970 BOTTLES OF BEER ON THE WALL

TODAY’S BLOG

970 BOTTLES OF BEER ON THE WALL…

I’ve been trying to think of ways to explain the benefit of long-term investing. I’m not a big beer drinker, but given that when I do go to a pub, I’m always shocked at how much a pint of beer is. According to the ONS, the average pint of beer in the UK was £3.67 in January this year. Clearly a  national average, because that wouldn’t buy much in London.

30 Years Ago… 1989

Anyway, let’s suppose I am someone that likes to buy the occasional pint of beer. As I get older, like most people I tend to remember elements of the past fondly. Particularly this time of year as students return to University. 30 years ago, perhaps you were at University or had long since left. 1989 – the time when Nigel Lawson was replaced as Chancellor by John Major. Simply Red had a hit album “A New Flame”; Challenge Anneka had aired for the first time and Nick Faldo won the Open. A pint of beer back then was £1.03.

BOTTLES OF BEER

YOUR ANXIETY

Let’s suppose you had £1000 you wanted to do something with. The memory of Michael Fish and the great storm closely followed by Black Monday was fairly fresh in your memory. You didn’t fancy the stock market. So you found a decent deposit account, rates were high causing problems for borrowers but great for savers at 14%.

Thirty years later that £1000 had risen to £2,080 by January this year. You had forgotten about it except for when you sighed with relief as economic recessions came, Y2K, Dotcom bubble, Korean crisis, 9/11, credit crunch – you had avoided them all.

Yet there is a problem. In 1989 your £1000 would have bought a 30-year younger you 970 pints of beer. Today your £2,080 would only stretch to 566 pints.

Your Uni Friend John had a PEP

Your good friend John from University had put his money into the UK stock market, he put £1,000 into a Personal Equity Plan, some quirky idea brought in by Nigel Lawson. He bought a FTSE100 tracker fund (ok, maybe not, but stay with me). He had to live with the same economic stresses and saw the topsy turvy workings of the stock market. However, at the end of 30 years his £1000 was worth £11,494. He hadn’t touched it (neither had his adviser) and so all dividends were reinvested. This sort of money enables John to buy 3,131 pints of beer. That’s 5 times more than your 556 pints.

Julia also had a PEP

John is fairly happy, but his girlfriend Julia at the time also put £1,000 into a PEP, but she put it all into the FTSE250 tracker. She figured that slightly smaller companies might do a bit better than bigger ones. Lo and behold, Julia’s £1,000 has turned into £20,818. Julia can buy 5,672 pints of beer, that’s ten times (10x) TEN TIMES as much as your 556 pints.

OK – Smallprint (or not) Caveat Emptor…

Admittedly I have taken some liberties with costs, charges and the available funds in 1989. The biggest liberty I really took was suggesting that people leave their money alone. They/we don’t. We all tend to fiddle around, attempting to find a slightly or perhaps considerably “better” option.

Long story short, when considering investment for decades, what on earth does “risk” really mean? The risk of the power of the money in your pocket being worth less (or worthless) due to rising prices? The risk of seeing your money stagnate in cash? The risk of seeing the value of investments rise then fall?

30 Years £1000

Monsters grow

What ought to be blindingly clear…. don’t let your anxiety dictate your financial planning and investment strategy. It is a dreadful guide to future performance. The monster at your door is inflation, however small it seems today, feed it for 30 years and it’s still hungry and likely to eat you alive.

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

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

WHAT WE’RE ALL ABOUT

If you would like a no-nonsense one page document explaining what financial planning is all about please enter your email here.

=

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

WHAT WE’RE ALL ABOUT

If you would like a no-nonsense one page document explaining what financial planning is all about please enter your email here.

=

970 BOTTLES OF BEER ON THE WALL2019-09-30T18:23:04+01:00

Markets are High, the End is Nigh

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

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

Markets are High, the End is Nigh2017-02-14T13:03:51+00:00
Go to Top