Concepts about investing – theories and generic ideas

ONE FOR THE GARDENERS

TODAY’S BLOG

ONE FOR THE GARDENERS

It has not been easy to find positive aspects of the pandemic, yet I have been fortunate enough to really enjoy working in the garden. I am not an expert, I have generally been handy at knocking stuff down, cutting, chopping and digging, but it took a pandemic to really switch me on to the joy and healing power of gardening and giving it more thought.

One of the surprises has been the short life of many blooms. There was a lot of groundwork, preparation, tending and expectation before the flower finally appeared, only to disappear within a day or a couple of weeks. Thankfully, I planted lots of plants that flower at different times, but the saying “the constant gardener” is very much my experience, different seasons bringing different work from deadheading to mulching.

It occurred to me that there are many lessons from gardening to learn when it comes to investing and indeed running a business. One of the things we attempt to do is equivalent to pruning – we might train some plants along a particular line, some stakes, supports or tied attachments might be needed to get the plant growing in the right direction. Perhaps cutting off some stems, to refocus the plant energy into the direction of the result we seek. We might want to give a plant a little extra care at times, responding to the local weather. That sort of thing.

TENDING YOUR PORTFOLIO

This is similar to rebalancing your portfolio. On a simple level this is taking profits, the discipline of actually buying at the bottom and selling at the top – within a range that makes sense for your planning objectives. There is a sense of tidying up, returning the portfolio to its intended structure, albeit larger and more mature (hopefully). Essentially getting it back on track having been permitted to grow within reason. Left unattended for too long the work becomes more significant and perhaps requiring larger tools and much more energy to do the job.

The problem with rebalancing is that we do need to do this regularly – not every month, perhaps not even every year. There is research about this which concludes that a rebalance adds real value if it’s about every 18-36 months (but not mandated that way). A key issue is the degree of movement away from the original plan – (we call this tolerance). A 10% trigger seems to hold credibility with evidence that this adds value over the long-term.

SEEKING MARGINAL GAINS

I’m conscious though that the process is long-winded. We need to advise you to rebalance or make adjustments, then get your permission and finally implement the changes and check that they have been done correctly. You are busy and probably get fed up saying “yes please do that” each time I ask you to confirm your permission. As a result, we are advising use of a Discretionary Fund Manager (DFM) to implement these changes based on agreed criteria. This means that there won’t be delays in optimising your portfolio, no need for you to agree each minor adjustment.

Normally I am not a fan of a DFM, but this is a fairly unique solution. Its incredibly competitive at 0.09% and takes an evidence-based approach using low-cost funds in a way that matches our own approach and investment philosophy.

Occasionally in gardening some decisions need to be made about what is altered to give the best chance of obtaining the results you seek. At your next review I shall be explaining what pruning, weeding, digging, mulching and reorganisation needs doing for your planning of future harvests

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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ONE FOR THE GARDENERSDominic2023-12-01T12:13:04+00:00

PATIENCE OF VALUE

TODAY’S BLOG

VALUE INVESTING

David Booth, the Executive Chairman and Founder of Dimensional wrote a piece that I would like to share with you. As you may know here at Solomons we believe in taking a long-term view of investments because they are designed to provide long-term sustainable wealth. Chasing returns appears easy as markets rise and fall, yet this as we have demonstrated time and time again is a fools errand and is not a robust, repeatable investment strategy, save a continual erosion of your wealth. Investing in equities (shares/stocks) provides the best chance of long-term inflation beating returns. A globally diversified portfolio with a bias towards smaller companies and undervalued ones (value) has plenty of evidence of outperformance over the long-term. However patience is required during periods where this does not appear to work (which if you think about it is part of the reason why it does). Anyway, here is David.

DAVID BOOTH

If studying financial markets for 50 years teaches you anything, it’s to keep things in perspective. During times of great uncertainty, like we’re experiencing now, investors may feel tempted to project today’s headlines forward or forget the useful lessons we’ve learned from the past.
I’ve been thinking about this a lot lately in the context of the growth vs. value stock debate.

Too often, news headlines distract us from taking the long view. They create a sense of urgency around what’s happening in the market right now. But we have nearly a century’s worth of data, and decades of financial science, to look to for guidance. That evidence reveals many investment lessons. For example, over long periods of time, stocks have generally outperformed bonds. This makes sense when you think about it. Stocks are riskier than bonds, so you expect to earn a premium return.

Most investors are probably familiar with this so-called equity premium, but they may be less familiar with the market’s size and value premiums. The same basic logic applies, and the same record backs them up. Historically, the stocks of smaller companies have outperformed those of larger companies. And relatively inexpensive stocks have outperformed more expensive stocks.

There’s solid theory behind thinking about investments in this way, but the premiums don’t necessarily show up every day. In fact, there can be long stretches when they don’t—stretches that can test the faith of investors.

I haven’t met many people who expect stocks to return less than US Treasury bills. And yet back when we started Dimensional Fund Advisors in the early 1980s, we found ourselves at the end of a 14-year period where T-bills actually outperformed the stock market. I remember a cover of Businessweek magazine proclaiming “The Death of Equities.” People then were saying the stock market would never be positive again. Of course, investors have since experienced one of the longest bull market runs in history.

We’re experiencing a similar historical variance right now with value stocks. Over the past decade, growth stocks have largely outperformed value stocks. But it’s important to keep things in perspective. According to Dimensional’s research, while value’s performance in the US from 2009–2019 was in line with its historical average (12.9% vs. 12.7%), growth significantly exceeded its historical average (16.3% vs. 9.7%). In other words, value has performed similarly to how it has behaved historically—it’s growth that’s been the outlier, performing better than expected. Financial science suggests you should enjoy these unexpectedly good returns, but don’t count on them repeating.

In my view, the rationale for investing in value stocks is as strong as ever: The less you pay for a stock, the higher your expected return. This is simple algebra. Still, some people are questioning whether the value premium has somehow disappeared. If value investing no longer worked, we’d have to throw out our economic textbooks and develop a new algebra.

I’m often asked what investors can do during times like these. The key to capturing any premium is to maintain consistent exposure to it. While we understand that the value premium may not show up every day, every year, or even every decade, sticking with value stocks can help you capture that premium over time.

No one can predict when premiums will show up, but we know they can show up quickly. In fact, some of the weakest periods for value stocks compared with growth stocks have been followed by some of the strongest. On March 31, 2000, growth stocks had outperformed value stocks in the US over the prior year, prior five years, prior 10 years, and prior 15 years, according to research conducted by our firm. As of March 31, 2001—one year and one market swing later—value stocks had regained the advantage in each of those time periods.

Why such a dramatic swing? It’s human behavior to stick with what’s working, and during periods when growth stocks are outperforming, many investors keep piling into those stocks. But many long-term investors think of it another way: The expected return on relatively cheap stocks is getting higher, which means more opportunity. As I like to say, value stocks are crouching lower now so they can spring up higher later.

Over half a century of observing markets, time and again I’ve seen that returns come in spurts. That’s why getting into and out of the market repeatedly is such a bad idea—you’re too likely to get caught on the wrong side of your decision. You can’t time returns. And you can’t predict them. To capture the historical premiums, you have to stay disciplined.

My long career in finance has taught me that there’s great value in keeping perspective, which includes keeping perspective on value. As my friend Robert Novy-Marx says, “I wake up every day expecting to see the value premium.” I, too, wake up every day expecting value stocks to deliver higher returns for investors. Time has only strengthened that conviction.

David Booth
Dimensional Fund Advisors

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PATIENCE OF VALUEDominic2023-12-01T12:13:13+00:00

STAMPS TELL STORIES OF INFLATION

TODAY’S BLOG

THE PRICE OF A STAMP

Royal Mail announced yet another increase to the price of a first-class stamp. As of 23 March 2020, the price will rise from 70p to 76p. Second class rises 4p to 65p. This will possibly have you gasping at yet another increase and recollecting when stamps used to be much cheaper.

This neatly leads me to discuss the topic of inflation. Whatever anyone within the financial world tells you, this is arguably the most devastating element to your financial wellbeing. Imagine you have £100,000 and inflation runs at an average 3% a year. Over the course of 25 years £100,000 is effectively worth £50,000.

Most people should be investing for decades, not days, weeks or months – decades. Your finances need to outlast you. When you enter the adult workforce and ultimately leave it, you have to rely on your investments to provide an income.

FIVE DECADES OF FIRST CLASS STAMPS

The price of a first-class stamp 10 years ago was 41p. In the millennium year 27p would have covered the cost of your standard first-class letter, which was not that much more than the 22p it cost in 1990. If you remember 1980, you will perhaps remember the 12p first class stamp and a decade before that – well, we hadn’t yet gone decimal, so 5d would have paid for your first-class letter which is around 2p. Over 50 years the price has risen from 2p to 76p for the same service.

The illustrations that you receive about investments (which are nothing like as beautiful as those of stamps) try to account for inflation, typically assuming 2.5%. CPI (yet another measure of inflation) is currently 1.8%.

IS YOUR MONEY GOING BACK IN TIME?

So, think on this. If your money in the bank is getting less than 1.8% interest, you are losing money. Your purchasing power is shrinking. Whilst this is great for those that owe money, it is terrible for those living off their savings. Yet I regularly come across people that lack into 3 or 5 years fixed rates of interest that are less than inflation. There are a variety of reasons, partly poor alternative cash deposit rates, but also a deep misunderstanding of how investments work and the dreaded “stock market” which news outlets seem to do their best to instils a sense of terror at the daily movements.

THERE IS NEVER A RIGHT TIME TO INVEST

Many of you worry about the right time to invest – the truth is, that it was 50 years ago, but otherwise it is today. Yes, we do not know what will happen to the UK economy, (we never do) we are facing all sorts of significant problems (again) but these will pass (again) being replaced by the next round of bad news and you will still have to live with the consequences of your decisions.

CHECK YOU ARE NOT DESIGNING TO FAIL

As the tax year is drawing to a close, check that you are not holding too much in cash. Certainly, having access to cash is vital – for planned expenses and the occasional mishap. You should have an emergency fund if your income is likely to stop. However, beyond that, you need to deploy your money to work for you over the coming decades so that it grows faster than inflation.

Do not make the mistakes you made a decade ago, holding onto cash and worrying about the financial crisis, or the decade before about Y2K or the one before that… inflation does not reward anxiety, it eats it for breakfast.

Pick up your phone or send me an email. It’s about time that this was mastered. Let’s get started…

Dominic Thomas
Solomons IFA

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STAMPS TELL STORIES OF INFLATIONDominic2023-12-01T12:13:23+00:00

How to read your valuation statement

Dominic Thomas
Feb 2019 • 5 min read

How to read your valuation statement

If you have an investment, you will receive a valuation every 3 months, on a quarterly basis. These tend to be issued to the 5th of January, April, July, and October in-line with the tax year end. Your statement will show various items, the elements that I want you to focus on understanding are the fund, the units and the price.

The Fund ABC

The Fund. You will see the names of funds, these start with the name of the investment company and then followed by the name of the fund itself. This tells you where and probably what the fund is investing. By way of example. I will consider the Dimensional UK Smaller Companies Inc Fund.

A – The Investment Group

The first bit of any fund name is the name of the investment group, this may sound obvious, but as many names are unfamiliar or get altered due to mergers it is important to state the obvious. In my example, “Dimensional” is the name of the investment company.

B – The Sector

In my example, this fund is invested into UK Smaller companies, a specific sector of the UK stockmarket. This is investing in shares in companies in the UK that are deemed “small” which really means not the top 350 biggest companies in the UK. It does not mean a little local business.

C – The Unit Type

Most funds also show “Inc” or “Acc” at the end, this reveals if the fund is paying out any income (dividends) – hence “Inc”. Alternatively, “Acc” (accumulation units) whether they are automatically re-invested within the fund. Generally speaking we use “income” funds because this makes life easier for everyone to track income for capital gains calculations. The income can be re-invested within your portfolio or paid out to you, the investor. This varies depending on the product type and strategy required.

Unique Identifier

Every fund has its own reference number, to make life deliberately complicated there are several different unique numbers for a fund “SEDOL” or “ISIN” are perhaps the most well used. This is nothing more than a way of locating the specific fund. All funds now have their own summary fact sheet, now called a Key Information Investor Document or KIID. How the financial world loves its acronyms.

Where and what the fund is invested into is a deliberate selection, designed to form part of your overall portfolio. The fund itself may be thought of as “high risk” (or “low risk”) but as part of a larger portfolio is designed to provide a combined risk for the entire portfolio.

Units

On your statement you will probably then see the number of units. Think of this the quantity of your holding in the fund, which can run to several decimal places. This is what you hold, or what you have bought – units in the fund. These amounts will therefore only alter if you have added more money (bought more units). They might reduce for the opposite reason – you have withdrawn money or units were sold to pay charges.

Price

Typically, the next column will be the price of the units on a specific day. Please note that the price changes each day and reflects the end of day value of all of the holdings within the fund. So in our example of the UK Smaller Companies Fund, this would be the value of all the equities (shares) held in UK Smaller companies at the end of the day. These are listed on global stockmarkets.

Value (or valuation)

This is typically the next column and is the sum of the number of units that you own in a fund, multiplied by the value.

Dimensional UK Smaller Companies Inc 46.694 units at £28.38 per unit is worth £1,325.18. In short: 46.694 x £28.38 = £1,325.18.

Your valuation is therefore a snapshot of the value of your funds on a specific day. It has happened, today’s value will be different. Having quarterly valuations really means that you have 4 days in the year of information.

Think Twice

When you look at your statement you may well compare it against a previous one. You might see changes in the funds held (if we have advised any) or changes in the units – even if no new money has gone in (due to a rebalance or re-invested income). You may observe that some of the values have fallen or risen. This reflects the fund and the market at the time.

It is tempting to think that funds that are worth less must be doing badly. This is not necessarily the case, in fact its highly unlikely to be true. It is merely the current value, not a reflection on the fund, which is selected specifically for its cost, reliability and the way it combines with your other holdings. Think of each fund as a parts of a car, you don’t have all engine or only tyres, it is put together deliberately to produce a longer term overall performance, designed with decades in mind, not days or quarters. In practice the different bits are asset classes – types of liquid investments that can be priced reliably on regulated global markets.

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How to read your valuation statementDominic2024-03-13T10:51:04+00:00

RETURN TO THE 1970s

Solomons-financial-advisor-wimbledon-blogger

RETURN TO THE 1970s

There has been a fair bit of talk about aspects of our current political rhetoric that threaten a return to the 1970s. Whilst my early childhood was pretty care-free in that time, there is little of the 70s that I would welcome back.

Insert a film set in the 70’s. A bleak story of a character that everyone’s limited television of the time cannot fail to recognise. “Funny Cow” has a title to offend and a story that will offer little other than despair as it pushes all the stereotypes and clichés of the time. The miserable family existence that passes for life in a northern town. The wife-beating, loud-mouthed husbands and the hollowed shells of wives that have turned to the new prison of alcoholism. Yet sadly this is very close to her story.

Solomons IFA review of Funny Cow the movie

A galaxy far, far away…

If you are inclined to revisit the 70s then this film is a reminder that it really is best left consigned to the past and a collection of good memories when we were all younger. The times were very different and have thankfully changed for the better. It seems like a long time ago… a galaxy far, far away… yet in practice it’s just 4 decades ago, closing in on 5. In reality that is the sort of time that most investors save and then live off their investments.

Short-term memory

The changes in our lives are not always easy to see but flipping through your photograph albums (remember them?) is a useful reminder of our journey. When it comes to investments, the opposite happens. We are constantly bombarded with a moment by moment update of the markets, what has changed in the last 5 minutes, rarely does anyone report or assess the long-term value of investing, billboards, newspapers, emails and websites are all set to the short term, as if this tells us anything of value. In reality the valuable information is surely only the long-term results. What has happened over not 3, 6 or 12 months, but over 10, 15, 20, 25 years. However, that requires a patience that most of us have been taught to ignore.

Here is the trailer for “Funny Cow” it’s well acted, (Maxine Peake is very good) but frankly unless you want to watch misery unfold for a lengthy 102 minutes, (the irony isn’t lost on me) a better use of your time would be to sort out those photos you still haven’t put into an album… or had one printed.

Dominic Thomas
Solomons IFA

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RETURN TO THE 1970sDominic2023-12-01T12:17:43+00:00

Picking Winners – Financial Myths

Most of the financial services industry thrives on inertia and misplaced trust. The investing world can be broadly broken down into two categories – active or passive management of money. The terms are not helpful but can broadly be best described as active management is where Fund Managers attempt to outperform the market by use of skill, philosophy and information. Passive management basically says this is possible, but impossible to do with any repeatable success, so invest into the entire market (or index) to obtain the market return.

There are skills, systems and processes needed within passive management if truth be told, particularly when an index is forced to alter its constituents (much like the end of season promotions and relegations). However, costs are generally much lower – unless you are unfortunate enough to own a Virgin Money Index tracker. Generally active funds are more expensive – considerably. This it is argued, is due to better performance.

Anyhow, research from American Dimensional Fund Advisers, who rather pride themselves of academic research and evidence, recently concluded their study of US funds available to US investors. OK, its America not the UK, but given that the US is roughly 8 times the size of the UK stock market, let’s use it as a better sample.

Coldplay - A Rush of Blood to the Head No.1 Album in 2002

Atomic Kitten - The Tide is High No.1 single in 2002

The Unvarnished Truth

The evidence looked at equity funds and Fixed Interest Funds over 5, 10 and 15 years (2002-2017). Given that most people are investing for their lifetime, though behave as though they do so for about 12 months, these are sensible starting timeframes for such research. For the sake of brevity, I will discuss their equity fund findings (the results were much the same for both asset classes).

Of all the funds available, only 14% to 26% outperformed their Morningstar category index. The longer the time frame the lower the number that outperformed. So, in simple terms about 1 in 4 outperform over 5 years, 1 in 5 over 10 years and about 1 in 7 over 15 years.

Survival of the Fittest

However, even if it was as simple as simply picking funds on that basis, you are more likely to have picked a fund that closed. Over 5 years 18% of the funds did not survive (about 1 in 5). At 10 years this rose to 42% failing to survive (1 in 4). At 15 years, well just 51% of the funds you could have chosen from survived. That’s 1 in 2.

Top of the Pops Investing

As many advisers and most online sites promote and select “top performing funds” it may interest you to know that a Fund Managers historic performance does not ensure a decent future performance. The data revealed that top quartile performance for consecutive 3-year periods occurred on average between 17% and 33% of the time. In short, not many sustained even a short-run, or strong track records failed to persist. Coldplay and Atomic Kitten both had good years in 2002 (when the data range begins). Who remains “successful”?

As stated, an often-cited argument is that active funds cost more because they perform better (we have established that some do – 14% of them over 15 years). Higher costs mean better results, right? Well not according to the evidence. Those with high charges (fund manager costs) with an average expense ratio (AER) of 1.93% almost entirely underperformed (94% of them). Those with the lowest costs (AER of 0.83%) delivered better results, with 25% of them outperforming.

The research also found that trading costs also impacted results (unsurprisingly). Some Fund Managers changed their portfolios almost entirely, the more they did and the longer the timeframe, the fewer that beat their benchmark. Yet this is typically claimed to be their true skill. Only 9% of high turnover funds beat their index over 15 years.

Hey Big Spender…

I have been in this game for quite some time, but it doesn’t need much experience to learn that those with more money have more money to spend…. On their version of reality (marketing) which is why many advisers, Product Providers and media swallow the myth that active management costs more because it delivers more. It can, but only in a very small number of cases and the chances of selecting such funds is virtually non-existent when most look at 3-year top quartile performance data.

There is another way, a better, cheaper way. We call it low-cost investment techniques rather than passive investing, because there is nothing passive about it. High costs and excessive turnover are likely to contribute to underperformance. You can avoid this completely, if you want to.

Dominic Thomas
Solomons IFA

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Picking Winners – Financial MythsDominic2023-12-01T12:18:00+00:00

Lady Luck – The Domino Effect

I have a growing awareness of my good fortune. I might call it luck. This week I was on a training course and we had a very good talk about diversity. We examined the topic from several perspectives, but for the sake of time, this was for application to our own firms (how we employ and empower staff) and also for clients and prospective clients – how we engage in a way that is authentic and accessible.

There is no doubt in my mind that I am fortunate. Lucky to have many “natural” and geographic advantages. Lucky in so many ways and many that I will probably never truly appreciate.

The session prompted some thinking and will inform some of the decisions I make in the future. New, helpful, relevant information tends to do that, doesn’t it?

Luck is not a Superpower

On the train home, I thought about the new film “Deadpool 2”. OK, it probably isn’t everyone’s “cup of tea”. It is an ironic, send up of the superhero, by a superhero. Violent and full of choice language it pokes fun at itself and the cinematic world. There are many comedic moments, which are best understood in the context of superhero films, this is not really a family film, yet it is about family.

Domino (Zazie Beetz) claims that her superhero strength is “luck”. Deadpool (Ryan Reynolds) mocks her, claiming that “luck is not a superpower… it’s not cinematic”. It is unreliable and outside of anyone’s control…yet Domino uses her natural skills which are enhanced by luck, which of course makes for an amusing sequence of events in the movie.

Checking back to real life, many of us may fail to appreciate the luck we have. Few can fully do so, some give it a different name. However, when it comes to reliability, luck sometimes isn’t a lady (Guys and Dolls). Luck is not a plan, it is not a super-strength and it definitely has no place in a financial plan, unless your plan is to gamble.

Coming to terms with Carnage

Markets are what they are, hostile for those that do not appreciate how they operate, they have their own “natural laws”. One is a correction. Equities are volatile, we need them to be, that is precisely what provides long-term growth and value. Yet almost everyone behaves as though it is your enemy. The media will fill its vacuum with tales of Armageddon like carnage that neither Deadpool or The Juggernaut could possibly match. Yet this is the unvarnished truth… markets are volatile, they fall, and they rise again… repeat, ker-ching…

The great untruth, is that risk can be removed, that there is growth without pain. Risk can only ever be swapped, not removed.

OK, so here is the trailer… click play at your own risk, lots of F-word and violence. You’ve been warned.

Oh.. if you do go to see the movie, as with all Marvel films, there is more to come within the long rolling credits.

Dominic Thomas
Solomons IFA

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Lady Luck – The Domino EffectDominic2023-12-01T12:18:08+00:00

Remembering Montmartre 1899

It is 1899 and I’m at the latest Secret Cinema event, transported back in time to Montmartre, Paris in 1899, arriving at la vie Boheme – the Moulin Rouge. We are greeted by Monsieur Zidler and shortly bump into a certain Henri, one Henri de Toulouse-Lautrec with friends and then serenaded by a new young writer. We marvel at the guests, who like ourselves are not themselves, but suitably attired for their profession in 1899.

Most will not be familiar with Secret Cinema, it is, after all, secret and has a tag line, reminiscent of Fight Club – Tell No One. The concept is simple – gather a crowd of film lovers to come along to watch a movie together. The twist is that its immersive to the extent that there is a successful attempt to create the feeling of being in the movie, with not simply “sets” but landscapes to explore. Engage, (in character) with the actors who perform their screen roles before and during the screening of the film. It’s a lot of fun.

Champagne Lifestyle

Sadly not all in Montmartre was 1899 – the prices certainly were not. A bottle of Champagne (well why not? after all Monsieur Pol Roger died in 1899 and Jules Medot founded the Champagne house Louis-de-Custine in 1899) at the Moulin Rouge was £40 and as we all know that doesn’t go terribly far… So pandering to my slightly sad interest in inflation, I wondered what the price of Champagne was in 1899 and whether it was possible to re-inflate it back to 2017. Sadly the £40 price tag for a bottle of Champagne in 2017 wasn’t deflated to the 1899 price of just 33pence (best attempt)…..probably just as well, £40 then would have bought 121 bottles. Inflation is arguably the most underestimated element that any investor must contend with and must be factored into any sensible financial plan.

Returning to the 70’s?

Many are currently suggesting that due to Brexit and the unfathomable Mr Trump, we are (collectively) in for a bumpy ride, perhaps something akin to the 1970s. If this does indeed become the case, presumably we can expect power cuts, strikes, industrial meltdown, oil price hikes and rampant inflation (well, by British standards anyhow). Personally, whilst I’m not pretending that everything is well, I don’t have a bleak outlook and find many of the scaremongering, nothing other than a tune for peddling. It is probably obvious to you by now that I’m not a fan of Mr Trump, or Brexit,

Inflating the figures

Anyway, back to the inflation issue and the 1970s. Remember that for the power of your £1 to remain the same it needs to keep pace with inflation. How inflation is measured is of course hugely contentious. We tend to use CPI and RPI as the most common metrics. That said, there often seems to be a disconnection between the rising prices of things you personally pay for and what the Office of National Statistics say they are. This isn’t a political jibe, if most of your spending is on utilities, then it’s likely that your personal rate of inflation is rather higher.

How do you remember the 1970s?

For the record, £100 at the end of 1970 was £364 by the end of 1980 because of the inflation (RPI) in the 1970s, which increased 9%, in 1971 then 7.6%, 10.6%, 19.2%, 24.9%, 15.1%, 12.1%, 8.4%, 17.2% and 15.1% in 1980. This represents an average annualized inflation rate of 13.3%. The FTSE All-Share achieved an average annualized return of 12.2%. So didn’t quite keep pace with inflation and saw some huge market declines (-28.6% in 1973 and -51.6% in 1974) Any investor that lost their nerve at the end of 1974 would have missed out on the 151.4% recovery in 1975. These huge changes eventually ushered in a fundamental change in monetary policy and “Thatcherism” in an attempt to control the supply of money and inflation specifically.

Think and act life-long

The advantage of standing back and considering a long term approach is that the short-term volatility of a year or even a decade reinforces the rarely practiced investor skills of discipline and patience.

If you are interested in Secret Cinema, here’s the promotional trailer. Click here for the link to their website, where you can find out about many of their immersive film experiences, but tell no one…

Dominic Thomas
Solomons IFA

Email me to get in touch

Remembering Montmartre 1899Dominic2023-12-01T12:18:39+00:00

Markets are High, the End is Nigh

I have no idea why radio and TV stations broadcast the level of the FTSE with every news bulletin. It’s as though they are screaming “the end is nigh”. Think about it for a moment, what purpose does it serve? The only people that can do anything about their investments are traders – who had the information already. To my mind the only reason I can think of is so that you and I panic. The markets are high, so we panic with the good news fearing that is must be coming to an end. Alternatively, they have fallen, so the anxiety and fear is by how much and how far.

So What?

A better question might be…. So what? How does this affect me at all? Well the truth is that your investments will almost certainly be impacted, but then that’s the point of investing. The issue is really does the rise or fall play any significant part on your financial well-being. This is where proper financial planning comes in. We know that investments fall in value. We allow for it. We also know and believe that the point of investing is so that they rise, otherwise we wouldn’t bother would we!

A picture paints a thousand words

So, I thought that I would share with you an interesting graph. This shows the returns of the FTSE All-Share over the last 30 years from 1986-2016 (31 years). The grey columns show the calendar year returns. You will observe that 22 or the 31 are positive, 9 are negative. In other words, 70% of the time, calendar year returns have been positive. However, when the negative years occur, those years can see large falls, note the worst being -33% in 2008 (the credit crunch, supposedly the worst financial collapse in generations).

Let’s get Negative

Now observe the red dots. These represent the largest fall in each year. All falls must be negative to be a fall. So, every year has one. Note how these are pretty “bad” yet don’t really seem that bad when you consider the actual return over the year (grey column). Its noteworthy that the average fall in a year is -15.8% – the median (if you line up all the results, the one in the middle) is -12.6%. So, in short you should expect a fall every year of around this sort of amount. It should not be a surprise.

You probably remember the crash of October 1987… just after the hurricane that Michael Fish didn’t expect. Remember the headlines of millions wiped off the markets. True, it (the FTSE All Share) fell -37% however over the year it showed a return of +4%. Which do you remember? I’m guessing the crash… which you would certainly remember if you got in a panic and sold your holdings (when they were down)… selling in a panic or a crisis is the surest way to actually have one, but remembering your long-term financial goals and why on earth you are investing anyway is vital. That’s what we and any other decent financial planner will help with, when the crowd and the media and the market are telling you to panic, do something!… do not.

Diversify to Dampen

However, very few people have all their investments in the FTSE All Share or indeed entirely in shares (equities) most will have a portfolio that has some in low risk holdings as well, ideally the portfolio will be globally diversified across nations and asset classes. This will dampen the effects of both the rises and the falls of the markets.

The Only Timing that Matters

Trying to time the best moment to enter or exit the market is impossible to do with any repeatable success. However clearly you and your planner need to mindful (aware) of when you want to withdraw money. It’s all very well a favourable long-term average return, (or even a calendar year one) but what about when it’s a really bad year and you need the money out? Again, the truth is that any decent planner will help assess this advance. In practice it is unlikely that you would need all of your investments at the same time, but it can happen, particularly if you decide to use your entire pension fund to buy an annuity (income for life). This is why we spend a lot of time getting to understand our clients, your goals, values and aspirations – importantly when you need the money, so that that we can plan appropriately, perhaps reducing investment risk or holding more cash than you might need. Context is everything and a plan is vital. So get in touch to ensure that your investments are structured properly – for you, not for the media.

Dominic Thomas
Solomons IFA

Email me to get in touch

Markets are High, the End is NighDominic2023-12-01T12:18:48+00:00

The Internal Fight and Behavioural Finance

There has been lots written in recent years about behavioural finance, in a nutshell this seeks to understand the reasons why investors (private and professional) behave the way they do, when invariably this produces very poor results. We all (hopefully) know that when it comes to investing you aim to buy low and sell high, of course this is not easy, particular in a world overloaded with information and noise. The struggle most investors have is essentially with themselves.

Perhaps this tension is reflected in recent films. There is a branch of investment theory that believes in looking for social signs that provide an investment advantage. Some take the hem line of dresses to reflect the direction of shares, the number of goals, the types of films… all essentially on the belief that more general “confidence” or lack of are displayed. Of course most theories hold a modicum of truth to even raise your attention, but as a long-term process, invariably amount to little more than highly spurious claims.

Over-confidence and Bad Behaviour?

Yet investors continue to display habits that are costly, panic and over confidence being two key elements. Investors find it very difficult to be dispassionate about their money, most believing that they are equipped sufficiently with common sense, market information of plain “insight” that provides advantage. The truth is rather different.

If you are persuaded that the big blockbuster movies are any indication of current sentiments, then perhaps the action-hero genre is worth consideration. As opposed to the usual theme of saving the world with the “good guy” we are presented with “Batman versus Superman: Dawn of Justice”, “Deadpool”, “Captain America: Civil War” and “Suicide Squad”. All reflecting concern about the assumptions we make about heroes and those we empower. Indeed also examining the conflict between friends, allies and team-mates when they disagree over the degree of Machiavellian behaviour required – ends justifying the means. Of course the deeper reflection is that we are ourselves each character, at war with ourselves. Something investors would do well to remember in the heat of trouble and why a rational, dispassionate, long-term, evidence based, sustainable investment approach is what we believe will ultimately protect and serve.

I’m hoping to put some posts together about the basics of behavioural finance, but in the meantime if you are struggling to see the enemy within, perhaps a trip to the movies may be helpful. Of course one might make the case that the current political backdrop and decisions being posed to us here in the UK are also reflected in film. We shall see quite how sensationalist, nationalistic and competitive our media become over the summer, an EU referendum, US Presidential campaign and ample national sporting events.

Here’s the trailer for the latest Captain America film “Civil War”. The Marvel franchise is very much alive to the complexity of character.

Dominic Thomas
Solomons IFA

The Internal Fight and Behavioural FinanceDominic2023-12-01T12:19:14+00:00

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