Picking Winners – Financial Myths

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 2002Atomic 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

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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Picking Winners – Financial Myths2018-06-21T16:30:43+01:00

Time for the Oscars

Time for the Oscars

The Oscars take place on Sunday night. To my mind, this always signals the end of the awards season. It also acts as a reminder and marker about certain years. Its 20 years since The English Patient picked up a bunch of Oscars. Frances McDormand, Juliette Binoche, Geoffrey Rush and Cuba Gooding Junior. Twenty years since Jerry Maguire and “Show me the money”. How time flies.

As you will have gathered I use film to explore various financial planning issues. At times I admit the links are a little stretched, but in essence a client comes to me with a story in progress and seeking help with how it turns out. There is some required editing, script writing, direction and the key characters all need to play their part. Of course original and unique content is always preferred.

So here are my posts for some of those nominated for the 2017 Oscar ceremonies. If I were a betting man, I’d suggest that La La Land are likely to take a bunch of awards. I enjoyed it greatly, but for me Hidden Figures, Hacksaw Ridge and Elle all had more of a profound impact. It was a shame that “I, Daniel Blake” didn’t get picked up in the US but was recognised at the BAFTAs.

https://wp.me/p2Rtww-1pA

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

Time for the Oscars2017-02-21T14:52:14+00:00

A Fresh Start for 2017

A Fresh Start for 2017

A new year, a new page, a fresh start for 2017. It hasn’t escaped my own attention that I have not been posting much since late November. This probably had something to do with my incredulity that America has elected Donald Trump and then the pressing tasks in December. However, I have now adjusted to the new reality of underqualified reality TV stars in powerful positions and feel the impetus of a fresh new year.

So here we are in 2017. All good financial planning will look forwards, but great financial planning also looks backwards to attempt to learn from the lessons being taught, and hopefully not too many of them are lessons that we had already learned but forgot.

Those New Year Resolutions

Many of us make new year resolutions. We’ve had just over a week of the new year, so how are you doing? One of the lessons I have learned is not to make new year resolutions, for me it’s the fastest way to feel utterly feeble. What is important however is progress towards goals, based on your own values. Naturally this is different for all of us and a date in the diary is not exactly a helpful “starting gun” but it does at least remind us to start, or keep going.

Last week as a client, you would have received an email about your Spending Plan. This is probably the thing that I and other advisers struggle to get returned by clients the most. Perhaps because it involves a reasonable amount of effort, perhaps because there is a sense of self-accounting in which we learn that we’ve overspent or not kept to our plans. Yet is it arguably the most important element of financial planning. Knowing where you are today, what your lifestyle costs and where your money goes. As it is said, the best indicator of future behaviour is past behaviour…

Whilst dreams, goals and plans can be helpful, without taking any action, they are pretty much worthless. My desire to shed some weight is not sufficient to make it happen. A desire to have enough income to protect and maintain your lifestyle into the future is not sufficient to make it happen. There’s some effort required. As your financial planner, part of my role is also a bit like a coach… one to encourage, occasionally nag, but to remind you of what you promised yourself.

So please, take the time to reflect and complete your Spending Plan. It doesn’t need to take long and its doesn’t need to be to the nearest penny, but it does need to accurately reflect where you are now. If you haven’t had the email, check your spam email (and change your settings for our emails) or get in touch to request one.

Wishing you a great 2017.

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

A Fresh Start for 20172017-01-09T13:42:56+00:00

Professional Adviser of the Year Awards 2017

Professional Adviser Awards 2017

I’m pleased to inform you that Solomons has been short-listed again as a finalist for the Professional Adviser Awards 2017 in the category for firm of the year – London. That’s now the fourth year in a row! Once again we are keeping some very good company with some of the best firms in London. Last year we were runner up (again) and once again I am not expecting to win – though of course I would love it if we did! This year’s short-list is also a little longer – twelve firms were short-listed.

As I have been asked in the past about how we were short-listed, in order to get this far a case study had to be submitted to the examiners. This year it was set by Jacqueline Lockie, who is the current Deputy Head of Financial Planning at CISI (Chartered Institute for Securities and Investment).

You can see the detail of the announcement here, should you wish to do so.

Professional Adviser is one of the better information services for UK-based regulated financial advisers, offering swift and comprehensive insight into developments in the financial services sector and aimed at those that generally advise “ordinary investors”. PA advise that the event is one of the industry’s best attended (and most respected) awards ceremonies every February.

Short-listed

The awards are broken into geographic regions; I have broken these down as best as I can from previous FCA information about the number of firms in each region. The FCA break the regions down a little further, with Yorkshire, West Midlands, East Midlands and Eastern all being separate categories. This is based on 5,718 firms in total throughout the UK. There are roughly 24,000 qualified advisers working at these firms.

  1. LONDON – 899
  2. SOUTH EAST – 598
  3. SOUTH WEST – 768
  4. MIDLANDS & EAST ANGLIA – 1,342
  5. NORTH EAST – 645
  6. NORTH WEST – 592
  7. SCOTLAND & NORTHERN IRELAND – 641
  8. WALES – 233

There is also an award for the overall firm of the year. Last year this was won by the firm that pushed us into second place. In all honesty, my view about awards is that they are largely a marketing gimmick, however, the PR and acknowledgement, even if somewhat questionable is welcome and hopefully conveys to our clients that we are well regarded within the field.

The award ceremony isn’t held until Thursday 9th February 2017.

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

Professional Adviser of the Year Awards 20172017-01-06T14:39:12+00:00
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