Markets are High, the End is Nigh

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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

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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 NighDominic2017-02-14T13:03:51+00:00

DIY 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?

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 InvestingDominic2017-01-06T14:39:29+00:00

Should I Buy A House?

I recently asked for questions and so I’m going to tackle those that I get. So I’m starting with someone at the very beginning of their financial life asking if they should buy a house.

A house is an asset, it is also a home, but frankly whether you rent or buy, a home is something you create. In Britain, we laud home ownership as a goal to strive for, most of the world doesn’t and most of Europe rent.

Why Buy?

The short answer is that you have control over where you live. If I may make the wild assumption that by the time you retire any mortgage is repaid, this means that you aren’t still paying rent or facing the regular prospect of renewing your rental agreement or moving. You can, within local bureacrat (sorry… I mean Authority) rules do what you like to your own home. You cannot knock through walls, convert a loft if you don’t own the property.

The Upside of Renting

You aren’t tied to a building, you don’t have to pay for upkeep or repairs. You have no mortgage, so no liability.

The Upside of Buying

You are “tied” but could sell – the issue is timing (no buyers?). Having an asset means other finances are easier – Banks think you are a lower risk, because you are a homeowner. Credit (which means debt) is easier to obtain.

Property prices rise and fall, but generally rise over the long term. It is as the TV pundits suggest, all about location, location, location.. which means where do people want to live? If you own the property you could rent (let) it, if you need to live away from it. However, this needs approval if you have a mortgage and you should never misrepresent the truth to a lender, that is asking for trouble.

Buying a home is a long-term commitment right?

Well yes it is… but one could argue that renting is a longer-term committment. Do you intend to rent for life? the cost of renting will also rise over time (with inflation). Renting is generally about afforability, in retirement, this means having a good pension or source of income to pay the rent… for the rest of your life.

Fear Factor

Property prices have risen enormously. The real issue is “are properties overpriced?” the honest answer is – of course they are. The entire system is built on vested interests. Lenders need to lend, (Governments need lenders to lend), Estate Agents need to sell, Surveyors need to survey and so on… the prices have been pushed up because homeowners want to make a profit on their home when they sell and move on – to larger or smaller valued homes. The system isn’t particularly good or fair, but it is the one we have today and I dont see much likelihood of it changing.

Buying and Mortgages

Most people have to borrow money to buy. That means a long-term loan and one that you need to be able to afford. There are different ways to repay, but you have to repay the loan at some point. However inflation does help. Let me explain.. a property is £250,000, you have a £50,000 deposit and so need to borrow £200,000, which for the sake of example, will be reapid over 25 years. After 5 years how much is the property worth? the same? more? less?… and after 10,15 or 20 years? Well generally proprty will rise, let’s say by an average of 3% a year. Without doing anything to increase the value of the house, after 25 years the property is worth £523,444… the mortgage is repaid (because you agreed to repay it over 25 years). Your equity (what you really own) has increased from 20% to 100% over 25 years…. but if you rent, well you still own “nothing”.

Keep it Real

As an exmaple, if you can borrow £200,000 over 25 years at 4% interest, your repayments will be £1,067 a month. Making the huge assumption that rates don’t change (they can rise or fall, or you could fix) then your repayments will be falling in real terms due to inflation. Rent costs will almost certainly be rising, every year… let’s look at a possibility.

Mr Holmes

Mr Holmes earns £57,500 buys a property for £250,000 in 2015. He has to borrow £200,000 and begins paying £1,067 a month (£12,804 a year – about 22% of his income. His salary rises by 3% a year (lucky him! today… but not unreasonable looking back and I haven’t assumed promotions etc). After 10 years His income is £72,275 and he’s still paying £1,067 a month (now 18% of his income). His house is now worth more at £335,979… so he’s gained £85,979 since buying it. His mortgage is gradually reducing, it takes a while by £200,000 has reduced to about £142,000 – he’s cleared about £58,000 in 10 years. At the end of 20 years his mortgage is now only £56,500, his income is now £103,850 and his monthly payments are still £1,067 and about 12% of his income. Another 5 years and the mortgage is gone… no more payments. He’s done, but his home is still rising in value.

Mr Rentit

Mr Rentit earns the same amount and found a similar property to rent but it only cost him £700 a month to rent. He has the same job and earns £57,500 a year. Mr Rentit isn’t a fool, and he decides to save the £367 a month that his friend Mr Holmes is shelling out each month. He puts this into a tax free ISA which grows at 7% a year (he’s fairly adventurous). At the end of 10 years Mr Rentit’s rent has increased each year… but only by 3% the same as the price houses are rising by. So after 10 years he is paying £1434 a month – double what he started paying. But he has no mortgage, and his ISA is worth £64,259… ten years later he’s paying rent of £1,927 a month (still 22% of his income). His ISA is now worth £192,662 and he has no mortgage. However he’s now a little concerned that rent keeps going up and thinks that his ISA could probably buy a house – just like the one Mr Holme’s has. But that is now worth £451,000 and he only has £192,662. So if he wanted to buy he’d need a mortgage of £258,338.As it is he is facing a lifetime of rising rental costs…. so let’s hope his pension can cope.

To be fair, he had the same £50,000 deposit 20 years ago and it had been in his ISA it would be worth £393,117 and he would still need a mortgage of £57,883 and pretty much level-pegging. He might argue that Mr Holmes had 20 years of upkeep costs and home insurance – that boiler that was replaced.. twice! and so on. Yet Mr Rentit may also be forgetting those letting agent fees, the moving costs and the hassle that he spent trying to register with the local GP/dentist etc eaxh time he moved.

Now, my example is obviously flawed and full of linear assumptions about inflation and the largest being a 4% difference in ISA outperformance of inflation/property prices. None of this will become reality. We could make the numbers prove one case or another (with the wrong assumptions). The issue is one of having an asset or not.

My experience is that most would not be like Mr Rentit – they wouldn’t save the £367 a month and those that did probably were tempted to raid the pot, so would have less. Most investors panic in market crisis, so probably wouldn’t get a market return unless they had a decent adviser… Most homeowners do improve their home, making it more valuable – but there are certainly upkeep costs.

The short answer is really – few people are “better off” by renting. In 40 years time (perhaps at or in retirement) Mr Holmes would still be having to pay rent of £3,480 a month…which means his pension would need to be able to provide this, Mr Holmes would not. So part of the answer is about discipline… and Mr Holmes, being a client, would have saved more of his income despite his mortgage costs, we would have advised him to high-speed repay his mortgage, freeing up income later to squirrel away… but that’s another story.

Dominic Thomas

Should I Buy A House?Dominic2017-01-06T14:39:30+00:00

Keep it Real

If one were to believe the media, there are many reasons for none of us to sleep at night through anxiety of our impending doom. However, whilst I wouldn’t wish to trivialise any of them, few in practice will have much impact. However for investors, there is one enemy that will do more to damage a portfolio than many other threats. That is “inflation”. This is a topic that I regularly discuss with clients, particularly someone new to our approach.

Hold cash, but not too much

Many people mis-manage their wealth by holding too much in cash or not being bold enough with their investments. I say this as someone that believes that holding cash is a good thing – wise, as cash provides liquidity – or at least it should in the normal course of life, providing for emergency funds and planned and unplanned expenses. However cash generally provides a poor return and one that few people can really afford.

The price of a cup of tea

Inflation is, at its most simple, the rising cost of living. I was reminded of this yet again on Friday as I attended the London Philharmonic Orchestra screening of the David Lean 1945 film “Brief Encounter” at the Southbank Centre. Much has changed in society since 1945 (a mere 69 years ago) particularly the days of buying two cups of tea and a couple of buns for 7 pence. I do appreciate that this was pre-decimal, but you get the point. So if building a portfolio it is helpful to know how long the portfolio needs to last, the longer its duration, the more likely the negative impact of inflation. The regulator has attempted to alert investors to this problem, by making providers quote returns with allowance for inflation. Invariably this makes the numbers look somewhat depressingly low and even negative, prompting the obvious sensible question “why invest?”.

Long-term impact

If you have our APP for i-phone, i-pad or Android, you can use it to review inflation in a specific year or over a particular timeframe. The calculator goes all the way back to 1949. I usually show investors the rate of inflation in their year of birth and then the average rate since then. Inflation has only really come “under control” since the early 1980’s as the longer-term rate remains within 2.7%-3.7% range. So for real growth to happen, investments must beat inflation, otherwise they are either simply keeping pace or falling behind. Of course investments will rise and fall in value so even in a conservative portfolio if inflation is 2% and returns are -3% over 12 months, then you are making considerable losses, over that time – however a longer-term perspective must be taken to have any practical use for investment assessment. In order to ensure the value of your pound increases, it must keep pace with inflation. To grow wealth beyond this, we are left with few choices, investment being the most obvious. A good investment experience, will provide returns above inflation, commensurate with the amount of risk associated with it (and how much risk you are prepared to take). As a result, returns that are above inflation are actually “real returns”. As a consequence, we model financial plans in “real numbers”. I believe that keeping it real is vital for any worthwhile assessment of a portfolio.

Dominic Thomas

Keep it RealDominic2017-01-06T14:39:34+00:00

What Is Evidence Based Investing?

What is evidence based investing? in short it is the use of data and mathematical formula to prove a rationale for investing. The Efficient Market Hypothesis says that market prices are fair: they fully reflect all available information. This does not mean that prices are perfect; some prices may be too high and some too low, but there is no reliable way to tell. In an efficient market, investors cannot expect to earn above-average profits without assuming above-average risks. Market efficiency does not suggest that investors can’t “win.” Over any period of time, some investors will beat the market, but the number of investors who do so will be no greater than expected by chance.

Successful investing, like many things, begins in the mind…

It is important that an investor has an investment philosophy, for this guides and shapes decisions. Even if the theory is one of random chance, this would require a consistent approach to implement it. The problem with investing is that it becomes an emotional experience – and it shouldn’t. When you see your portfolio rise or fall in value, you have a gut reaction, often this is not good for you. There is a temptation to believe that beating the market is due to additional skill or knowledge, a belief forcefully proposed by active fund managers, who make their living by beating the market – or trying to. The sad reality is that few of them do (really few) and when taking a long-term perspective it is very difficult indeed to pick those Managers that can consistently outperform. Most Fund Managers don’t hang around for long, many funds get closed and when you consider the charges they apply, few (and I really mean a few) actually outperform.

Would you prefer evidence or guesswork when planning for your future?

My role is to help investors achieve the market returns for the various assets into which they invest. The main point being that when investing your money, I do not see any advantage in putting it at additional risk. This is essentially what most investment managers have to do in order to beat the market. Economic theory has backed up and evidenced this approach over the long-term and you may have seen me recently tweet at Eugene Fama was awarded a Nobel prize for economics. His research and theory together with that of others has helped inform the research used and investment philosophy that we adopt for our clients. Here is a short video about his pioneering work.

Dominic Thomas: Solomons IFA

What Is Evidence Based Investing?Dominic2017-01-06T14:39:43+00:00

London Fashion Week – Fashionably Early and Hem Line Investing

2006: The Devil Wears Prada -Frankel

As a financial planner, I’m not one to suggest for a moment that I’m also a fashion expert – except I suppose when it comes to fashionable investments. The London Fashion Week closed yesterday – I don’t really know if it’s my interpretation or whether a week that starts on Friday and ends on a Wednesday is fashionably late, early, unconventional or simply the next big thing….anyhow of one thing you can be sure, fashion is by nature premature – in that this was a show for Autumn/Winter 2012.. after all this is showing what will be stocked later in the year. What I can report is that hem lines look set to be a little above the knee this September. There are some of the more “out there” financial speculators that see this as an indicator of confidence and use this to inform investment decisions. Yes you did just read that here. I don’t know if there is any substance to the suggestion, but as investors tend to have a herd-like mentality (professional and private) it is possible to see that confidence could be contagious in many aspect of life, so why not the markets? After all, inflation will be lower (by mathematical analysis) and we will have gone through what transpires for Europe (though the out workings are likely to be very long-term).

To purists, fashion is designer clothing, to others it is making things that we see and use “cooler” by that read the anything pre-fixed with “i” (ipad, iphone etc). Great businesses will be seeking to ensure that their products and services are as “user-friendly” and “cool” as possible. The Chinese middle and upper classes (it seems George Orwell was right) have an appetite for luxury brands and cannot get enough of them… selling like hot cakes. So although China’s growth and inflation are slowing (which was inevitable) the new land of opportunity is proving to be something of a goldmine for those willing to create one and many will have attended the London Fashion Week.

The direct value of the UK fashion industry is reported to be worth £21bn and its wider contribution in influencing spending in other industries is over £37bn. In the UK the fashion industry is the largest creative sector for employment, with 816,000 jobs. It is about the same size as the food and beverage service industry and telecom industry. The UK is regarded as having world leading fashion colleges, so this is where the story begins. The major export markets for the UK are the USA, Japan, Russia, France, Italy, the Middle East, Hong Kong and China. Of course, much like having a tailor made suit or designer dress, a good financial plan is one that is unique, bespoke and fits you perfectly.

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

London Fashion Week – Fashionably Early and Hem Line InvestingDominic2017-01-06T14:40:08+00:00

Real Women Have Curves

Real Curves

There is a recurring debate about how woman they are portrayed in the media. It would seem that the curves of the 1950’s have been largely replaced by a more angular look. Increasingly in the age of instant feedback on our appearance (thanks Facebook, Twitter et al) there is growing pressure to look a certain way – whether you are male or female…

In reality whatever you believe to be the “right shape”, it would certainly seem that not even the “models” live up to the image that is produced…. the makeup artist, lighting and photographer may do their best to make the model look their “best” but invariably software, has replaced airbrushing and used to “adjust the image”. The final image is rarely reality. This of course is a classic marketing trick – make something look better than it really is. The financial services industry is no better in this regard, perhaps worse. Fashion tends to operate in cycles… so to do investors.

This gap, shall we call it the perception gap, is evident too in the world of investing. Here is one chart that is helpful and concerns investor perception. The investor sentiment curve. This is one of the few investment graphs worth reflecting on. Before investing your money, you presumably will taken a view on “where we are” in this cycle. Be warned that your opinion may differ considerably from that of the investment manager. This will probably impact the decisions that an investment manager will make and the results you achieve. Given the current problems in the world, whether that’s China, Ukraine, Russia or Greece or whatever today’s news suggests is a problem, reflect on this image. Alternatively you could elect not to “play the game” but to appreciate that these cycles occur, there is little that anyone can do about them. This is probably wise for those already invested, but perhaps a little blase for those about to make a substantial investment.

Don’t play the game

The chart above explains why so many people (professionals included) underperform the market. The markets are not sentimental. Most investors react to news and as a consequence experience these feelings outlined above. The market is not the place to gain emotional maturity, the lesson it teaches is that time in the market will provide a better experience than trying to time the market. Do not make investing an emotional experience, it is a discipline.

Changing the real you?

It is interesting to note that from studies across the world, FinaMetrica (the risk profiling tool that we use for our clients) have found that the vast majority of clients do not change their general attitude towards risk, some do, but most do not. Most investors are… well “medium risk” which is a very unhelpful term, but something that most of us probably know in our core being.

Be yourself, not your investment adviser

Conversely, most financial advisers and investment managers score far more highly on the risk scoring system – they are higher risk takers. This might be for a number of reasons, perhaps more aware about how markets operate but also perhaps because the majority are wedded to the success of markets. This may and would have an impact on your investments if you simply opted for the advisers appetite for risk rather than your own. That is why I believe it is really important, vital even, for you to ensure that your appetite for risk and your capacity for loss are your own and not mine, or anyone else’s. Getting your portfolio right should mean that whilst there will be disappointments at times, there should not be unexpected results.

Real Women Have Curves

As in other aspects of life, there are many that will attempt to reduce almost everything to the point that conformity and uniformity are indistinguishable… this in mind, here is the trailer for the 2002 award winning film “Real Women Have Curves” starring America Ferrera, who is best known for her leading role as “Ugly Betty” and you may have been fortunate to see in the West End in one of the many productions of Chicago.

Dominic Thomas
Solomons IFA

Real Women Have CurvesDominic2017-01-06T14:40:21+00:00