of -2% per annum.

The same research has been replicated across many different markets all over the world and the results are very similar.

This shows the importance of remaining invested, even when markets get turbulent.

In this world where investment decisions are made by computers in milliseconds and the distance from the stock exchange determines which trading house wins, anyone who thinks that they can time the markets is either lying, deluded or both.

Research has also shown that so called ‘investment experts’ and analysts have a pretty much exactly 50% chance of success when trying to predict when markets will go up or down. You might as well flip a coin to predict the direction of tomorrows markets, it has as much chance of being right as anyone else out there.

Im pretty sure on Monday of this week no one predicted the falls we have seen on Wednesday and Thursday. If they did I am yet to hear about it.

The point is that markets move very quickly.

If you attempt to time the market, the chance of missing those best 10 days is very high indeed. Markets can and do recover quickly and the biggest gains (i.e. those best 10 or 20 days), tend to follow significant market falls.

We only have to look back as far as February to see a similar phenomenon in action. In the early days of the month, the S&P 500 dropped around 8-9% over just a couple of days. Of course this was widely reported in the media with the usual collection of colourful language such as ‘turmoil’, ‘chaos’, ‘panic’ and, my personal favourite, ‘bloodbath’.

What received almost zero mainstream media coverage was the subsequent recovery. Only weeks later the S&P 500 has recovered the 8-9% it lost and it then went on to break new record highs only a few weeks after that.

Calm seems to have returned this morning on the markets. Could this be the start of the next recovery, or just the eye of the storm?

The truth is that no-one knows, but the time-tested investing adage of ‘time in the market, not timing the markets’ is as valid today as it ever has been.

Keep Calm and Carry On. It’s the only way to invest.

 

 

The New Science Of Spending

In the good old days, retirement was simple.

You worked for 30 years with the same employer, received your gold watch for long service and then retired with a 2/3rds final salary pension – what could be more straight forward!

Nowadays, things are a little more complex.

We don’t tend to work for the same employer. Gone are the days of the final salary pension, leaving individuals to take more responsibility for their own retirement income. This retirement income will often come in many forms. Gone are the days of a single employer final salary pension that was completely automatic (no thought required).

Now we often work for 5 or more employers, collect various personal pension plans, company pensions, ISA’s and other savings vehicles for our retirement.

All of this needs far more management and input than has previously been the case. We no longer have the automated final salary pension where your retirement income was simply dictated by your final salary and length of service.

Now we have decisions on how much to pay in, what investment funds to choose, how much tax free cash to take and so on.

Now, the new auto-enrolment legislation has gone a small way to automating the pension system again, but most people acknowledge that this is just a sticking plaster and much more will need to be done to see the population at large enjoy a prosperous retirement.

The psychological shift

Perhaps the biggest shift (and one that people are yet to fully get their head around) is the psychological shift from an accumulation to a de-cumulation mindset when people retire.

Back in the days of fixed income final salary pensions, you didn’t really have to worry about this. You never accumulated a pot of money in the first place, you simply earned membership in the pension scheme which gave entitlement to an income in retirement.

At retirement that income turned on and you then had a nice monthly deposit into your bank account.

In the new world of pension freedoms, people will spend 20, 30, 40 or dare I say perhaps 50 years accumulating a pot of money. All of a sudden, when they retire, they then need to start de-cumulating (i.e. spending) that money.

The problem is that this is not an easy shift to make

When you have spent a lifetime saving money and building up your nest egg, it can be very distressing to see it start to fall in value.

Various studies have shown that in the investment markets, human beings feel the pain of loss about twice as strongly as the pleasure of gain.

I suspect that the same psychological forces are at work when we start to spend down our nest-egg – it hurts!

This often results in people holding back on their retirement spending plans because they simply don’t want to see the value of their pot fall. But this can lead to some real problems.

Occasionally we meet people who are living on a shoestring, despite having 7 (and sometimes 8) figure retirement portfolios and this is all because they don’t want to see the value of their precious nest egg go down.

But go down it must if we are to enjoy a great retirement – indeed, one must ask the question – if you wont spend the money in retirement, when exactly will you spend it?

 

 

 

Reflecting on the $1 Trillion Company

Lots has been said about the rise of Apple to become the worlds first company to achieve a $1 trillion market capitalisation.

I have 2 interesting observations on this milestone:

 

1 – Is Apple Really The First?

In the strictest sense, this is true, although as with many things, when you dig a little deeper, there is more to the story than meets the eye.

Although Apple, is the first company to reach a $1 trillion valuation in nominal terms, this fascinating article from Time, suggests that there are at least 5 companies in history that would today be worth over $1 trillion if you adjusted for inflation.

In fact, Time suggests that on an inflation-adjusted basis, the largest company that has ever been is the Dutch East India Company, which dates back to the 1600’s, with an inflation adjusted market cap of $8.2 trillion in todays money.

Also of note is the reason for this gargantuan valuation – the Dutch tulip bubble. Many people will be familiar with the Dutch tulip craze, which is the first widely recorded ‘financial bubble’ in history. For some (still unknown reason) people went mad for Dutch tulips in the 1600’s, pushing their prices to completely insane levels.

Until very recently, the Dutch tulip bubble remained the biggest financial bubble in history (when measured by the sharp increase and then even sharper fall in value), although this crown has now been taken by Bitcoin.

Some could draw comparisons with the tech bubble of the early 2000’s, although as I think the world has now realised, technology really is worth a lot and has the power to change the world, unlike Dutch tulips, pretty as they may be.

This is confirmed by the fact that all 5 of the worlds largest companies are now tech giants in the form of Apple, Microsoft, Alphabet (Google), Amazon and Facebook.

 

2 – Do Record Breakers Always Suffer A Fall?

A lot will now be said about the ‘inevitable’ fall of Apple. When a record is broken, we assume that this must be the end of the road.

The same has been said about the stock market over the past 2 years or so. “Now that we have reached a record high, we MUST be due for a crash”.

This is complete nonsense. Records are made to be broken and if the British Olympic teams of recent years have taught us anything, it is that records can be broken again and again by the very same person (read company).

As such, I suggest you also read this article on how Apple could now be on the way to achieve a $2 trillion market cap, before you rush off and sell those shares!

As always, just because a record has been broken, there is nothing to say how long that new record will stand for. In Apple’s case, it only lasted a day or two, as Apple now has a market cap of $1.030 trillion.

The final point of note here, is that $1 trillion is simply a ’round number’ that has significance for us human beings only. Other than being a 1 and 12 zeros, it doesn’t really mean much else in the context of Apple’s rise and rise.

Who knows, perhaps the first $2 trillion company will be here sooner than we think?

 

Why Don’t We Ever Feel Wealthy?

In our seminars I often talk about the fact that no one really ‘feels’ wealthy.

This might strike you as odd, given that we spend our working day looking after people who are generally fairly well off by most standards.

It does seem however, that no matter how much money we have and how rich we appear to others, we don’t ever appear to feel wealthy in ourselves.

If I were to mention that this phenomenon occurs to people with £100,000 in wealth, then perhaps you could understand. Most would agree that £100,000, while a very nice sum indeed, is not enough to live a totally worry free financial life.

But we see this happening to people with over £1,000,000 in liquid wealth (that is excluding property values and other intangibles). Surely when you have £1 million in cold hard cash or investments you can call yourself wealthy?

Based on our experience, apparently not!

We regularly speak to people with £5 million or even £10 million in liquid cash and investments and yet they still do not feel wealthy in themselves.

Why should this be?

I don’t have any scientific evidence on this topic (perhaps this is a subject for my next dissertation?), but I have a few potential reasons why this could be:

  1. There is always someone richer. Whether you have £10 or £10 million, there is always someone richer who lives down the road or whom you know and associate with.

2. Some people don’t feel ‘worthy’. This is especially true when people have perhaps come from a less advantaged background and have made significant wealth with their own hands. In many cases, they don’t feel worthy of this new found wealth or perhaps they feel that they don’t deserve it.

3. I think the main reason though is down to mindset. Some people seem to be natural savers. They feel guilty about making large expenditures and always feel inclined to save as much as they can (even if they already have £10 million).

Other people, are natural spenders – they tend to spend money as they earn it, even if they do earn a lot.

This creates a bit of a problem because savers, generally, will continue to save and feel that they are not ‘allowed’ to spend, even when they have become incredibly wealthy.

Spenders on the other hand, tend not to become so wealthy in the first place.

So what is the solution? Well, as with most things, the middle ground is perhaps the best place to be.

It helps to have made a plan in advance about how much money you actually need to (insert goal here – retire early, but a boat etc). When you have defined the goal in advance you:

A – know when you have achieved the goal – you know when you can ‘stop’ and

B – generally feel less guilty about spending the accumulated money, if there was a specific goal or reason for saving it in the first place.

We call this ‘defining the finish line in advance’.

Much like in a race – you generally know the distance when you start and the type of pace you will need to run to win.

If there were no finish line already defined, how would you know when to stop? How would you know what training and preparation you needed to do?

The same is true with financial planning.

We find the clients who experience the greatest freedom around money are those who have a goal laid out in advance. This way, when they ‘make it’ they know that they have reached their finish line and can give themselves permission to stop (and go and spend some of that hard earned money).

 

 

 

 

Could A Bad Brexit Be A Good Thing?

I was chatting with a client the other day about the potential implications of a hard Brexit, soft Brexit, medium rare Brexit and about any other incarnation of Brexit you can imagine.

Despite all of the white papers and policy discussions, the divisions between the very people supposed to be making the negotiations with the EU suggest that we have a very long way to go before a deal becomes ‘clear’.

Our conversation turned to the timing of investments and specifically, “should I invest money now because a ‘bad Brexit’ (which in the context of the markets is supposedly a hard Bredit) could cause havoc for stock markets”.

As the conversation evolved, I realised that my response to the question was pretty much the same response I give to anyone who is worried about some sort of ‘market event’.

Granted, Brexit might be a fairly major event in the grand scheme of things (or perhaps it wont – we really don’t know), but the principles are still the same.

My response went something like:

  1. There will always, and I mean always, be some sort of potential future event to cause potential upset on the stock market.

Before Brexit we had Trump, before Trump we had a million other things we could have been worrying about.

There will always be a reason not to invest. The human brain loves not making a decision, it loves to procrastinate. The problem is that there is always something on the horizon that could be the next big disaster which gives us a perfect excuse to put off taking action.

After Brexit is complete, there will be something else – mark my words!

  1. Even when these supposedly disastrous events do happen, the effect on the stock market is often negligible or is in fact the complete opposite to what is expected.

Using Trumps election and the Brexit vote as perfect examples, both were predicted to cause financial meltdown and havoc if they became reality and indeed they did, for about 2 days!

After this incredibly short period of time, markets continued their march upwards and have gone on to break records on a seemingly weekly basis ever since.

Had you taken all of your money out of the market on the day before the Brexit vote, when would you have put it back in?

I strongly suspect that you would not have pressed the ‘buy’ button again after those 2 days steep falls and indeed, anecdotally, those who did this are still sitting in cash, waiting for the right moment to invest, having lost out on 20+ per cent growth in the mean time.

  1. Finally, all of the above is trying to predict the future, when I certainly can’t do. If anyone can, please let me know (I think we could make a lot of money together).

As such, making these timing decisions is like flipping a coin – there is no way of know which way things will turn and in the short term markets move in almost random directions.

So … back to the point … what should someone do if they are thinking of investing and they are worried about a big event triggering a crash. Our suggestion here is always the same:

  1. If you are transferring money from one investment to another, then you should do so as quickly as possible and with the minimum time possible out of the market.
  2. If you are investing a significant sum of new cash, it generally makes sense to divide this up into 5 or so tranches and invest the tranches over a period of time. So if you wanted to invest £500,000, perhaps divide this into 5 and invest £100,000 per month over 5 months.

This staggered approach minimises the potential for a big crash to upset your whole investment and in fact it could turn it into an opportunity. Lets say that the market falls 20% after you have invested your first 2 tranches. Well – you can now buy the rest of your investment at a 20% discount on what you paid before – fantastic!

Now of course, this strategy can also work against you – if the marker rises by 20% after 2 tranches, you should have invested the lot on day 1!

But all of this assumes you can predict the future and you can’t. What we achieve by investing over a period of time is that we reduce the risk of buying at a very high or very low point – we average out and in an impossible to predict world, I will take the average every time.

How Quickly Things Blow Over

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’

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

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.