Markets are High, the End is Nigh

Solomons-financial-advisor-wimbledon-blogger

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

What is the best way to save for retirement? Part 6

Part 6 in the series “What is the best way to save for retirement?”

Inflation – Power to the people?

Inflation is probably the most underestimated factor within finance and economics. It has a massive impact on what you really need to do and frankly drives the need to ensure that your assets increase in-line with or preferably above the rate of inflation. This sounds easy, but it isn’t. You know all about inflation as it is, I don’t need to explain much. All I need do is ask you to remember going to the sweet shop and what you used to be able to buy, or perhaps how much you bought your first home for.

We forget what we don’t see

Inflation at the moment is historically low, despite what the media and politicians may suggest it is low. In fact ONS statistics reveal that the annual rate of RPI (retail price inflation) has not been above 5% since 1990. That’s now 24 years ago. It has varied since then between 0.7%-4.5%. This is why so few of us really give much thought to the impact of inflation. However, the longer term average rate of RPI since 1948 has been 5.5% and ranged between 2.9%-6.3% as a long term annual average. This was largely due to high levels of inflation in the 1970’s (24.9% in 1975) when we had a decade of high inflation rates, often forgotten, but which in turn led to tighter monetary control introduced as “Thatcherism”.

Size matters after all

My figures from the previous posts about the size of pot you need are therefore somewhat off. Why? Well because I suggested a target income of £20,000 a year from the age of 65, assuming a starting age of 35. I did this deliberately. Investors get really quite distressed by “real figures” the numbers invariably look too big and too terrifying. Here’s what I mean.

Warning: Explicit Information

£20,000 inflated at 3% a year for 30 years becomes £48,545. This is the same amount in real terms (if inflation runs at 3%). So I hope that you are sitting down. Rather than needing a pot of £500,000 to pay £20,000 a year (4% annuity) you really need £1,213,625 in real money. Yes that’s £1.2million. Rather than investing £305.69 a month (increasing by 3% a year) you actually need to invest £741.98 a month – more than double. You are no richer in reality; it’s just that inflation has been properly taken into account. The same facts are accurate, but the amount you really need to invest is considerably more.

Is time is on your side?

If you are rather closer to 65, say you are 50, you still have 15 years of inflation on £20,000 a year which becomes £31,160… worth the same amount… penny drops (literally) on the reason why I asked you to recall the childhood trip to the sweet shop. So in this example, a 4% annuity to provide £31,160 needs a fund of £779,000. You have 15 years to achieve this amount, hopefully you have made a start.

What about that buy to let property purchase idea?

So let’s turn to the property purchase option if you recall it. I suggested saving for 10 years for a deposit. Well starting with the end in mind we used a 5% rental yield. This would need to be £48,545 in 30 years time, so the property value would therefore need to be £970,900. So if property prices rise by inflation (3%) then you would need to be buying a property for roughly £400,000 and a 20% deposit would be £80,000 saved over the first 10 years, so rather than saving £214.71 a month, you really need to save around £450 a month (increasing by 3% each year for 10 years) and taking on a commercial mortgage for £320,000 – that’s quite a lot of debt.

Is it real?

The problem with real numbers is that they are pretty alarming. In reality you will hopefully have various sources of income for your retirement, hopefully including the State Pension. However the key issues are how well your portfolio performs and it will rise and fall in value which can be concerning. So its important that you consider the inflation adjusted or “real” returns. To give an example, the FTSE AllShare Index has averaged 5.9%pa above inflation since 1956. The average rate of inflation over the same period was 5.6% – so the actual FTSE AllShare return was 5.6%+5.9% = 11.5%. Since 1991 (to end of 2012) inflation has been 3% and FTSE AllShare real return 5.7% = actual returns of 8.7% but what you will notice is that the real return is pretty similar (over the longer term) at about 5.6% but not in the short term!

A suitable portfolio and strategy

Its important to get your investments right as in practice most people cannot stomach the volatility within shares. So you wouldn’t have all of your portfolio in shares, you would typically have some in Bonds and perhaps a bit in cash, thereby reducing but protecting the returns. Getting this balance right is not as simple as picking funds or using some sort of off the shelf “model” it needs to be thought through carefully…. Which is what I help clients do.

Its about your lifestyle, not the money

It goes without saying that £20,000 is not regarded as “a lot of money” by some people. In fact, £20,000 is a fair bit less than the average wage. However, great financial planning is not about value judgements about what is and what is not a small or large amount. No, its all about helping you to get clear about the lifestyle you want and what you need to do to achieve it, if that is possible, when considering your available resources, your appetite for and ability to take risk. When they say time is money, it is perhaps most pertinent in relation to inflation.

Was this helpful? Just plain scary? Too much? What questions do you now have? Email me or post a comment. Tomorrow I will conclude by providing some pointers to what I mean by “lifestyle”. Thanks for reading and here’s something you may remember from the 1970’s.

Dominic Thomas: Solomons IFA