The Internal Fight and Behavioural Finance

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

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

The Internal Fight and Behavioural Finance2017-02-02T13:34:39+00:00

Is Financial Services like gun crime?


Is Financial Services like gun crime?Gun_Crazy

Here in the UK we have some gun crime, its horrible, but it is still thankfully rare. In North America the obession with guns is perplexing, the rising death toll and increasing militarisation of police forces is alarming. We have seen further mishandling and stereotyping lead to deaths in police custody and now further riots in some American cities. I’m not anti-police, I am anti-stupidity and I don’t think I’m telling you anything you don’t already know. America has almost no gun control, you can wander into a gun store or general department store (heck, sometimes they even give them away for opening a bank account -see Bowling for Columbine) and buy a firearm and ammunition. No real checks. We tend to think this is insane.

Yet here in the UK we have an equally perplexing situation which has collectively blind-sided most people. Its in the form of pension advice. Yes that rather dull topic (believe me I know how dull). Anyway it seems that your neighbour – the one that’s tempted by all those offers of too good to be true (because it isn’t true) high investment returns is wreaking havoc with the rest of us, like a loaded gun.

Garbage in, garbage out..

Despite warnings from the regulator, or there being a regulator, believe it or not, there are some “advisers” out there peddling all sorts of… well…”junk”. These always promise high returns, but actually pay high commission (something that is meant to be banned). So I can only assume that the person that does this is greedy, gullable or vulnerable. If the latter, then they have my sympathy and support, but those that are gullable, well it may sound harsh, but at some point in life you have to take some responsibility for your actions. As for the greedy… why should the rest of us pay for your gambling habit? eh?

Back to the gun analogy. Say I am a shop keeper, I don’t sell guns, in fact I sell books, but the guy nextdoor does. Guess what? his customer went on a rampage in the mall and shot 60 people. Being a shopkeeper I am sent a bill for compensation because I am a shop keeper.

What do I mean? Well pensions are regulated products and in theory should be arranged by regulated advisers. However in some products (SIPPs – Self Invested Personal Pensions) you can hold “uncoventional” funds… or what I might call “stuff you shouldn’t ever touch”. The regulator (FCA) would call this “non-mainstream funds” and in fact categorise them as “unregulated” in other words not regulated and therefore not actually protected by compensation. However because they were bought through a SIPP (regulated) and arranged by an adviser (regulated) therefore when it predictably goes wrong (it will) anyone that is an adviser gets to pay for the compensation. Now I don’t know about you, but I thought being an adult involved taking responsibility for your actions, so being one, I don’t sue people every time decisions I take don’t work out right.

Yes inflation is 0% but fees increase 75%

I tell you this because on top of a £20million levy a few days ago in March, the new annual levy has been set, increased from last years £57million to £100million for those that arrange pensions (shop keepers). This levy always comes with 30 days to pay (thanks). This is only a fraction of the full regulatory fees that I and other adviser firms have to pay.

Nobody to blame… but the good guys can pay up right?

The pension companies that allowed these investments in their pensions claim “not guilty – the adviser did it”, the regulator claims “We can’t use our product intervention powers on unregulated investments”… so cannot stop the funds being sold (or bought).

Those that sold these things have scuttled off elsewhere, probably to re-emerge in a different guise, leaving the dwindling number of firms (now about 5,300) and advisers (now around 24,000 from about 250,000 20 years ago) to pay the bill. The bill is paid by the firm and is enough to wipeout some firms, meaning that next year….the numbers reduce, so the share of the bill increases. There is only so much “cost” that a small firm can manage before needing to pass this on to their clients. I therefore predict that as a consequence, many advisers will be “forced” to put up their fees… which means you are also coughing up for the greed of your neighbour, because they cannot be bothered to take any responsibility for believing in fairytales…

Sorry to moan, but seriously… this isn’t fair is it? Of course people that have been ripped off need compensating, but seriously, you didnt think investing in a timeshare via your pension was normal did you? Your comments would be very welcome…. perhaps I am missing something, perhaps my entire profession is… in which case I’d like to know so that I have a snowballs chance of improving it.

Dominic Thomas

Is Financial Services like gun crime?2017-01-06T14:39:28+00:00



James Anderson recently became England’s most successful bowler as he took his as he took his 384th wicket, that belonging to Denesh Ramdin and overtaking Ian Botham in the process. This is of course an incredible achievement in International cricket – congratulations Mr Anderson. So I was surprised to see an item on the BBC sports website that attempted to work out who really was/is the best bowler England have ever had.

Sport as you will know has become increasingly dominated by statistics – attempts on target, completed passes, distance run, speed of delivery the list is very long and naturally varies from sport to sport. When winning any sport tournament, many rather dull teams/individuals have argued that its not the manner of the victory, just that there was a victory. I cannot help but think of the time Greece won the 2004 European Football championship (sorry Greece)… or for that matter many Champions League finals, where one team essentially set up camp in their own penalty area hoping to counter attack and steal a victory. Wisden

Cricket is not new to adopting statisitical analysis – arguably starting the statistical obsession with John Wisden’s annual almanac started in 1864. So anyone wishing to pour over cricket statistics has had plenty of opportunity to do so. Anyway the BBC asked its pundits to assess England’s top 10 bowlers and ascribe a value to the wicket taken. In short a batsman that averages 50 runs is worth more than one that averages 5. Recompiling the data provides a different twist with Matthew Hoggard topping the list (248 wickets). Whilst this is “all very interesting” sport, like life cannot be metered into a nice, neat formula. There is always a context, which even with a lengthy span of statistical data is flawed. For example – the quality of the opposition is a key ingredient, the prevailing rules, TV replays and so on, let alone the context of the pressure of the moment. Statistics are cold, unrepentent and have no context other than a time period.

Investment returns and the charts that you see plastered on advertising boards or in any media are similarly misleading. Most investors probably know that this is the case, but few behave as if it is. Most investors are tempted to invest once returns are good, most sell when they have been poor, on average chasing returns, receiving below-average market returns at above market cost. Sadly the equivalent best investment “gongs” or awards also measure historic data (there is no other) and the context of this is against peers. Who is the best fund manager? well it rather depends on which sector, what timeframe, what measure of risk is used, and what luck was involved. In short, its an impossible task, yet many play the game and attempt to quantify who is “best”.

In practice, the only investment returns that matter are the ones that you actually get. Cricket, motor racing, football, tennis, golf…are all enjoyable escapes, but again the only best that any sportsman/woman can be is their own best, in the context of their sport, time, team and luck. I have nothing against awards for best this or that, (they can be a lot of fun – especially if you win one or two) but as ever, context is everything. I can only be the best financial planner that I can be, constantly striving to improve and be better than I was last year, last month, last week… and of course our service (like most) is not for everyone, but for those that want and need it… well we try to make it the best possible.

Dominic Thomas


DIY Investing

Solomons-financial-advisor-wimbledon-bloggerDIY Investing

To my mind, one of the great ironies of financial planning is that a litigious culture, historic mis-selling, poor regulation, fearful professional indemnity insurers, better qualified advisers and RDR has meant that the cost of advising anyone has increased. Already this year our regulatory costs have increased by more than 10% (yet inflation is 0%). This will result in the continued rise of DIY investing (do-it-yourself).

I have tended to take the view that most people need to have a budget, a target, a savings habit and only when they have £50,000+ do decisions get complicated enough for me to get involved. Its not always the case, but largely. So it is alarming how poor most people are at investing – and by poor I mean really bad.

Just Unlucky?lucky sleven

An academic study from 2012 “Just Unlucky?” by Meyer, Stammsschulte, Kaesler, Loos and Hackethal at Goethe University in Frankfurt, into the success or otherwise of online investors (who generally think of themselves as well-informed) concluded that 89% of them lost an average of 7.5% a year. Let me repeat that 89% achieved -7.5% a year! Those that performed better were basically no better, exhibiting the same performance metric as luck. The research is based on German investors.. a nation that is historically characterised as shrewed, efficient, conservative and risk averse.

91% of DIY investors fail – big time.

Why? It would seem a significant element is holding the wrong asset classes and not well diversified globally. There is also a high degree of fear and greed at play, selling at the bottom and buying at the top. I can only imagine that some were following the tips from journalists and media commentators “best buys”. If dealing costs are factored in (and this was DIY investors using online dealing accounts, which presumably they thought were low cost) returns were 1% worse at -8.5% and achieved by 91% of investors.

Part of my job is helping people reduce their mistakes. We cannot be perfect, but we do apply sensible disciplines to remove a lot of errors. We call this advisers alpha – adding returns by good advice. Other research (of American investors) by Dalbar suggests that most investors underperform the market by 4-6% a year. But this latest research suggests it is far worse than that. Yet from next week, the new pension freedoms will mean that more people will take it upon themselves to go DIY with their pension. I don’t imagine that it will be a favourable outcome. This does not bode well for those using “discount” online investments, who eventually become so disenchanted with markets that they try less mainstream investments – which invariably blow up in their face and due to a peculiar twist, advisers such as myself pick up the bill… which to makes the cost of advice higher… and so the cycle repeats.

Dominic Thomas

DIY Investing2017-01-06T14:39:29+00:00

Dark October Days


Dark October Days

There is something about October that makes me feel somewhat downbeat. Perhaps it is waking up in the dark and then coming home in the dark. The weather is generally pretty grey and miserable, autumn, for all its glorious colours is truning into winter and the summer feels like a distant memory. I also find walking the dog much more of an effort – wellies and avoiding the rutting stag in Richmond Park. This is cold-catching time and to say that markets tend to catch a cold in October would be an understatement.

Most will remember the more infamous “Black Monday” market crash of October 1987 with the FTSE100 falling 12.22% in a single day. More recently October 2008 provided some of the most terrifying and largest single day falls (in percentage terms) ever on 6th falling 7.85%, 10th falling 8.85% and 15th falling 7.16%. Today as I write, the markets are once again “in a state of turmoil” depending on what you read and who you listen to, as news is digested and responded to.The_Hunt_for_Red_October_movie_poster

However, despite this “evidence” on 16 October 2008 the FTSE100 stood at 4,377.30 yesterday it closed at 6,211.64. Despite the news, markets have been rising and opened at the start of this month at 6,211.60 Looking at short-term statistics is very unhelpful, add in the occassional image of a stockbroker clutching a phone, peering at a monitor or holding his head in in hands and the scene is set for the appearance of further market chaos and sentiments of “you simply cannot trust the markets”. Well, in practice, despite October having what appears to be an unusually larger than fair share of bad days hostorically, it isnt actually much different from other months. Markets rise and fall, reflecting sentiment about the state of the world, which invariably has little to do with reality. This is partly due to several European countries still struggling to generate economic growth and the US finding life harder going. This is not really a new phenomena is it?

Keep to the long-term principles of investing, if you are keen to make a short-term play then a market fall is essentially a discount, some would argue “a more accurate value” but either way, sitting on the sidelines waiting for the markets to rise again before getting back in is the wrong choice. So stay the course, keep to the game plan.

Dominic Thomas

Dark October Days2017-01-06T14:39:34+00:00

Skandia Close OId Woodford Funds


Skandia Close Former Woodford Funds

Its all change at Skandia – soon to be renamed Old Mutual Wealth. On Friday they (OMW) took action which is rather unusual. Funds (INVESCO High Income and INVESCO Income) that had been previously run by one of the most successful fund managers (Neil Woodford) were closed. This follows the exit by Neil Woodford from INVESCO Perpetual who then formed his own investment company (Woodford)… genius name right? Anyhow, Skandia have argued that a lot of investors and advisers are following him getting out of his old funds at INVESCO and moving to his new ones….well his new one (Woodford Equity Income Fund). This is undeniably true. There are costs involved in running the new funds (naturally) and keeping the old ones running (also… naturally). What is exposed in practice is the lack of extra juice squeezed from the annual management charge from INVESCO by Skandia.starmanposter

The CEO of Old Mutual Wealth (Paul Feeney) believes that they “have been between a rock and a hard place with regards to how we manage Neil Woodford’s resignation from these funds and the demand we have seen to move investors into his new offering. We have discretion over these assets being in our life book and therefore have a fiduciary duty to do what we believe is the right thing”. He goes on to state “Whilst theoretically we could have kept the funds open, the demand we have seen from advisers for Woodford would have resulted in even greater redemptions from the INVESCO Perpetual funds. This would have resulted in the TER of the funds increasing and ultimately the Skandia funds becoming untenable”.

(TER is the Total Expense Ratio…or charges in plain English).

So what?

Well, the wisdom of this action will only be seen in hindsight (not a great comfort) and my main objection is the lack of notice. Those that have been happily using the INVESCO Funds concerned (not all INVESCO funds) are being forced to change. This does rather create the impression of selling at a low point and perhaps buying at a high point. The truth is we won’t know until much later. However, what it does expose once again is the problem with “Star Managers” who are a rarity. The only UK Fund Manager more well-known is probably Anthony Bolton, who ran the Fidelity Special Situations Fund very successfully for many years then retired, only to find retirement somewhat unsatisfactory, (I presume) so launched a Chinese fund… which has, not met with the same success. Unlike Mr Bolton, Neil Woodford is sticking with what he knows and can avoid blaming the Chinese for their lack of corporate governance*. This all stems from the belief that investment out-performance is repeatable and sustainable. I don’t subscribe to such a belief when it comes to the long-term (which is the only worthwhile measure of “repeatable” or “sustainable”).

In practice this has exposed the problem of chasing the curve, hoping that because of the past, the future will yield similar results. It is pretty difficult to dissuade most investors from this sort of “top of the pops” behaviour given the tide of marketing and “evidence” of out-performance (by which I mean rather meaningless charts, designed to show certain events in their best possible light).

Is this the best way to invest? Yes if you are in first and out first…but to do that requires courage, conviction and perhaps some inside knowledge, most lack the first two sufficiently and the last is illegal. For those impacted by this move, we will be in touch (as will Skandia… sorry I mean Old Mutual Wealth).

Dominic Thomas

* CityWire 2014-04-01 “The Chinese Are Great Liars

Skandia Close OId Woodford Funds2017-01-06T14:39:35+00:00

Lessons from Greeks – Stay the Course

1954: Ulysses – Camerini
One of the great things about being a financial planner and member of the IFP is that I get to hear a lot of really good talks from very well informed people. Last night’s local London IFP branch was no exception. The topic was behavioural finance from a leading author and speaker on the topic, Greg B Davies. I won’t be able to any justice to the content of his talk in a few words, but he played some “behavioural theory” mind games with us – helping us to see the different ways in which people perceive risk and the behaviours that they adopt. Importantly, he suggested that how questions are “framed” can manipulate behaviour, which is something that every impartial financial planner needs to be aware of.
Whilst there are many exceptions, Greg was very clear that solid psychometric testing for risk is the logical and most preferred way to asses your attitude to risk – in essence a ringing endorsement of our approach and use of FinaMetrica risk profiling with clients. However, this is part of the story and as an adviser, I need to be mindful of the reluctance of clients (investors) to realise a loss – even though it may be sensible, logical and beneficial, realising a loss is something that as humans, we struggle to do. As many others before him have suggested, to be good investors we need to remove emotion from our decision making. However, he recognised that this is not an easy discipline, we can have very good and rational reasons for “selling at the bottom”, although such a decision will not serve us well in the long-term.
Greg warned of the problems of short-term thinking and investment strategies focused on the short-term. We need to be mindful of the fact that in general, we as humans tend to dislike losing money twice as much as we like making money. He also argued that whilst there are flaws in Modern Portfolio Theory, it is currently the best model that we have to help investors achieve an appropriate balance between risk and returns. Greg reminded me that perhaps the most important role a financial planner plays is helping clients reduce the number of mistakes that they would otherwise make. He reminded us of the image of Odysseus, (Greek version of Ulysses) who knowing that he was going to be lured by Sirens, bound himself to the mast of this ship, and stopped the ears of his crew with wax so that they would not hear. A familiar story, but what I hadn’t reflected on before was the practical limitations that running a ship whilst being tied to the mast, providing direction to people that cannot hear. This (discomfort) was the “price that needed to be paid” to avoid the limitations human nature (to succumb). So as markets remain “nervous” remember the long-term perspective, stick to your goals, and take heed of Odysseus who was thoughtful enough to defend himself from himself.
We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting
Lessons from Greeks – Stay the Course2017-01-06T14:40:02+00:00

Being Wary of Men in Black Suits

2002: Men In Black 2 – Sonnenfeld
On your behalf (and mine) I have been seeking out the wisdom of “experts” again today, with the second and final day of the Morningstar 2012 conference.  That said, one of the most memorable talks was from Dave Fishwick, Head of Macro and Equities Investments at M&G who pointed to the flaws in human nature to consistently seek out the opinions of supposed experts. “Men in suits”, who purport to have a valid, credible opinion. He suggested that many of those claiming to have spotted significant moments of change, invariably have only done so once, and perhaps this has something to do with luck. This was acknowledged later by contrarian investor Alistair Mundy of Investec, who talked with great honesty about the need for Fund Managers, advisers and investors to be honest about our mistakes and to learn from them, something that is often difficult for Fund Managers in particular, to do. He pointed to the abilty of humans to forget all too readily and this is something that investors need to be mindful of in the coming months as yet more market turbulence is likely as European markets eventually figure out how they will address their problems.
The world has changed though, particularly in the credit markets, what was once low risk, is now arguably high risk, for which there is a considerable premium. The Bond market has seen huge inflows of money as investors seek safety, yet many corporate bonds are actually paying lower levels of yield (income) than equities from the very same companies. Risk has been moved from the private sector to the public sector, with sovereign nations more at risk than many investment banks. This is a fundamental change in the way Bonds have worked throughout my time on earth (or indeed anyone else’s for that matter). Luke Spajic of PIMCO, argued that the new upside down credit world poses questions for portfolio construction and something that I am currently reviewing, though thankfully believe clients are well positioned.
The key points from my perspective frankly have little to do with investment selection, but everything to do with having robust, repeatable processes that are tried, tested and work. This is something that I have constantly worked on for our clients over the last decade or so. Financial planning has a fair bit to do with artistry – applying experience and professional opinion to the reality of data. Ultimately though, achieving goals is the purpose of financial planning, not calling the market (right or wrong).. but helping our clients to get where they need to go, as cost effectively as possible and ensuring that purchasing power and lifestyle are protected.

We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting
Being Wary of Men in Black Suits2017-01-06T14:40:02+00:00
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