Illness, transport strikes and even natural disasters are just some of the ways a holiday can be ruined. But the disruption can be far less expensive – and not nearly as stressful – if you take sufficient care when organising travel insurance.

Even the pain of relatively minor holiday mishaps like lost luggage, stolen cameras or cancelled flights can be ameliorated when you have appropriate cover.

However, if your coverage is inadequate you face the double blow of a ruined holiday and the wasted expense of a dud insurance policy.

Insurance nightmares usually result from leaving the arrangements until the last moment. Let’s face it, it’s not the most exciting part of planning a trip. But if insurance is an afterthought, arranged with just the click on a button on a website, you may not really understand the policy and what it covers.

Here are the ten things you can do to ensure you protect yourself effectively:

1.   Price isn’t everything – A cheap policy isn’t good for you if it’s so riddled with limits and exclusions and excesses that it’s impossible to claim on.

2.   Watch the excess – This is your share of the loss – the amount you’re prepared to cover yourself when you make a claim. A higher excess will get you a lower premium, but make sure it’s not so high that you’ll never get anything back.

3.   Read the policy – Take the time to study the fine print. A £5,000 allowance for lost luggage may sound OK. But what if it comes with a cap of £500 on any one item?

4.   Declare existing medical conditions – An existing condition, asthma for instance, could invalidate your policy. Better to declare it and wear the added cost if necessary.

5.   Theft cover – Valuables judged by the insurer as left ‘unattended’ usually aren’t covered. Understand their definition of unattended, as it might not be the same as yours.

6.   Don’t double up – Rental car firms offer insurance, with a fee to waive the excess. But check whether you already have cover via the credit card you’ll pay with.

7.   Credit card check – Check the conditions for travel insurance that come with your card, though. You may have to pay for the whole trip on the card to activate the cover.

8.   Check what isn’t covered – Epidemics or acts of terrorism generally aren’t covered. High-adrenalin activities like skiing often aren’t included and will cost you extra.

9.   Cancellation fine print – If you cancel your trip because you have a better offer, or you ignore travel warnings, or the travel provider goes bust, you may not get anything back.

10.   Do your homework – For peace of mind, do some research. Consumer champions like Which can help.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

There’s no getting away from the fact that investing — especially investing in equities — involves risk. But risk can mean different things to different people. There are also many different types of risk, so let’s have a look at some of the main ones.

Market risk and volatility

For many people, the most commonly perceived risk is market risk. If the share market falls sharply, you lose money, on paper at least. But this only matters if you plan to sell tomorrow. If your horizon is long, these daily ups and downs will matter less.

If you’re investing internationally, the ups and down of currency markets can affect the value of your portfolio in your home country. And if you’re invested in bonds, risks are posed by rising inflation, changing interest rates or a bond issuer defaulting on their payments.

Allied to market risk is volatility. The degree your investments rise and fall from year to year can affect your outcomes in a couple of ways. Firstly, there’s the stress that volatility can cause. Some people just aren’t as well equipped to deal with the ups and downs. Secondly, volatility can also have a real cost on your portfolio, as we shall see.

Diversification: the only free lunch in investing

You can deal with volatility through diversification. That means spreading your investments so you are not overly dependent on individual asset classes, countries, sectors or stocks. So, when one component zigs, another may zag. Think of it like shock absorbers in your car. Without them, you’re going to feel every  bump in the road. With them, the ride will be much smoother.

Diversification is often described as the only “free lunch” in investing. The flavour sensation of higher returns also can come with the indigestion of higher risk. But you can moderate the range of possible outcomes by ensuring you are not too exposed to any one ingredient. Think of it like a buffet full of different dining choices.

Of course, you could just stick to your home country. It’s what you know, after all. But this “home bias” also carries risks as well. Just as the performances of asset classes and individual sectors vary, so can those of countries. Think of Japan in the 1980s. Its market appeared unstoppable. Then it spent more than two decades in the doldrums.

Occasionally, the media gets excited about individual industries. Think about what happened in the early 2000s when the world was going crazy for technology stocks. It was a great bet while it lasted, but then it all came crashing down. Again, you can deal with this by spreading your allocation across different sectors, by diversifying internationally — and by keeping an exposure to all the drivers of expected return.

Falling in love with individual stocks is another risk you don’t need to take. If your gamble pays off, great! But it’s speculation. It’s not investment. You’re taking a bet that those companies will continue to dominate. Back in the 1960s, the media swooned over the ‘Nifty Fifty’, blue chips that would never let you down — names like Xerox, Eastman Kodak, IBM and Polaroid, all of whom were disrupted over the years. Nothing stays the same. That’s why you diversify.

Other types of risk

As for foreign exchange risk, you can “hedge” (a type of insurance) overseas returns to your home currency. But there is no evidence that this makes a difference to long-term returns. If you fully hedge your exposure and your home currency rises, all well and good. But if your home currency falls, you risk missing out on the kicker you get by converting the now more valuable foreign exchange. One answer is to hedge 50% of your overseas exposure and leave the other half unhedged.

While bonds are less volatile than shares, they still have their risks. The three main ones are rising inflation, increasing interest rates and default.

Inflation reduces the purchasing power of bonds. The income you were counting on suddenly buys less than it once did.

When a central bank increases interest rates, the prices of existing bonds can drop because their coupon rates look less favourable. Default occurs when a bond issuer can’t repay what they owe. Again, you can manage these risks by diversifying across different countries and currencies, and across government and corporate bonds.

Liquidity risk refers to difficulty in getting access to your money. So-called “alternative” investments often carry this risk. You can manage liquidity risk by always having sufficient cash on hand to keep you going in an emergency.

Finally, there is longevity risk, which means outliving your money. We’re all living longer, which isn’t necessarily a bad thing. But how do you ensure your savings last you through retirement? And therein lies an irony. Unless you’re willing to take sufficient risk as an investor, you may end up with a retirement pot that simply isn’t big enough. That’s right — one of the biggest risks you face as investor is not taking enough risk.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

When looking for advice about how to invest, who better to turn to than Warren Buffett? The man they call the Sage of Omaha is widely recognised as most successful, and highly respected, investor in the world.

Buffett is the chairman and CEO of Berkshire Hathaway, Although, in common with almost every other active money manager, the firm has failed to beat market since the global financial crisis, Berkshire Hathaway nevertheless delivered excellent returns for its shareholders over many decades prior to that.

Over the years, Buffett has passed on plenty of advice to ordinary investors, both in interviews and, in particular, in his annual letter to shareholders. It essentially breaks down into eight important lessons, each of which we’ve illustrated with quotes from Buffett himself.

1. Develop good habits

Buffett puts much of his success down to having good habits. It’s the same, he says, with saving and investing, and the earlier you develop them the better.

"The biggest mistake is not learning the habit of saving properly.”

“Do not save what is left after spending; instead spend what is left after saving.”

“Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date.”

2. Think long term

Buffett is a longstanding critic of short-termism in the investing industry. Berkshire Hathaway’s favourite holding period, he once said, is forever.

“Someone's sitting in the shade today because someone planted a tree a long time ago.”

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

"No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant.”

3. Ignore market forecasts

Hand in hand with Buffett’s long-term outlook goes his disdain for short-term market forecasts. No one, he says, can predict short-term market movements with any degree of accuracy.

“The only value of stock forecasters is to make fortune tellers look good.”

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

“Short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

4. Avoid salespeople

Buffett has repeatedly urged investors to be distrustful of salespeople — particularly those who claim to know which funds or sectors are going to outperform in the future.

“There’s been far, far, far more money made through salesmanship abilities than through investment abilities. And the people you pay to help identify (future outperformers) don’t know how to identify them. They do know how to sell you.”

“All the commercial push is behind telling you that you ought to think about doing something today that’s different than you did yesterday. You don’t have to do that. You just have to sit back and let American industry do its job for you.”

5. Know what you don’t know

Another important lesson that investors can learn from Warren Buffett is humility. Investors, he says, typically know less than they think they do — and pay the price for it.

“What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.”

"Risk comes from not knowing what you're doing.”

6. Keep it simple

Buffett lives by a few simple rules, and he urges investors to do the same. Successful investing, he says, is far more simple than many investment professionals make it look.

“There seems to be some perverse human characteristic that likes to make easy things difficult.”

“You only have to do a very few things right in your life so long as you don't do too many things wrong."

7. Use low-cost index funds

Despite being a poster-boy for many in the active fund management industry, Buffett has consistently said over many years that investors are better off using low-cost index funds.

“Performance comes, performance goes. Fees never falter.”

“Both large and small investors should stick with low-cost index funds.”

"By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb.”

8. Keep calm…

Perhaps the most important lesson Buffett teaches investors — and certainly the one he focuses on the most — is the importance of developing the right temperament.

“You’re dealing with a lot of silly people in the marketplace; it’s like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be OK.”

“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”

“What investors then need is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.”

…when markets fall

"You shouldn't own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.”

“There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

…and when they rise

"Equities will do well over time — you just have to avoid getting excited when other people are getting excited."

“Nothing sedates rationality like large doses of effortless money.”

That, in a nutshell, is what the world’s most famous investor says the rest of us should do in order to be successful investors.

No, investing isn’t always easy; that’s one of the reasons why you need a good adviser keep you on course to achieve your goals. But, take it from Warren Buffett, the basic ground rules are remarkably simple.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

In the UK, Neil Woodford is investing Royalty. He famously outperformed his peers over many years as manager of the Invesco Perpetual Income Fund. When, five years ago this month, he set up his own fund, the Woodford Equity Income Fund, it was billed as the fund launch of the decade.

Alas, for tens of thousands of investors taken in by the PR and marketing hype, it hasn’t worked out as planned. The fund’s performance has been consistently dreadful and, one after another over the last few months, Woodford’s biggest clients have been withdrawing their money. 

Last Friday, the Kent County Council pension fund committee announced that it too decided to cut its losses, and yesterday, Woodford and his fellow executives took the highly unusual step of suspending trading in the fund, blocking further investor withdrawals until further notice.

Suddenly everyone has an opinion on Woodford and why the fund was doomed to fail. A simple Google search will show you that some of the commentators and publications putting the boot in now once waxed lyrical about his stock-picking expertise.

We have spoken many times about our scepticism of the Woodford cult (and active fund managers in general) — the fact you can invest in an index fund at a fraction of the cost and the odds of reproducing his previous performance were always heavily stacked against him. But we take no pleasure in his downfall.

If anything good is to come out of this sorry affair, we hope it’s that we all learn a little humility.

Hugely intelligent though we are sure Woodford is, the idea that one person can outwit the collective wisdom of millions of market participants requires an enormous leap of faith. Very few people beat the market any more, at least not on a cost- and risk-adjusted basis or over meaningful time periods. Since the global financial crisis, not even Warren Buffett has managed to do it.

We desperately want to believe there’s someone out there, in the massively complex and random world of finance, who knows what’s going and who really can predict the future. But that doesn’t mean that person exists. Even if they do exist, the overwhelming evidence is that they’re almost impossible to identify in advance.

Its time for reflection, time for us all to be a little more humble, and a little more honest with ourselves. We include advisers like ourselves in that, as well as analysts, consultants, journalists, investors and, yes, fund managers too.

Strange though it seems to feel sorry for a multi-millionaire, you could actually do so for Neil Woodford. When you’re fêted for years as a genius, it must be crushing to have it gradually dawn on you that you probably aren’t one after all.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

Christmas eve delivered a present that most investors were not hoping for – the biggest fall on that specific day in history (at least in the US) of -2.7%.  That capped a fall in global markets of around -4% for the year.  That is hardly an investing disaster, especially as high-quality bonds held their own, as did global property.  It probably felt a lot worse a) because of the relentless negative news coverage of things like the risk of a US-China trade war and the knots that Parliament has tied itself in over Brexit and b) because the peak-to-trough fall was considerably more than this at around -11%.  From some of the newspaper headlines, one might think that we were experiencing calamitous times in the equity markets:

‘Global stock markets suffer worst losing streak for five years’. The Guardian (26th October 2018)

Or:

‘Stock market slide in 2018 leaves investors bruised and wary’ The Financial Times (31st December 2018)

Take a look at the chart below.  Looked at in isolation, one could easily get sucked into this kind of rhetoric that is aimed at selling newspapers (or these days, attracting clicks).

Figure 1: Global equity markets in 2018

Source: Albion Strategic Consulting. Financial Express © 2019. MSCI ACWI (net div.) in GBP 1/2018 to 12/2018

Yet we need to keep a perspective on this.

First, over the 10 years since 2009 (the bottom of the market during the Credit Crisis) global markets have delivered positive returns in eight out of the ten calendar years. The last negative year for equities was back in 2011, when the markets were down around 7%. Over the history we have available to us – on average – one in three years deliver negative returns. Investors have, of late, been extremely lucky.

Second, over that period, in every single year, investors have suffered a fall from a previous market high and many of these were larger than 10%. However, even being invested from the start of 2008 and suffering the 35% peak-to-trough fall in 2008, an equity investor over that 11-year period would have turned £100 into £230, i.e. 8% compounded over 11 years, if they had been disciplined and patient (two areas of human weakness!). It’s at those times good advisers really come into their own, refusing to panic and rebalancing portfolios if needs be, buying equities when they are down – something that most investors won’t find easy emotionally, even though logic dictates that it makes good sense.

Figure 2: Every year, markets fall at some point – 2008 to 2018

Source: Albion Strategic Consulting. Financial Express © 2018. MSCI ACWI (net div.) in GBP 1/2008 to 12/2018.

Finally, as humans, we tend to have a strange view of what invested wealth represents and how we feel about it at any point in time.  We tend to be happy as wealth – at least on paper - goes up to some value at a specific point in time and unhappy when we reach that value again, if it is achieved after a market correction.  The figure below makes this point.

Figure 3: Human inconsistency around wealth

Source: Albion Strategic Consulting. Financial Express © 2019. MSCI ACWI (net div.) in GBP 1/2013 to 12/2018.

Remember, the true meaning of wealth is having the appropriate level of assets that you require, when you require them, to meet your financial and lifestyle goals.  In the interim, movements in value are noise, somewhat meaningless and part and parcel of investing.  When you invest in equities, you should try to avoid mentally banking the money you (appear to) make on the undulating, and sometimes precipitous, road you are on.  Remember too that the headline equity market numbers are unlikely to be your portfolio outcome, as most investors own some sort of a balance between bonds and equities.

Keeping things in perspective

Investing in equities is always going to be a game of two steps forward and one step back.  What equities deliver from one year to another is of little consequence to the long-term investor, who does not need all of their money back today.

As far as 2019 is concerned, no one who is honest knows what will happen in the markets.  The global economy is still set to grow by 3.5% above inflation this year, according to the IMF, which is not that bad.  Today market prices reflect the aggregate view of all investors based on the information to hand.  If new information comes out tomorrow, prices will adjust to reflect the impact this has on company valuations.  As the release of new information is, by definition, random so too must price movements be random, at least in the short-term.  Over the longer-term they reflect the real growth in earnings that companies deliver through their hard work, executing the delivery of their business strategies.  In the longer-term, investing in the stock market is a game worth playing, at least with part of your portfolio.

As Benjamin Graham – a legendary investor in the early 20th Century once said:

In the short run, the market is a voting machine but in the long run it is a weighing machine"

We could not agree more.

Other notes and risk warnings

Use of FE Analytics Data

© FE Analytics 2019. All rights reserved. The information contained herein is proprietary to FE Analytics and/or its content providers.  Past financial performance is no guarantee of future results.

Risk warnings

This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.

This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Errors and omissions excepted.

Max Tennant - February 2019

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

What a mess
It is rare that politics is discussed in our articles about investing, but it is evident when turning on the news that it feels like there is much going on in global politics at the moment that is unsettling, complex and confusing at one end, such as Brexit, to the downright worrying and unpleasant at the other, such as Russian meddling in the democratic process and the use of nerve agents on the streets of Salisbury. There is much in between that is hard to compute in terms of its impact.  Trump’s populism feels unpleasant to many, but is his call to NATO members, such as Germany, to meet their commitments in full to share more of the financial burden of protecting Europe unfair, given Russian aggression? Is his trade war with China wholly a bad thing?  A recent leader in The Economist (1) supports – at least in part – his tirade against its mercantilism and unfair trade practices.  Let’s not forget climate change…

Issues closer to home such as Brexit and the potential for great political uncertainty in the event of no satisfactory (or any) deal being reached, feel - at least to UK residents – more prominent in our lives at this moment than some of these wider issues.  

The Brexit affair
Whichever way one voted, it is hard not to be dismayed by the shambles that is Brexit, concocted by all sides.  Until recently, the UK appeared to have no clearly defined strategy. Its negotiations are led by a PM who wanted to remain, receiving criticism from the right-wing of her party for not going far enough, and daily criticism from the opposition party, led by a long-time Eurosceptic, that still has no credible alternative aside from six ‘cake-and-eat-it’ criteria that any deal must meet.  

For example, Criteria 2 poses the question ‘Does it deliver the “exact same benefits” as we currently have as members of the Single Market and Customs Union? (2)’, which is an impossibility, unless the deal is to remain. What a mess!  One would laugh if the consequences for our nation were not so great.

The EU has hardly covered itself in glory either with their intransigence and deep-seated, implicit desire to make everything so tough that other EU member states won’t dare to follow suit, or that UK voters might change their minds.  Yanis Varoufakis – the Greek finance minister at the time of their debt crisis – revealed the trap that the EU would set for the UK government, in his book (3) about his own experiences of dealing with it.   Did any of our politicians read it?

In the event that any deal agreed gets voted down in Parliament - or there is no deal – we face a high chance that the Conservative government could fall (but will turkeys vote for Christmas?) to be replaced by a far-left leaning government led by Corbyn and McDonnell.  Whatever your own thoughts and preferences on that, the one certainty is that we would be in for a period of radical change.  Certainly, that means higher personal taxation.  In Labour’s 2017 manifesto they gave us a clue: a 45% income tax rate to kick in at £80,000 of income, with a 50% rate above £123,000.  This results in marginal tax rates – taking into account National Insurance and tapering of allowances - of 55% for those earning between £80,000 to £100,000, 73% up to £123,000 and 58% thereafter, according to the Institute for Fiscal Studies.  

Even before these changes it is interesting to note that 4 in 10 adults currently pay no income tax and the top 10% of income taxpayers pay 60% of all income tax (4) and around 30% of all personal taxes collected.  Corporation tax is set to rise from 19% to 26% and the 10% shareholding held for employees – announced by McDonnell at the Labour Party Conference - is likely to be a large new tax on companies, given the £500 limit per employee on dividend income and with the remainder going to HMRC.  Renationalization of some industries, possibly without full compensation, is not beyond the realms of possibility.  Wherever you sit in terms of the balance between equity (how the economic pie is sliced up) and efficiency (how big the pie is), there is no doubt that we are living in ‘interesting’ times.

The point of this note is to recognise that the world we live in can be an uncertain and uncomfortable place and it can create anxiety over our future wealth and well-being.  It also sets the context for why and how a sensibly structured portfolio can provide considerable comfort for longer-term investors, and how we can put the uncomfortable noise of what’s going on in perspective.

It is not all bad, in fact, far from it
A recent study by the OECD (5) projects that global (after inflation) growth will rise by 3.7% in both 2018 and 2019, with major European economies growing by 1% to 2%, including the UK (1.3%). Growth in the US is predicted to be around 3% in 2018 and 2019.  In the UK, employment is at a record high and real wage growth (after inflation) has been positive since 2015 and the budget deficit is now around 1% of GDP compared to 10% before the austerity program.  Global growth leads to a growth in global earnings, which, when added to dividends paid, equates to the economic return due to equity investors for providing capital.  That’s good news. 

The chart below illustrates that markets weather the multitude of World events they experience, rewarding the patient long-term investor, with growth in their purchasing power.
 

Figure 1: The relentless growth of purchasing power, despite World events (1/1985-7/2018)

Source: Albion Strategic Consulting (6)

The capitalist spirit continues to drive positive change
Since 2016 alone, 90 million people have been lifted out of extreme poverty (7), something that afflicts 8% (634 million) of the World’s population, most of whom live in Sub-Saharan Africa.  South Asia and East Asia and the Pacific have lifted around 0.5 bn and 1 bn people out of extreme poverty, respectively, since 1990 (8).  That is on account of the unleashing of the energy and innovation that capitalism has driven in these regions, including China.

In terms of infant mortality, the progress has, again, been staggering.  In 1990, on a global basis, infant mortality stood at 65 deaths per 1,000 live births. Today it is less than half that at below 30 (9). This is due to the reduction in poverty and improvement in healthcare and education around the globe, again driven and funded by the wealth that capitalism delivers (10).  

Please take the time to view an amazing data visualisation of the World’s progress since 1810 by Hans Rosling (11), a renowned global health academic, to lift your spirits . It’s a great way to spend four minutes.

We, as humans, tend to hold many misperceptions around important issues, overestimating guesses when an issue worries us and underestimating those that do not.  In part, this is because we rely on the fast thinking part of our brains, which are often not over-ridden by slower, more measured, reasoning (12).   

For example in the UK we guess that 37% of the population is over 65, when in fact it is 17%.   We believe that the top 1% of wealthiest people own 59% of the wealth, when in fact it is 23%.  Only 13% of the UK’s population are immigrants, yet we guess at 25% (13). One can begin to see how polarised political system can use facts and misperceptions to their advantage. 

So where does all this leave investors and their portfolios?
You may well be asking yourself whether what is going on in the World affects how your money is invested and if any changes need to be made to your portfolio.  The question implicitly suggests that we can look into the future and know what is going to happen.  If it were that easy, all investors would know what to do and prices would already have moved. Remember that you are not the only person thinking about these global challenges and all scenarios are reflected in current prices.  As a consequence, we need to rely on the structure of our portfolios to see us through.

We set out three key risks relating to Brexit and how sensible portfolio structures can mitigate them.

Risk 1: Greater volatility in the UK and possibly other equity markets
In the event of a poorly received deal - or no deal - it is certainly possible that the UK equity market could suffer a market fall as it tries to come to terms with what this means for the UK economy and the impact on the wider global economy.  A collapse of the Conservative government and a Labour victory would add further uncertainty. 

Risk 2: A fall in Sterling against other currencies
In 2016, after the referendum, Sterling fell against the major currencies including the US dollar and the Euro.  There is certainly a risk that Sterling could fall further in the event of a poor/no deal.  

Risk 3: A rise in UK bond yields (and thus a fall in bond prices)
The economic impact of a poor/no deal and/or a high spending socialist government could put pressure on the cost of borrowing, with investors in bonds issued by the UK Government (and UK corporations) demanding higher yields on these bonds in compensation for the greater perceived risks. Bond yield rises mean bond price falls, which will take time to recoup through the higher yields on offer.

Looked at in isolation, these may appear to be significant risks.  Owning a well-diversified and sensibly constructed portfolio, however, can greatly reduce these risks.

Mitigant 1: Global diversification of equity exposure
Although it is the World’s sixth largest economy (depending on how you measure it), the UK produces 3% to 4% of global GDP, and its equity market is around 6% of global market capitalisation.  Many of the companies listed on the London Stock Exchange derive much of their revenue from outside of the UK (around 70% to 80%).  For example, HSBC, even though it is often thought of as a British bank, generates over 90% of its revenues from overseas.  Well-structured portfolios hold diversified exposure to many markets and companies.
 

Figure 2: Global market capitalisation (developed and emerging markets) - 2018

Source: Albion Strategic Consulting using data from iShares – August 2018 (MSCI ACWI ETF).

Equity markets are always volatile, responding – sometimes materially – to new information. Despite this, changing your mix between bonds and equities would be ill-advised.  Timing when to get in and out of markets is notoriously difficult. Markets move with speed and magnitude and missing out on the best days in the markets can have material long-term return impacts.  Provided you do not need the money today, you should hold your nerve and stick with your strategy.      

Mitigant 2: Owning non-Sterling assets and currencies in the growth assets 
In the event that Sterling is hit hard, it is worth remembering that the overseas equities that you own come with the currency exposure linked to those assets.  For example, owning US equities comes with US dollar exposure, as this exposure is not hedged out.  In short, a fall in Sterling has a positive effect on non-UK assets that are unhedged.  The chart below illustrates the impact that currency in unhedged non-UK assets has had over the past decade.  As you can see, at times of market crisis, the Pound has fallen against other safe-haven currencies such as the US dollar.

Figure 3: A falling pound is a positive contributor to portfolio returns

Source: Morningstar Direct© 2018. All rights reserved. Data derived from MSCI World Index in GBP, MSCI World Index in Local Currency and MSCI UK Index.

The bond element of your portfolio should have little or no non-Sterling currency exposure to avoid mixing the higher volatility of currency movements with the lower volatility of shorter-dated bonds. 

Mitigant 3: Owning short-dated, high quality and globally diversified bonds
Any bonds you own should be predominantly high quality to act as a strong defensive position against falls in equity markets.  Avoiding over-exposure to lower quality (e.g. high yield, sub-investment grade) bonds makes sense as they tend to act more like equities at times of economic and equity market crisis.  Your bond holdings should be diversified across a number of different global bond markets, which mitigates the risk of a rise in UK yields (and thus falling prices), as the cost of borrowing in other markets may not be impacted in the same way, at the same time.

Some thoughts to leave you with
Even if you cannot avoid watching, hearing or reading the news, it is important to keep things in perspective.  The UK is a strong economy with a strong democracy.  It will survive Brexit, whatever the short-term consequences that we will have to bear, and so will your portfolio.  Keeping faith with both global capitalism and the structure of your portfolio and holding your nerve, accompanied by periodic rebalancing is key.  Lean on your adviser if you need support. That is what we are here for.  

Perhaps try to catch up on the news only once a week and use the extra time to read about some of the exciting and positive things that are happening in the World.‘This too shall pass’ as the investment legend Jack Bogle likes to say.

---

[1]     The Economist, September 22nd – 28th edition, ‘Hunker down’, page 12.
[2]     www.labourlist.org (2017) Keir Starmer: Labour has six tests for Brexit – if they’re not met  we won’t back the final deal in parliament. 27th March 2016.
[3]    Yannis Varoufakis (2016), And the weak suffer what they must The Weak Suffer What They Must? Europe’s Crisis and America’s Economic Future, New York: Nation Books, 2016
[4]     IFS (2017) www.ifs.org.uk/publications/10038 Note also that an income of a little over £50,000 put one in the top 10%.
[5]     OECD Economic Outlook and Interim Economic Outlook (September 2018) http://www.oecd.org/eco/outlook/economic-outlook/
[6]    Global balanced portfolio: 36% MSCI World Index (net div.), 26% Dimensional Global Targeted Value Index, 40% Citi World Government Bond Index 1-5 Years (hedged to GBP) – no costs deducted, for illustrative purposes only. Data source: Morningstar Direct © All rights reserved, Dimensional Fund Advisers. Past performance is not indicative of future performance.
[7]     World Poverty Clock www.worldpoverty.io (worth a look at how poverty is reducing).
[8]     The Economist, September 22nd – 28th edition, ‘Poverty estimates’, page 65.
[9]     World Bank (2017) https://data.worldbank.org/indicator/SP.DYN.IMRT.IN?end=2017&start=1990
[10]     For any reader interested in a more positive outlook, Matt Ridley’s book ‘The Rational Optimist’ is a good read
[11]     Hans Rosling’s data visualisation. https://www.youtube.com/watch?v=jbkSRLYSojo – a brilliant four minutes!
[12]     Nobel Prize winner, Daniel Kahneman’s book ‘Thinking fast and slow’ is a great read on this subject.
[13]    Data source: Bobby Duffy (2018), ‘The Perils of Perception: why we are wrong about nearly everything’.  Bell & Bain Ltd. Glasgow.  A great read on the subject.

Use of Morningstar Direct© data
© Morningstar 2018. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

Risk warnings
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.Errors and omissions excepted.

Max Tennant - October 2018

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

We are delighted to announce that we will be taking part in the first Bristol Giving Day on the 10th October 2018.
 
Our diaries have been cleared and Ifamax will become a drop-in clinic for the day. We will be available for a day of short sessions for anyone to come in and get help on anything finance related, no matter how big or small. We will also be holding sessions over the phone/Skype/e-mail if someone is unable to get into our office.
 
There will be no charge for our time but would hope for a donation to this worthy cause. Ifamax will match any money raised during the day.

How can you help:

• Spread the word to friends, family members and colleagues

• Make a donation on their behalf

• Affiliate your own business with Bristol Giving Day

Link to donate - https://mydonate.bt.com/fundraisers/ifamax

Please contact Ashton Chritchlow on 0117 33 22 626 or ashton@ifamax.com to book in a slot.

Bristol Giving Day will join together businesses and local community causes to spread generosity across the city. One day in the year to inspire extra charitable giving, and right proper fun to make a big difference to lots of local causes. Organised by Quartet Community Foundation with the support of the Bristol business community, Bristol Giving Day will be vibrant and inspiring as we join together to love our city. Any fundraising time given on the day will be celebrated – from 10 minutes or half an hour during the lunchtime, to time/activities tying in with your work’s social calendar.

More information can be found on https://bristolgivingday.co.uk/

Please note that we will not be providing regulated financial advice during the sessions. We will be providing guidance in good faith, based on our experience of financial matters.

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

How can you get the best foreign currency rate while on holiday? Well, I have done a reasonable amount of research into this now and must conclude that it is impossible to get the best rate available from just one source! So, I’ve asked myself another question – what’s the most hassle-free way of paying for things while travelling abroad knowing that you’ve got a good deal? And, what do I mean by hassle-free you may ask! To me, it means one account, one card and no bother about pre-purchasing any currency in advance. I either use my apple pay, tap or chip-and-pin, I don’t want to even give it a moment’s thought, after all, I am on holiday.

What has fundamentally changed in the way we can spend abroad comes down to what is known as peer to peer. TransferWise, for example, has teamed up with banks across the globe to match up payments. This is how it works: Tony, from London, goes to New York and while there buys himself a pair of shoes costing him $65. At the same time Sarah, from New York, has gone out with a friend and paid for a meal in a restaurant in London costing £50. Tony’s payment is then matched off against Sarah’s and visa Versa, thereby taking out the expensive cost of transmitting and changing that money. By doing this TransferWise can give you the mid-market price which you can see live on Google. They then charge you a small fee, typically 0.35% for major currencies (up to 1% on other smaller currencies).

Now a similar process is followed by Mastercard and Visa, but you don’t necessarily get as good a rate. A report written by Nomadgate, based on research provided by Nerdwallet on exchange rates for US Dollars into various other currencies found that Visa was on average 0.3% more expensive than the mid-market rate (as you see on Google) and Mastercard was on average 0.21% more than the mid-market rate, although there were occasions where you won as the Mastercard and Visa may lag pricing wise in your favour from time to time. I tested this today for example and yes, Mastercard did provide me with a better rate than that shown on Google. But, that won’t be the case all the time. 

I have looked at three new providers, all with slightly different offerings:

•    TransferWise
•    Revolut
•    Monzo

There are other providers out there, but these now seem to have got some traction, which is important, as I do believe that there may be some consolidation to come.

TransferWise offers a nice easy to use application for your phone and a card to go with it. With their Borderless account, you can preload with some cash and not bother about pre-purchasing any currency, as that’s a hassle (although you could if you wanted). Keep your money in sterling, pay in Euros one day and US Dollars the next, no problem, mid-market price + a small transparent fee. But there is a snag. If like me, while on holiday you may wander off from the family, buy the odd cappuccino and purchase a newspaper. TransferWise has a minimum fee of 80p on Euro transactions (and similar rates for other currencies), so this would equate to an additional £1.60. That’s going to start racking up on a two-week holiday. 

Revolut also has a great phone application. I’ve not used them myself, but friends and colleagues seem very happy with them. They will also give you the mid-market price like TransferWise, but there is no additional fee. But they have two snags in my opinion. On weekends, when currency exchanges are closed they will add 0.5% to the transaction fee for major currencies 1% for smaller currencies like the Thai Baht or 1.5% or more for some. The second snag relates to the fact that they are losing money. While your money is kept in a separate bank account with Barclays and I am sure your money is safe; there could be some administrative issues if they started to struggle.

Finally, Monzo. Yes, app and card, apple pay, tap. With this, you get the Mastercard rate and while the Mastercard rate might not be quite as keen as the mid-market price (on average), there is no loading on weekends like Revolut or minimum transaction fees that you get with TransferWise. This to me is hassle-free.

Stress Testing!! (no test occurred – just a guess)
Cappuccino bought in a café in Rome on a Tuesday morning.
1st - Revolut, 2nd - Monzo, 3rd - TransferWise.

Newspaper purchased in Paris on a Saturday morning.
1st - Monzo, 2nd - Revolut, 3rd - TransferWise. 

Paid for hotel Hong Kong on a Monday morning.
1st Revolut, 2nd - TransferWise & Monzo.

Paid for hotel in New York on Sunday.
1st - Transferwise & Monzo, 3rd - Revolut. 

Banking guarantees, profitable, here tomorrow (who knows).
1st - Monzo, 2nd - TransferWise (profitable for 2 years now), 3rd - Revolut. 

The winner: Monzo. In my opinion, probably the most hassle-free. No need to pre-purchase currency. But the crucial difference to me is that they are a Bank. You get the full £85,000 banking guarantee with it. 

Some words of warning.
ATMs. Each of these cards allows you to take withdrawals free of charge while abroad up to £200 in any 30-day period. Exceed this and you will be charged 3%. When you do withdraw money from an ATM, always take the option to withdraw in local currency. If you don’t do that the Bank providing the ATM will do the foreign exchange for you and charge some hefty fees. 

When you are in a shop or restaurant abroad, again take the option to pay in the local currency, otherwise, you will be charged by the vendors’ bank for the exchange. 

As mentioned, there are other providers out there, but I think Monzo looks pretty good.  

Risk Warning

This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial advice.                       

Max Tennant - June 2018

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

The WannaCry ransomware attack was only last May and an article today in The Independent reports that it expects scams to rocket during 2018. So, what’s to do?

Jeremy Clarkson claims that he doesn’t know how the internal combustion engine works – he just drives cars. He doesn’t even claim to be a good driver and I am not sure he’s telling the whole truth about that, but I get his point. I kind of feel the same way about the internet. I don’t really have the foggiest on how it works, it just does (or doesn’t) and that’s good enough for me. But this is clearly no excuse to having some form data accident just as it would be for Mr. Clarkson to crash without a seatbelt on.

Early last year, during the winter half-term holiday with my family. I read an article in the Times about how poor some people’s passwords were and how easy they could be to hack using a password cracking software. I was guilty of many of the common mistakes outlined in the article. Classic mistakes for passwords include:

• Names of pets, past or present.

• Using parts of addresses, past or present.

• Names of people you know, past or present.

• Using only one word and adding up case, numbers before or after symbols etc. All this stuff is very easy to crack. 

Not only did I have a problem, but on investigating my team, my whole office did as well. That is something I’m not proud of and as Financial Advisor, we should set ourselves to the highest of standards. Since that time I have become almost evangelical about cybersecurity. I’ve not only done several presentations to other groups of financial advice firms, but I also like to help our clients to be cyber safe as well.

As always, there are no guarantees, but I would start with two actions now:

• Firstly google ‘how long should my password be?’ I am not going to tell you what we’ve done here in this Ifamax Insight, but I would say that reading a few of those articles randomly will give you a process in mind of what you probably need to do to protect your devices. The good news is, that if you make it tough enough, you shouldn’t need to change it again.

• The next issue is that every website you use should also have a different password. I’d strongly suggest that you get a Password Manager. If you don’t yet know what these are, again google it. There are a host of providers and many articles on the subject. Again, for security reasons, I won’t tell you which one we use, but I can tell you that it’s brilliant and there is no more endless form fills or paper trail for any password.

Next, go and read www.cyberaware.gov.uk for tips in keeping more aspects of your business and personal life safe.

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

"I have found that the importance of having an investment philosophy - one that is robust and that you can stick with - cannot be overstated"

David Booth

The world stock market has delivered an average annual return of around 10% since 1988 (1). But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically.

For example, how often have the stock market’s annual returns actually aligned with its long-term average? To answer this question, we have looked at the US stock market which has a much longer track record and has also delivered an average annual return of around 10% since 1926 (2). 

Exhibit 1 shows calendar year returns for the S&P 500 Index since 1926. The shaded band marks the historical average of 10%, plus or minus 2 percentage points. The S&P 500 had a return within this range in only six of the past 91 calendar years. In most years the index’s return was outside of the range, often above or below by a wide margin, with no obvious pattern. For investors, this data highlights the importance of looking beyond average returns and being aware of the range of potential outcomes.

Exhibit 1: S&P 500 Index Annual Returns 1926–2016

The S&P data are provided by Standard & Poor's Index Services Group. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Tuning In To Different Frequencies

Despite the year-to-year uncertainty, investors can potentially increase their chances of having a positive outcome by maintaining a long-term focus. Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, 10, and 15 years in the US market. The data shows that, while positive performance is never assured, investors’ odds improve over longer time horizons.

Exhibit 2: Frequency of Positive Returns in the S&P 500 Index - Overlapping Periods: 1926–2016

From January 1926–December 2016 there are 913 overlapping 15-year periods, 973 overlapping 10-year periods, 1,033 overlapping 5-year periods, and 1,081 overlapping 1-year periods. The first period starts in January 1926, the second period starts in February 1926, the third in March 1926, and so on. The S&P data are provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Conclusion

While some investors might find it easy to stay the course in years with above-average returns, periods of disappointing results may test an investor’s faith in equity markets. Being aware of the range of potential outcomes can help investors remain disciplined, which in the long term can increase the odds of a successful investment experience.

What can help investors endure the ups and downs? While there is no silver bullet, having an understanding of how markets work and trusting market prices are good starting points. An asset allocation that aligns with personal risk tolerances and investment goals is also valuable. Financial advisers can play a critical role in helping investors sort through these and other issues as well as keeping them focused on their long‑term goals.

---

[1].   As measured by the arithmetic average of calendar year returns of the MSCI All Country World Index (gross div.) from 1988 to 2016. MSCI data © MSCI 2017

[2].   As measured by the S&P 500 Index from 1926–2016. S&P data provided by Standard & Poor’s Index Services Group.

Source: Dimensional Fund Advisors.

Risk Warning
This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial  advice.

Max Tennant - November 2017

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

Gold has always held a certain appeal for humans. Its lustre, due to a lack of oxidation, makes it pleasing to look at and to handle. Yet, it is simply a lump of metal that generates no income and will only be worth what someone else wants to pay for it at any point in time. Given the lack of cash flow, common valuation models are not useful. Warren Buffett is not a big fan:

"Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

Gold has suffered prolonged, negative real returns over periods as long as 20 years and delivered an annualised return of just 1.5% p.a. after inflation - around 5% lower than equities - between 1987 and 2017, yet with comparable volatility. In its favour, gold prices are uncorrelated to equity markets.  Yet many investors seem enamoured by its fabled investment properties. Do these claims tack up?

Claim 1: Gold is a good defensive asset at times of global equity market crisis.
In the period under review, there were three substantial equity market crashes.

Figure 1: Gold as a defensive asset from 1/1979 to 6/2017

Data source: MSCI World Index (net div.), Citi WGBI (1-5) hedged GBP from Morningstar © All rights reserved.

The spectacular return of gold during the credit crisis was perhaps driven by fear, pushing up the price of gold. If you are able to guess how others are going to behave in the future, you would be able to take advantage of gold’s hedge against fear, buying and selling it at appropriate times. Market timing is exceptionally hard to do, without the luxury of hindsight. Holding gold as a strategic diversifier in a portfolio carries with it a punitive, long-run zero real return assumption. Gold may be a good hedge against fear, but it is hard to exploit in practice.

Claim 2: Gold is a good inflation hedge.
Perhaps one of the most quoted properties of gold is its supposed ability to provide a hedge against inflation. The evidence does not support the assertion, at least over normal investment horizons. Over the long-term gold keeps up with inflation; A US army private gets paid almost the same – in terms of gold - as a Roman legionary did 2,000 years ago!

The belief that gold is a good inflation hedge is anchored on its performance during the late 1970s when gold prices and high inflation rose in tandem. James Montier of GMO undertook an analysis that demonstrated the 10-year inflation for each decade and the gold price return was uncorrelated except for 1970 [1].   In terms of an inflation hedge, stocks and index-linked gilts provide better opportunities to achieve this objective.

Figure 2: The real price of gold and underlying annual inflation 1/1979 to 6/2017

Data source: www.gold.org. UK Retail Price Index – Bank of England

Claim 3: Gold is a useful store of wealth in an Armageddon scenario.
A case can perhaps be made for holding some physical gold in the form of coins or ingots, in the liquidity reserves of those who fear the breakdown of fiat (paper) currencies at times of extreme market events, such as those surrounding the collapse of Lehman Brothers or even greater global calamity such as another world war.  

In the extreme collapse of the financial system, paper gold (e.g. via a gold fund or ETF) would be less favourable given the risk of counterparty failure and the potential inability to access the underlying gold when it is truly needed. Don’t forget that gold is very heavy and if you bury it, you need to be able to find it again; our museums are full of gold Roman coins, buried and lost two thousand years ago!

Conclusion
Enjoy your gold jewellery, perhaps hide a few Krugerrand's in the airing cupboard, but don’t believe that owning gold will improve the structure of your portfolio. From an investment perspective, all that glistens is not gold.

---

[1]  Montier, J., (2013) No Silver Bullets in Investing (just old snake oil in new bottles), GMO White Paper, December 2013

Risk Warning
This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial  advice.

Max Tennant - August 2017

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

As dawn breaks, the morning light reveals yet another political gamble that has not paid off for the dice roller.  The UK has a hung Parliament, with no party holding an absolute majority. Such is the unpredictability of parliamentary democracy.  If you ask the people of the UK what they think, be prepared for the answers that you might receive!

The last few weeks has highlighted the divide in opinion in the country of the role and size of the state in our lives, with further austerity and a shrinking state on the one hand, and a material rise in spending (and taxation for some) on the other.  Each of us has our own feel for what we believe to be best for ourselves and the country, which we were able to express at the ballot box yesterday.  We also remain, as a nation, somewhat divided on the Brexit issue, although perhaps mostly united in the reality that it is going to go ahead, in one form or another, respecting the will of the (slim) majority.

More importantly, the last few weeks has united us as a nation in grief and utter condemnation of the barbarous terrorist attacks in Manchester and London, and a deep sense of resolve that the values that we collectively hold as a nation are immutable: decency, respect, tolerance, and democracy.  Last night we saw what this truly means; Members of Parliament losing their seats, magnanimously shaking hands with their victors and accepting the right of the people to have their say.  The election is another stark reminder to those who assault our values that they will never win. 

Certainly, it is an awkward time for such political turmoil, with the start of the Brexit negotiations just days away.  We will leave the ramifications of this result and the speculation of what we might expect next to others.  We don’t want to add to the noise or a further sense of election analysis fatigue.

Strong and stable portfolios (if not government)
What we do want to do is to reassure you that your portfolio is well-positioned to weather any storms both now and in the future.  It is worth remembering the following: 

• Your portfolio is highly diversified through the thousands of equities and bonds that it holds and the countries that it is invested in.

• Your non-UK equities are unhedged, which means that you hold this portion of your portfolio in non-GBP currencies.  In the event of a fall in the value of Sterling (GBP), as we have initially seen, these overseas assets will be worth more in Sterling terms.

• Your bond holdings – which are hedged – are diversified across global markets, reducing the impact of any rise in the cost of borrowing that might occur on account of the greater uncertainty that the UK faces at this time.

• While markets don’t like uncertainty, the UK is a small player in the global pond and this morning’s result is just a ripple.    

• Portfolios go up and down; they always have and they always will.  If you don’t need to spend the money today, don’t worry about what happens in the coming days, weeks and months.    

Although this morning’s result may feel uncomfortable for some, let’s keep it in proportion. We live in a tolerant, open society – and by the look of the greater level of engagement in the election by the younger generation – a great democracy that cares passionately about its future.  Put the kettle on, have a nice cup of tea and celebrate this next – if unpredicted and a little uncertain – step for our nation.

If you would like to speak with us about this or any other matter, please feel free to give us a call today.

Risk Warning
This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial advice.

Max Tennant - June 2017

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

Over the long run, the market has provided substantial returns regardless of who lives at Number 10.

Next month’s snap election is the first national vote in the UK since the EU referendum. While the election’s outcome and overall impact are unknown, there is no shortage of speculation about how the election will impact the stock market. Below, we explain why investors would be well-served avoiding the temptation to make significant changes to a long-term investment plan based upon these sorts of predictions.

Exhibit 1: Growth of a Pound Invested in the Dimensional UK Market Index
January 1956–December 2016

For illustrative purposes only. Past performance is not a guarantee of future results. Index is not available for direct investment, therefore, their performance does not reflect the expenses associated with the management of an actual fund. Dimensional indices use CRSP and Compustat data.

Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants— including expectations about the outcome and impact of elections. While unanticipated future events (genuine surprises) may trigger price changes in the future, the nature of these events cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. So it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a general election.

The focus of this election is Britain’s exit from the EU. But, as is often the case, predictions about the outcome and its effect on the stock market focus on which party will be “better for the market” over the long run. Exhibit 1 shows the growth of £ 1 invested in the UK market over more than 60 years and 12 prime ministers (from Anthony Eden to Theresa May).

This exhibit does not suggest an obvious pattern of long-term stock market performance based upon which party has the majority in the Commons. What it shows is that in the long run, the market has provided substantial returns regardless of who lives at Number 10.

Equity markets can help investors grow their assets, but investing is a long-term endeavour. Trying to make investment decisions based upon the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely result from random luck. At worst, such a strategy can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.

Risk Warning
This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial advice.

Max Tennant - May 2017

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

Ever ridden in a car with worn-out shock absorbers? Every bump is jarring, every corner stomach-churning and every red light an excuse to assume the brace position. Owning an undiversified portfolio can trigger similar reactions.

In a motor vehicle, the suspension system keeps the tires in contact with the road and provides a smooth ride for passengers by offsetting the forces of gravity, propulsion, and inertia.

You can drive a car with a broken suspension system, but it will be an extremely uncomfortable ride and the vehicle will be much harder to control, particularly in difficult conditions. Throw in the risk of a breakdown or running off the road altogether and there’s a real chance you may not reach your destination.

In the world of investment, a similarly bumpy and unpredictable ride can await those with concentrated and undiversified portfolios or those who constantly tinker with their allocation based on a short-term rough patch in the markets.

Of course, everyone feels in control when the surface is straight and smooth, but it’s harder to stay on the road during sudden turns and ups and downs in the market. And keep in mind the fix for your portfolio breaking down is unlikely to be as simple as calling a tow truck.

For that reason, the smart thing to do is to diversify, spreading your portfolio across different securities, sectors, and countries. That also means identifying the right mix of investments (e.g., stocks, bonds, property) that aligns with your risk tolerance, which helps keep you on track toward your goals.

Using this approach, your returns from year to year may not match the top-performing portfolio, but neither are they likely to match the worst. More importantly, this is a ride you are likelier to stick with.

Just as drivers of suspension fewer cars change their route to avoid potholes, people with concentrated portfolios may resort to market timing and constant trading as they try to anticipate the top-performing countries, asset classes, and securities.

Here’s an example to show how tough this is. Among developed markets, Denmark was number one in Sterling terms in 2015 with a return of 30.6%. But a big bet on that country the following year would have backfired, as Denmark slid to the bottom of the table with a return of just 0.5% in 2016.

The US has had a stellar run, ranked in the top three of the world’s best performing developed share market three times in the past six years (2011, 2013 and 2014). But between 2002 and 2006 it was a laggard, appearing in the bottom five in each of these years (see Exhibit 1).

Predicting which part of a market will do best over a given period is also tough. For example, while there is ample evidence to support why we should expect positive premiums from small-cap, low relative price, and high profitability stocks, these premiums are not laid out evenly or predictably across the map. US small-cap stocks were among the top performers in 2016 with a return of more than 21%. A year before, their results looked relatively disappointing with a loss of more than 4%. International small-cap stocks had their turn in the sun in 2015, topping the performance tables with a return of just below 6%. But the year before that, they were the second-worst with a loss of 5%.

If you’ve ever taken a long road trip, you’ll know that conditions can change quickly and unpredictably, which is why you need a vehicle that’s ready for the worst roads as well as the best. While diversification can never completely eliminate the impact of bumps along your particular investment road, it does help reduce the potential outsized impact that any individual investment can have on your journey.

With sufficient diversification, the jarring effects of performance extremes level out. That, in turn, helps you stay in your chosen lane and on the road to your investment destination.

Happy motoring and happy investing.

Risk Warning
This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial advice.

Max Tennant - May 2017

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

From 6 April 2017, a new allowance may reduce the amount of tax due when leaving your estate, including your family home, to your descendants.

The allowance starts at £100,000 for 2017/18 and will increase during the subsequent three tax years by £25,000 per year until it reaches £175,000 in the 2020/21 tax year. When added to the current nil rate tax band of £325,000 per individual, this means an allowance per individual of £500,000 and £1 million for married couples and civil partners for their descendants before any inheritance tax is payable. Both these tax allowances can be passed onto the surviving spouse or civil partner.

This new allowance supports a Government aim to make it easier to pass the family home onto children, grandchildren, adoptive and step-children and may have a significant impact on inheritance tax planning strategies.

However, in order for your descendants to benefit, there are some important points to be considered:

• The qualifying property needs to have been your main residence at some point during your lifetime. You do not have to be living in the property when you die.

• If you own more than one qualifying property, your personal representatives can nominate which one should be used.

• You must leave the property to a lineal descendant. In addition to children and grandchildren and their spouses, this includes step-children, adopted and fostered children.

• It does not include your spouse, you can only transfer the allowance to them.

• The Main Residence Nil Rate Tax Band can be transferred to a surviving spouse or civil partner even if the first to die did not own a property.

• The total value of your estate should not exceed £2 million. In this case, the allowance is tapered down. It is reduced for every £2 which exceeds this limit.

• If you die in the 2017/18 tax year with an estate of more than £2.2 million then your residence allowance will be reduced to £0.

Use of Trusts
Care should be taken if your residence is to be placed in trust after your death. The legislation permits gifts into certain types of trust. This includes life interest trusts and those which benefit from preferential inheritance tax treatment. It does not include discretionary trusts even where the only people who can benefit fall within the definition of ‘lineal descendant’.

Downsizing
Your descendants can still qualify for the new main residence allowance if you downsize or sell up to move into care, provided you did so after 8 July 2015. It may be possible to use the main residence allowance to reduce inheritance tax on assets of any kind.

Limitations
Strict requirements may mean the main residence allowance is of limited use, especially if your estate is worth more than £2 million or you don’t want to leave your main residence to a lineal descendant. Each individual case will be different. We are very happy to answer any queries you may have and if this applies to you, we will discuss this at your next review meeting.

Risk Warning
This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial advice.
 

Max Tennant - March 2017

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

We tend to regard wealth as financial assets, large houses, and nice cars accumulated through a life of hard work.  Yet that is to view wealth in narrow terms; on the very day we are born we are wealthy in terms of our human capital, or in other words, the present value of all the future earnings that we will generate over our working lives.  This needs to be reflected in how we invest during the accumulation phase of investing.

As younger people have a long time to go before they will need the money, the advice they receive is often that excess earnings should be invested predominantly in equities.  A subtler approach takes into account the attributes of each person’s human capital, which ranges from bond-like to equity-like in nature.  Take for example a university professor and a fin-tech entrepreneur; the former has a stable income, linked to inflation and job security; the latter has little income stability and, most likely, a high correlation to the equity markets. The professor’s human capital acts like a bond, the entrepreneur’s as equity.

So, if they are both 40 years old and have the same level of financial capital, should they invest in the same way? Intuitively, the answer is no. 

Human capital should be treated like any other asset class; it has its own risk and return properties and its own correlation with other financial asset classes.

Ibbotson, Milevsky, Chen and Zhu (2007)[1] 

Those with more bond-like human capital could well take on more risk and those with more equity-like human capital should, perhaps, take on less risk with their financial capital.  Ironically, it is also possible that those who choose steady, stable jobs may have a lower tolerance to losses than the entrepreneur, and vice versa.  One can see the risk of this scenario.  Additionally, two partners may also have different levels of risk in their human capital. Imagine a professor married to an entrepreneur; together they form a balanced portfolio between bonds and equities and their investable portfolio of financial capital should reflect this. 

Figure 1: How human capital attributes influence asset allocation

Source: Albion Strategic Consulting

Cash-flow modelling can help those in the accumulation phase of investing to understand the financial impact of changes to their human capital.  Owning sufficient life cover to protect the outstanding human capital should be an important part of the discussion.  It is difficult to see how a stockbroker or investment manager can structure a portfolio sensibly, particularly where the investor still has substantial human capital, without the insight into, and modelling of, the client’s total asset picture.  No financial portfolio is an island.

[1] Ibbotson, Milevsky, Chen and Zhu (2007), Lifetime Financial Advice: Human Capital, Asset Allocation and Insurance, Research Foundation of CFA Institute publication.

Risk Warning

This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial advice.

Max Tennant - February 2017

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

On the winter solstice, Ifamax went to work on making life just a little bit better at the Dogs’ Friends Rescue, which is based near Cheddar. We went with no specific plan, other than for them to use us as they wished.

Ashton and Jamie were initially tasked with cleaning out some stables and then adding waste to their composting heap. I’m afraid I had to intervene momentarily to give a fork using demo. Having come from a farming background myself, watching those two boys in action with long fork handles was painful on the eyes.

Naomi and I were tasked with filling a skip. Dogs’ Friends are halfway through redevelopment of one side of their yard. Some old sheds were being removed and there was quite a bit of rubbish and rubble to clear away.

The biggest challenge in working in the main yard was being around six very large, but friendly Golden or Chocolate Labradors. These Labs took great interest in every item that was being removed and simply walked in your way when you least expected it. Naomi made the massive mistake of actually showing them some attention, which for her, resulted in trying to push off about one ton of dog for the rest of the afternoon, as they all competed for her affection.

Our last job was then for all of us to clear down the main yard. The surface is rather broken and is full of potholes. I think it’s an area that really needs funding as it can’t be easy to work with, especially during very wet or cold periods.

Ashton, Jamie, Naomi and I, all had a great day of hard work. It was pleasing to step back and see the change we had made and we would happily do it again.

If you would like to donate please to Dogs’ Friends, please click on the link.     

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

We are somewhat loathe to put out yet another piece about what might happen in the markets as it risks focusing long-term, sensible investors’ minds on short-term events.  The referendum on Scottish independence, Grexit, China’s slowdown and most recently Brexit, have come and gone, in market terms, with most investors sitting on healthy increases in their portfolios since 2014, despite uncertainty at the time.  However, it is not a bad thing to revisit the robust rationale for the structure of our client portfolios, particularly at such a time.

With less than a week to go before US citizens exercise their democratic rights and responsibilities, the race between the two Presidential candidates – love them or loathe them – looks too close to call.  This campaign has, perhaps, brought out the worst of the US electioneering process between two polarising candidates, with much talk of the least-worst outcome.  At times it has been unedifying, to say the least.  Yet by this time next week, the world will have a new US President.  No-one ever said that democracy was easy.  As Churchill once said:

‘Democracy is the worst form of government, except for all the others.’

From a market perspective, share and bond prices, along with exchange rates, reflect all publicly available information, which includes the aggregate market view on both candidates, their economic and foreign policies and the various scenarios of who wins the House of Representatives and who wins the Senate.  It is therefore next to impossible to second-guess, at this point, what might happen to markets in terms of directional movements.  What we do know is that, like Brexit, there is likely to be a lot of uncertainty, which will be reflected in market volatility, as events unfold, and market participants try to make sense of the outcome delivered by the US people.

It is also worth remembering that it does not really matter which party is in power, from an equity market perspective. The relentless growth of the US (and global) economy, driven by the desire of the private sector for profit, is ultimately reflected in dividends paid to investors and the real growth in corporate earnings that leads to stock price rises over the longer-term.  Time is your friend.

Figure 1: Cumulative, nominal return – US equity market 1970-2016 in GBP and USD.

Data source: MSCI US Index TR from Morningstar Direct

Risks and mitigants

Shorter-term risks to investors’ portfolios include equity market volatility (nothing new there!); rises in bond yields; and weakening of the US dollar.  It is perhaps worth revisiting why our clients’ portfolios are structured as they are:

• Your equity holdings are highly diversified: holdings are diversified across global economies (emerging and developed), across sectors and by individual companies.  Although the US represents around 50% of the global equity markets, it is worth noting that around 45% of the sales of goods and services of S&P 500 companies are made outside of the US (1).

• Your bond allocations are defensive in nature: in the event that bond yields rise, again it is worth noting that US bonds form only part of the bond allocations held in portfolios and, where they are held, they tend to be short-dated bonds which are less sensitive to rises in yields (price fall) than longer-dated bonds.  The majority of bonds held in portfolios are of very high credit quality, which tends to do better at times of market uncertainty, compared to lower quality bonds.

• Your bond exposure is fully hedged, whilst equity exposure is unhedged: if the US dollar depreciates, then for investors with non-dollar portfolios, this could have a negative effect on performance.  Any clients with a US dollar portfolio will conversely benefit.  However, as indicated above, 50% or more of the equity assets are in non-dollar assets and 45% of overseas sales made by US companies will now be worth more in US dollar terms, supporting the US market.  A similar phenomenon has been seen in the UK, post-Brexit.  The bond allocation in portfolios will be largely unaffected by currency movements.

As ever, our advice is to stay put with your strategy and weather any storms that may come your way. Your portfolio is a sturdy vessel in choppy waters. Patience, discipline, and fortitude will see you through.  It is worth reflecting on the sage words of a former President:

Let us never forget that government is ourselves and not an alien power over us. The ultimate rulers of our democracy are not a President and senators and congressmen and government officials, but the voters of this country.

Franklin D. Roosevelt

Be it Clinton or Trump, they are only the vassals of the people.

[1]     S&P Dow Jones Indices (July 2016), S&P Foreign Sales at 44.3%, Lowest Level since 2006.

Risk Warning

This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial advice.

Max Tennant - November 2016

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

When news breaks and markets move, content-starved media often invite talking heads to muse on the repercussions. Knowing the difference between this speculative opinion and actual facts can help investors keep their nerve. 

At the end of June, the referendum for the nation to withdraw from the European Union. The result, which defied the expectations of many, led to market volatility as participants weighed up possible consequences.

Reporting on the result, The Washington Post said the vote had "escalated the risk of global recession, plunged financial markets into freefall and tested the strength of safeguards since the last downturn seven years ago".

The Financial Times said 'Brexit' had the makings of a global crisis. "(This) represents a wider threat to the global economy and the broader international political system," the paper said. "The consequences will be felt across the world."

Now it is true there have been political repercussions from the Brexit vote. Teresa May replaced David Cameron as Britain's prime minister and overhauled the cabinet. There are debates in Europe about how the withdrawal will be managed and the possible consequences for other EU members.

But markets have functioned normally. Indeed, within a few weeks of the UK vote the FTSE 100 hit 11-month highs. By mid-July, the US S&P 500 and Dow Jones industrial average had risen to record highs. Shares in Europe and Asia also strengthened after dipping initially on the vote.

On currency markets, the pound sterling fell to a 35-year low against the US dollar in early July. The Bank of England later surprised forecasters by leaving official interest rates on hold.

Yes, the Brexit vote did lead to initial volatility in markets, but this has not been exceptional or out of the ordinary. One widely viewed barometer is the Chicago Board Options Exchange's volatility index or 'VIX'3. Using S&P 500 stock index options, this index measures market expectations of near-term volatility.

You can see by the chart above that while there was a slight rise in volatility around the Brexit result, it was insignificant relative to other major events of recent years, including the collapse of Lehman Brothers, the Euro Zone crisis of 2011 and the severe volatility in the Chinese domestic equity market in 2015.

None of this is intended to downplay the political and economic difficulties of Britain leaving the European Union, but it does illustrate the dangers of trying to second guess markets and base a long-term investment strategy on speculation.

Now the focus of speculation has turned to how markets might respond to the US presidential election. CNBC recently reported that surveys from Wall Street investment firms showed "growing concern" over how the race might play out.

Given the examples above, would you be wagering your portfolio on this sort of speculation, particularly when it comes from the same people who pronounced on Brexit? And remember, not only must you correctly forecast the outcome of the vote you have to correctly guess how the market will react.

And think about this. Even if you do get it right, what's to say some other event might steal the markets' attention in the meantime? The world is complex and unpredictable. No-one really can be certain about anything.

What we do know is that markets incorporate news instantaneously and that your best protection against volatility is to diversify both across and within asset classes, while remaining focused on how you are tracking relative to your own goals.

The danger of investing based on what just happened is that the situation can change by the time you act, a "crisis" can morph into something far less dramatic and you end up responding to news that is already in the price.

Journalism is often described as writing history on the run. Don't get caught investing the same way.

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

The UK has woken up this morning to a vote to leave the EU, the Prime Minister is set to leave office in October and the markets are suffering a bout of jitters.  We all knew that these were possibilities.  To some this is a good day, to others, it is not.  But we are where we are and we need to look forward to where we go from here.

We should not, however, lose sight of the fact that what we have witnessed is a long-standing, robust and stable democracy at work with both sides attempting to sway voters with the power of argument, passion, and belief.  Although we have seen some dubious use of facts and figures, some scaremongering on both sides and some less than savoury comments at the fringes, this process has been free of violence, open to all and with everyone’s vote holding the same sway; that we should be both proud of and reassured by.

We are also seeing the markets at work, trying to make sense of what this all means and reflecting the aggregate view in market prices.  We are likely to see market gyrations over the coming weeks and months, but we should all remember to view it as short-term noise.   There are many ‘known unknowns’ as Donald Rumsfeld would say: we face an uncertain and likely tough negotiation to exit the EU, with unknown outcomes; an increased likelihood of another Scottish referendum and threat to the Union; and the knowledge that broad change is upon us.

As individuals, we need to try not to worry about things that we can’t control, such as what will happen to the UK economy over the next five years, or where the markets go in the next few days, weeks and months.  We should focus on things that we can control such as the structure of our investment portfolios.  As we have explained before, your portfolio is well-positioned to weather this storm, both in its structure and the high-quality funds that we recommended to execute your portfolio strategy.  To reiterate:

Your portfolio is globally diversified in terms of its equity exposure

It is worth remembering that the UK economy represents less than 5% of global GDP, and its equity market is around 6% of global market capitalisation.  The stock market is also not a direct proxy for the UK economy as many of its constituents have considerable overseas operations, such as HSBC and Shell.  In fact, around 70% of earnings from FTSE 100 companies come from overseas.

Your portfolio has well-diversified exposure to other developed equity markets and emerging markets economies and companies, which will help to mitigate any UK-specific market fall.  Equity markets as a whole might be volatile, but that is the nature of equity investing, and being diversified will help. 

A fall in Sterling is actually beneficial to portfolio performance

This morning has seen a big fall in Sterling against the US dollar and the Euro.  Ironically, this fall is beneficial to your portfolio as the non-sterling denominated overseas assets that you own are now worth more in Sterling terms.  That is an example of a good diversification in action.

Owning short-dated, high-quality global bonds delivers strong defensive qualities

The primary defensive assets in your portfolio are short-dated, high-quality bonds, diversified on a global basis.   At times of market uncertainty, money tends to flood from more risky assets (equities and low-quality bonds) into high-quality bonds, driving yields down and prices up.  We have already seen early signs of this happening in the major bond markets this morning.

Have faith in your portfolios and resist the urge to look at its value too often. You don’t need this money today or tomorrow, so try not to worry about any short-term falls; that is the nature of investing.  This is a long-term strategy to meet your long-term goals.

As the dust settles on what is a momentous day for the UK and the EU, perhaps we should remember that almost an equal number of people voted to remain as to leave.  We now all need to find ways in which we can help to rebuild bridges with the other side in whatever small way that we can.  The UK has as a proud past, a strong present, and an exciting – if different – future to that envisaged by many when they went to bed yesterday.  Remember, we are the World’s fifth-largest economy with more people in employment than ever before, one of the longest and most stable democracies, and we are an educated, tolerant and open society capable of making the UK a huge success.  The vote is what it is and we all need to think about how we can contribute to making this happen.   

Risk Warning

This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial advice.

Check out more of the latest news from IFAMax:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way