By Robin Powell

Make no mistake, this is a landmark week in the history of British fund management.

Yes, there’ve been City “stars” who have fizzled out over the years. But surely none has crashed to earth in quite such dramatic fashion as Neil Russell Woodford CBE.

Woodford, it was revealed earlier this week, has been fired from his flagship fund, Woodford Equity Income, which was gated in June after years of dismal performance, and the fund shut down. The fund’s assets are to be liquidated, but according to the FCA  investors will have to wait until January to get their money back. Suffice it to say, it will be substantially less money then they originally invested. It has since been announced that Woodford’s company, Woodford Investment Management, is to close down completely.

An industry shaken to its core 

Adrian Lowcock, head of personal investing at Willis Owen, summed it up when he told the Financial Times: “We have seen the complete demise of the most famous fund manager the UK has seen for years… This collapse is on a par with the implosion of New Star at the height of the financial crisis, and it will shake the funds industry to its core.”

It is indeed a rude awakening — including for Mr Lowcock, who in previous roles at Architas and Hargreaves Lansdown was one of Woodford Equity Income’s most outspoken advocates.

I’ve spent some time in the last few days looking at what was written about Woodford and the Equity Income fund at the time of the fund’s launch in June 2014 and in the months that followed. What is so extraordinary is not just how much coverage there was, but the fact that it was almost universally positive. There were frequent references to “the Oracle of Oxford” and Britain’s answer to Warren Buffett”.  Even the BBC described him as “the man who can’t stop making money”.

The role of Hargreaves Lansdown

What’s also very noticeable is how much of the coverage emanated from Hargreaves Lansdown.

Interestingly, many of the articles published on the platform’s website around that time have since been removed, but many remain. In one, the company’s founder Peter Hargreaves calls Woodford “one of the most gifted fund managers I have ever met”. Other HL commentators lauded his ability to “get the big calls right” and to “shelter money from the worst of market falls”.

Mark Dampier, Hargreaves Lansdown’s head of research, was quoted again and again in both the trade and mainstream press. One distinguished newspaper even gave him his own weekly column.

Dissenting voices 

Yes, there were a few dissenting voices. I regularly wrote on The Evidence-Based Investor about the folly of joining the stampede into Woodford’s funds. Indeed a journalist Financial Times journalist later contacted me to say thank you for persuading him and his partner to take their money out before it all went pear-shaped.

But those of us who did express concern — Paul Lewis from BBC’s Money Box was another one — were drowned out by Woodford enthusiasts. Responding to my suggestion that the academic evidence concludes, overwhelmingly, that winning funds are all but impossible to spot in advance, a well-known adviser wrote an extraordinary article in The Scotsman headlined Academics know nothing about investing.

I don’t mean to sound smug or clever. I had no reason to believe that Woodford would perform quite as badly as he did. I was just pointing out that the odds were heavily stacked against him beating the market on a cost- and risk-adjusted basis over any meaningful period of time.

Substantially worse off today 

In the event, Woodford wasn’t just beaten by the market; he was absolutely trounced by it. Apart from the worry that his investors have had to endure, and will continue to do so, they are substantially worse off today than if they had simply ignored the hype and invested in a low-cost index tracker.

Let’s hope that this whole sorry episode makes people think rather more carefully before entrusting their money to a heavily marketed active fund manager. 

But memories are short. This is just the latest in a long line of investment fiascos, and it won’t be the last.

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Robin Powell is a freelance journalist and editor of The Evidence-Based Investor.

Every investing style has its time in the sun. In the past decade, the sun has shone brightly on high-relative price ‘growth’ stocks, while relatively cheap ‘value’ stocks have remained deep in the shadows, neglected and unloved.

This has sparked a vigorous debate among investment professionals about whether growth stocks, like formerly pasty-skinned holidaymakers falling asleep on Mediterranean beaches, have had too much of a good thing, or whether value is out of favour for good.

Certainly, there is a significant body of research showing there is a long-term premium available for investors who tilt their portfolios away from glitzy growth toward less fashionable value stocks — ones with low prices relative to fundamentals like earnings or book value.

The problem is that no one has worked out either when and where that premium will kick in. Of course, that hasn’t stopped some of the world’s best fund managers from trying to unlock a pattern, but most admit that timing is a fool’s game.

As to why growth stocks (Amazon, Apple, Microsoft etc.;) have enjoyed such a run, there are several theories. One is that the era of central bank-led cheap money lifts the relative attraction of the expected strong future cash flows of growth stocks. This is known as the hunt for yield.

Another theory is that in an era of stagnant economic growth and significant technological disruption of many industries such as retailing and media, the share prices of traditional capital-intensive businesses risk becoming permanently depressed. This is known as the “value trap”.

A third theory is that the growth of so-called "passive" investing, in which funds just seek to track an index instead of making active bets on individual stocks and sectors, has created a self-perpetuating cycle in which high priced growth stocks just become more and more inflated.

But these explanations, however persuasive on the surface, still overlook that long periods of underperformance for value are not unheard of and, in any case, don’t really tell us anything about what might happen next.

They also neglect to consider that the problem is not so much that something has gone wrong with the value premium, but that growth has had quite an exceptional decade.

Analysis by Dimensional Fund Advisors shows that while growth’s annualised compound return of 16.3% in the past decade was much stronger than its return over 90 years of 9.7%, the performance of value in the most recent 10 years at 12.9% was close to its long-term average.

A second point is that much of the attention on the value-growth conundrum has focused exclusively on the US market, when in fact the value premium has been positive in many other markets over the past decade, including New Zealand, Singapore, Canada and Australia.

As well, in past periods when value has turned, it has done so in spectacular fashion, such as after the tech wreck of the early 2000s.

We can draw a few conclusions from this. One is that the evidence still points to a long-term premium from value. That doesn’t mean it will be there every year or even decade. Of course, if it was predictable, it wouldn’t exist. It would be arbitraged away.

A second conclusion is that these premiums aren’t uniform across different markets. That argues for global diversification. At some point value will kick in somewhere, so if you spread your net sufficiently wide, you’ll capture it.

A third conclusion is that you do not have to be focused entirely on value anyway. You can hold in your portfolio a mix of large, small, growth and value stocks. You might tilt your portfolio to value, but you can still get the benefit of growth when it is having its time in the sun.

Finally, consider this. The spread between value and growth stocks, measured by book-to-market ratios is now as wide as it was in 1992, when Professors Eugene Fama and Kenneth French published the landmark paper which highlighted the value premium.

That means the potential for outsized returns is greater now than it has been for some time. But as Warren Buffett says, you need to be patient and you must know that you can live with the ride in the meantime.

Value eventually will find its place back in the sun. But no one knows when.

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2019 will doubtless go down in history as the year that Britain became obsessed with Brexit. Just now, there seems to be no escaping it. But is the media’s fixation on relations with Europe obscuring the fact that Britons are becoming increasingly concerned with a potentially far bigger issue? Climate change.

A survey in July by ComRes, commissioned by Christian Aid, found that 71% of the UK public think that, in the long term, climate change will be more important than exiting the EU. Six out of 10 adults said the government was not doing enough to tackle it.

In fact, several polls in the last year or so have produced similar results. An Ipsos MORI survey for the Evening Standard, published in August, for example, showed that 85 per cent of adults are now concerned about global warming. That’s the highest figure since the pollster started asking the question in 2005.

The impact of news coverage

What has caused this shift in opinion? Well, climate change has certainly featured prominently in the news. We’ve seen heavily publicised demonstrations by Extinction Rebellion in London; 16-year-old Greta Thunberg hit the headlines when she sailed to New York on a zero-carbon yacht to New York to address world leaders at a climate change summit; and the hottest July ever around the globe reinforced concerns that the effects of global warming are starting to escalate. 

In truth, however, opinions were changing before any of those news stories broke. Responding to a survey commissioned by the Department for Business, Energy and Industrial Strategy (BEIS) and published in March this year, 80% of the public said they were either fairly concerned (45%) or very concerned (35%) about climate change. The overall proportion of the population concerned about the issue was the highest since the study started in 2012.

It’s not just women and young people

Another interesting takeaway from these surveys is that old stereotypes appear to be breaking down. For example, a long-held view is that those most concerned about environmental issues tend to be either young or female. It’s still true that marginally more women express concern about global warming than men, but according to both the Ipsos MORI and BEIS polls, the gender gap is narrowing. Both studies also showed that levels of concern with climate change do not differ greatly by age.

Of course, we shouldn’t be surprised that the views of younger and older people are less polarised now than they were, as the older generation dies off. But academics have been pointing out for several years now that older people are actually more interested in environmental issues than is often assumed. 

In 2013, for example, a study called Age and environmental sustainability: a meta-analysis collated the results of multiple studies between 1970 and 2010, in order to “determine the magnitudes of relationships between age and environmental variables”. The researchers found that “most relationships were negligibly small”. They also concluded that “small but generalisable relationships indicated that older individuals appear to be more likely to engage with nature, avoid environmental harm, and conserve raw materials and natural resources”.

Walking the walk

That last finding is particularly significant. After all, it’s one thing to be concerned about the environment and quite another to do something about it. Studies have shown that, very often, people who claim to have green credentials fail to match their words with action. 

Another area in which older people are more likely to act in an environmentally sustainable way is in investing. Around the world, it’s generally the over-55s who are contributing the most to the sustainable investing market. Triodos Bank predicts they will continue to do so in the UK in every year until 2027.

Summary

In short, all the evidence appears to be pointing to an increase in interest in the environment and to a growing willingness to act on it. Nor is it just certain sections of the population whose attitudes are changing. 2019 may just be the year that, in Britain at least, the tide of public opinion finally turned on climate change.

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A perennial temptation for investors is the urge to quit the market at the top and to get back in at the bottom. While the lure of market timing sells millions of books and is standard fodder for financial television, the reality rarely lives up to the promise.

History is littered with the failed dreams of market timers. Less than five years after the nadir of the financial crisis, some pundits were saying US stocks were over-valued. Another five years on and the market had gained more than 60%.

Not even the gurus have much of a record. Back in 1996, Federal Reserve chairman Alan Greenspan warned of "irrational exuberance" in the stock market. But we now know that the market went on climbing for three years before the dot-com bubble burst.

Even if your logic about valuations is impeccable, there’s no guarantee the market will come around to your view. As someone once said, markets can stay irrational longer than you can stay solvent.

But the most overlooked challenge with market timing is that it requires you to make TWO correct decisions: Firstly, you must get out at the right time. Secondly, and often more challengingly, you must know when to get back in.

Think back to the global financial crisis. Plenty of people were throwing in the towel by early 2009. But how many got back in in time to enjoy the big bounce that followed in the second and third quarter of that year?

The fact is markets don’t move in a straight line and big gains (and losses) can come in relatively short periods. Not even the professionals have much of a track record in successfully negotiating these unpredictable twists and turns.

So, if market timing is a mirage, what can you do? Here are five alternative options that make more sense — and none requires you to possess a crystal ball.

1. Take a long-term perspective

"The historical data support one conclusion with unusual force,” the index fund pioneer Jack Bogle once wrote. “To invest with success, you must be a long-term investor." Instead of trying to time the ups and down of the markets, why not simply change your time horizon? Over the very long term, patient investors have almost always been rewarded. Of course, not everyone can take the long view. Those, for example, who are about to retire or who need to access their money in the next two or three years, don’t have that luxury. But if you don’t need it for, say, 15 years of more, you can afford to look at the big picture.

2. Construct a portfolio for all market conditions

Everyone should have a balanced asset allocation — certainly a mix of stocks and government bonds, and perhaps property as well — that matches their capacity for risk. A defensively-minded person may only have 50% of their portfolio in stocks, with the rest in bonds. The right mix also depends on your age, goals and circumstances. Whatever your risk capacity, diversification is key. Spreading your risk across different asset classes and geographies will reduce the impact of a steep decline in one particular market. Ultimately, it’s your asset allocation that is going to be the most important driver of your investment outcome.

3. Periodically rebalance your portfolio

Generally, the less you tinker with your portfolio the better. That’s not to stay you shouldn’t touch it at all, but any changes you do make should be done in a strategic, structured and disciplined way that reflects your needs and circumstances. A good discipline to adopt is to rebalance your portfolio periodically, to restore your original asset allocation. This means, every year or so, selling sone of the winners and buying some of the losers. It seems counter-intuitive, but effectively it forces you to sell high and buy low, which is just what you should be doing. It's a much better strategy than falling victim to knee-jerk responses to the latest bout of market volatility, which inevitably involve emotional, short-term decision-making.

4. Pound cost average

Another option, if you really are worried about the stock market and want to reduce your risk, is “pound cost averaging”. Say, for example, you have a sizeable sum of money — an inheritance, say — that you want to invest. Instead of going all in and investing the full amount in one go, you can drip feed small amounts into the market over a period of time. Incidentally, financial economists don’t think this approach makes much of a difference from an investment perspective and you might end up with slightly lower returns. But it’s a useful way of helping you sleep at night and minimising regrets.

5. Increase the size of your cash reserve

Finally, another strategy could to consider is to hold a larger cash reserve — either within your portfolio or in another account. Everyone should hold enough cash to cover around six months of living expenses, in case of unexpected medical bills, or losing a job, for example. But nervous investors may prefer to hold rather more than that. The advantage of increasing your cash reserve is that, in the event of a market downturn, you can see it as a buying opportunity and use your extra cash to increase your market exposure.

SUMMARY

In summary, timing the market — while superficially an attractive idea — is fraught with danger. If you get lucky, great, but there’s no method to it. We’ve seen that not even the gurus are much good at it.

The good news is that second-guessing the market just isn’t necessary. With the right outlook and a methodical process, you can achieve better results — and enjoy a smoother ride along your investment journey.

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Here at IFAMAX we’re big fans rugby fans and we can’t wait for the start of the Rugby World Cup. The build-up to the tournament has got us thinking about rugby as an analogy for investing, as our latest article explains.

Much of what the media focuses on when reporting on finance are the fortunes of individual companies. For an individual long-term investor, however, the danger with this approach is missing the wood for the trees. 

Naturally, the media likes stories about companies because they change all the time and they often boil down to people issues. That’s fine, but what matters to you more as an investor is the performance of broad ‘asset classes’, not individual securities.

An asset class is a category of investments that share similar characteristics and perform different functions in a diversified portfolio.

Let’s use rugby as an analogy. The forwards tend to be bigger and stronger. Their job is to gain possession of the ball and protect it when they do. The backs tend to be smaller and faster. Their job is to use that possession won by the forwards and score points.

This is a bit like the roles of bonds and stocks in a diversified portfolio. Like rugby forwards, bonds don’t tend to move very fast. They’re defensive in nature. But without them in your portfolio, you might not see much of the ball.

Shares, or equities as professionals call them, tend to be more like backs. They move around a lot more. But they also keep your wealth scoreboard ticking over.

Equities differ from bonds in another way. When you buy them, you’re becoming a part owner of the company. Whereas when you buy a bond, you’re more like a creditor. You’re lending the entity money, but you’re not an owner.

The sources of your returns in equities are twofold. First, there’s the chance that your shares will rise in value as the company grows and prospers. Second, there is the possibility of you getting a share of the profits in the form of dividends.

With bonds, there are two sources as well. As with shares, there’s the chance of capital growth (the price goes up). But there are also the regular interest payments you get for owning the bond. This is why bonds are often referred to as “fixed income”.

Bonds are seen as a more defensive investment because as a creditor, you rank ahead of shareholders in the event the company goes bust. But that doesn’t mean there aren’t risks associated with bonds. There’s always the chance the company will default on its obligations. Plus, your fixed income may not be so valuable if interest rates rise.

Within bonds, there are also varying levels of risk. Unlike shares, bonds are also issued by governments as well as by companies. Government bonds, particularly the top-rated ones, are seen as less risky than corporate bonds, but at the cost of a lower return.

And we can divide those categories up even further. Not every government bond is considered safe as houses. Think back a few years ago to what happened to Greek bonds during the Eurozone crisis.

But broadly speaking, equities tend to be more volatile than bonds over the long-term. And for that reason, the expected returns for investing in shares tend to be higher. This is called the equity premium and relates to the compensation that investors expect in return for having to put up with a bumpier ride.

But just as a rugby team composed entirely of fleet-footed backs without forwards to defend possession would be a risky proposition, being 100% in shares is not always wise either, unless you are very young with a low balance and can ride the ups and downs.

Ultimately, your bonds-shares split will depend on a range of factors like your age, risk appetite, life circumstances and goals. Most importantly, it comes down to what you can live with. If the portfolio is so volatile that you can’t sleep, it may be time to review it.

Naturally, these decisions are best made in consultation with a financial professional who knows you, understands your situation and can offer a detached view – sort of like the role of a referee in a rugby match. This person’s job is to ensure the game flows, the rules are followed and that no-one gets hurt.

Oh, we almost overlooked the forgotten asset class. This is cash. It comes in the form of bank term savings accounts, with higher rates of interest, or money market funds that combine short-term loans to the government, known as Treasury bills.

To return to our rugby analogy, you could think of cash as your reserves bench. It’s there if you need it in a hurry, though you may never call on it. The returns over the long term are less than equities and bonds, but in some years, cash can do better than both. Ultimately, though, cash is an asset class for savers rather than investors.

Finally, there’s been a lot of interest recently in so-called alternative investments beyond listed stocks, bonds and cash. These include commodities, hedge funds, private equity and even collectibles like fine wine, classic cars and rare art.

These alternatives all have their own merits, but they have disadvantages too, like a lack of transparency (you can’t see the risks clearly) or relative illiquidity (you can’t easily turn them into cash when you need it) or high fees (particularly for hedge funds).

Most advisers, like a good rugby coach, will tell you to build the bulk of your portfolio around the solid platform of stocks, bonds and cash, along with some property. 

Now time for kick-off!

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DNA testing used to be something distant and scientific that cropped up in TV crime series like CSI: Crime Scene Investigation or in family dramas where a child’s parentage was in doubt. Today it’s perfectly easy, and relatively cheap, to send away for a kit to check out our own genetic makeup.

You might think about doing this because you want to know more about your family background, having binge watched a programme like Who Do You Think You Are? Or perhaps you're curious to know whether you have the gene for certain diseases or conditions.

Exploring your family history is usually a benign activity, unless it uncovers an unsettling family secret. But digging into the health aspects of your genome just because you’re curious – rather than for clinical reasons, under the advice of a doctor – could be ill advised.

That’s not just because there have been doubts in the past over the reliability of commercially marketed testing, or because the psychological and medical impact of a worrying finding is better handled when the testing is with the knowledge of your doctor. It’s also because such tests can have consequences for you as a consumer of life insurance products such as death, trauma and income protection. 

The question to consider before undertaking a medically focused (but optional) genetics test is whether you’d have to disclose the results in any future life insurance application.

This is especially important if you’re younger and haven’t yet taken out such cover. When you do decide to apply for this sort of insurance, the insurer will ask a range of questions aimed at assessing the degree of likelihood they’ll have to pay out in the future.

One question will be about pre-existing conditions. Another may be the catch-all ‘anything else we should know about’ question that insurers ask as they decide who and what they’ll cover. Your ‘duty of disclosure’ could mean you have to share the results of your genetics test at the time of application, or whenever you change your contract.

If the testing has shown you have the potential to develop a particular disease or condition, the insurer may decide to charge you a higher premium because you’re a higher risk. 

The rules differ depending on where you live, with some countries banning or restricting life insurers’ use of genetic results but others still permitting it. So, ask these questions of your insurer or local consumer agency before you go ahead with a genetic test:

• I may apply for a life insurance product one day. Will I be legally required to disclose all genetic test results to the insurer?

• I already have life insurance. In what circumstances would I be required to disclose new genetic test results – for example, if I wanted to increase my cover?

• I already have life insurance. Is it ‘guaranteed renewable’ – that is, once I’m covered the insurer can’t change the contract just because of new information?

Never be deterred from taking a test your doctor advises is necessary. But if it’s just curiosity getting the better of you, make sure you’re fully informed about the potential financial impact of sending off for a DIY genetics kit. 

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We all know we shouldn’t throw good money after bad, but we do it all the time.

Perhaps you’ve made yourself sit through a bad movie purely because you felt that having paid for the ticket you didn’t want to be left with a sense of money down the drain? Or, for the same reason, you’ve read a whole book despite deciding by the end of Chapter 1 that you weren’t going to enjoy it.

The sunk cost fallacy

Behavioural economists call this tendency among people to stick with losing propositions as the sunk cost fallacy. You see it all the time in consumer finance, investment and business.

Think of the person who buys a motor vehicle that turns out to be a lemon. The buyer constantly is sending the car to the garage to be fixed. Yet every time it comes back from the mechanic something else goes wrong. The consumer would have been writing it off early in the piece.

Investors are affected too

This happens with investments as well. People will get overly attached to losing stocks and refuse to sell them, purely because they feel they have already stuck with them for so long and want to believe that at some point they will turn around.

There are a few ways of overcoming this tendency. One is not to become emotionally attached to investments. A bad movie doesn’t stop being a bad movie just because you doggedly opt to sit through the entire feature. Your money is gone; now you’re wasting your time as well.

A second approach is to look to the future, not the past. Maybe the next movie will be better. A third idea is diversification. Accept that not every movie you see is going to hit the mark. But if you see a range of them, something might take your fancy.

See the big picture

A final way of framing this challenge is to think of the big picture. People tend to place a higher value on what they might lose rather than on what they stand to gain. Walking out on a bad movie opens up the possibility of a better experience doing something else.

Bad movie or bad investment, that money and time wasted is gone. You can’t do anything about it. But you still have options and choices. And that starts with writing off a losing proposition.

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There’s a well-known phrase that’s often used when the topic of budgeting comes up: “Watch the pennies and the pounds will take care of themselves.”

It’s true that small expenses — a posh latte here and a takeaway there — do add up. But the outgoings that people really need to focus on are the major ones. In most cases, it’s what they spend on their homes and cars which has the biggest impact on how much money they have left at the end of each month.

In other words, it’s far more important look at the pounds (and the hundreds of pounds) you’re spending before the pennies.

But, as the financial writer Andrew Craig explains to Robin Powell in this video, the first step to taking control of your expenditure is to start a spreadsheet showing all the money you spend each month.

It doesn’t matter how big your income is; if there’s more money going out than you have coming in, you could be heading for trouble.

This is one of many videos you will find on the IFAMAX YouTube channel. They cover a wide range of subjects, from investing to sustainability and personal finance. We’re regularly adding new videos, so why not subscribe to ensure you keep up to date?

Video transcript:

It’s well documented that, all over the world, levels of financial literacy need improving.

The good news is that, by investing a modest amount of time in researching this subject, you can improve your finances substantially.

Andrew Craig runs a financial education website called Plain English Finance. He was inspired to start it while working in the City of London.

Andrew says: “One of the things that really came home to me in doing that was, even people in the city had a really kind of bad nuts-and-bolts understanding of their personal finances. What is an ISA? What is a pension? What are stock markets? What’s inflation? What are interest rates?

“I started Plain English Finance as a sort of angry young man, as a reaction to that. And our guiding principle ever since I did that has really been to improve the financial affairs of as many people as we can.”

What then, according to Andrew, are the most important personal finance rules to follow?

He suggests there are two main ones.

“Rule number one is: don’t spend more than a third of your income on your house — which is something that sounds a bit crazy to people these days because we’re so obsessed with homeownership in Britain — because rule number two is: you should basically always invest ten percent of your income in investment products that aren’t your house. And a lot of people, in spending vastly more of a third of their income on a roof over their head find that they then can’t afford to save and invest ten percent of their money in investments.”

Saving or investing ten percent of what you earn can be a challenge.

The best way to tackle it, says Andrew, is to start a spreadsheet showing all your monthly outgoings.

You should then focus on trying to reduce the biggest numbers.

Andrew says: “Rather than trying to save money on how many cappuccinos you buy everyday... or, you know, going to Lidl instead of Waitrose... which is all very laudable; actually, the single easiest way... there are two things that are very easy to change if you’re willing to live in a less fashionable neighbourhood and perhaps a slightly smaller house or flat, is — number one — the biggest number is invariably the roof over your head.

“And then the second one down the spreadsheet from that tends to be cars. Too many people... dare I be slightly sexist, particularly men, rush to buy a really flash, expensive car prematurely.”

For more tips on keeping your finances in shape, you can always visit Andrew Craig’s website.

You’ll find it at plainenglishfinance.co.uk.

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In step 5 of our financial decluttering drive it’s time for the big reveal. Our volunteer, business coach Nicola Wilkes came to us with several folders packed with paperwork and a shaky grasp of what was in them. Here we'll see what she gets back, discuss her next steps and make sure her financial paperwork stays minimal and manageable.

If you are an existing client we may have worked on decluttering your finances before. All existing clients can take up this service at any point in time.

Receive the whole video series in your inbox click here.

Check out the other steps here on IFAMax:

Step 1 - How we’ll tackle your paperwork

Step 2 -Show us what you’ve got

Step 3 - Keep, scan, can

Step 4 - Lightening the load

Step 5 - A streamlined new start

Ever been on holiday where the weather wrong-footed you? The brochures promised tropical bliss, so you packed accordingly. Instead, you are greeted by bone-chilling wind and rain. Shivering and exposed, you resemble an undiversified investor.

As with the weather, financial markets can be unpredictable. Yet, in their own glossy brochures, investment providers often promise the equivalent of endless sun. Excited, investors pile in like bucket shop holidaymakers. This rarely ends well.

But there’s an answer to this cycle of unrealistic hope and illusion-shattering reality. It’s called diversification. Described by Nobel laureate Harry Markowitz as the only free lunch in investing, diversification is the equivalent of an all-weather wardrobe.

Smart holiday-makers, knowing that resort weather is never as consistently glorious as the marketing suggests, will pack for a range of climes. Alongside the shorts, sunscreen and T-shirts will be warm sweaters, umbrellas, and novels for rainy days. 

Likewise, diversified investors will not hang their hopes on one asset class, or one sector, or one country, or one stock. They’ll spread their exposure across and within stocks and bonds, across different markets, industries and currencies.

Diversification increases the reliability and predictability of returns. Looked at another way, it smooths the way and reduces the sudden bumps in the investing road. The ups may be less spectacular, but the downs will also be less stomach-churning.

Like well-prepared travellers, diversified investors are ready for a range of outcomes. If the stock market is roaring ahead, they can have sufficient exposure to enjoy the benefits of that growth. But when stocks are down, they can also be protected under the relative shelter of government bonds.

Diversification works because different parts of financial markets aren’t perfectly correlated. As one asset class goes down, another may go up. Stocks, a growth asset, and bonds, a defensive one, are the classic example.

But diversification also applies within asset classes. In your stock portfolio, you can spread your risk across sectors. Instead of putting everything in technology or materials or financials, you can have a bit of everything. And instead of sticking to one country, you can diversify internationally, across developed and emerging markets.

You can diversify within a bond portfolio as well, spreading your holdings between government and corporate bonds, between long-term bonds and short-term bonds and between bonds of higher credit and lower credit.

And if you really must cut the holiday short because of an emergency at home or some other unpredicted event, you can have a portion of your investments in cash.

Ultimately, diversification works because you are giving yourself more choices. You are less reliant on any one variable. In this way, you are reducing idiosyncratic risk relating to single industries or stocks or countries.

Think of what happened during the tech boom of early this century. Piling into technology stocks worked very well, until it didn’t. At that point, many investors were left like a sun-seeker in an Ibiza cold snap with a suitcase full of swimsuits and sandals.

There is still residual risk related to the market itself, of course. This so-called systematic risk is something you can’t diversify away. But the main point is you should do everything you can to increase the reliability of outcomes and eliminate risks you simply don’t need to take.

The outcome is greater peace of mind and an understanding that when markets get unsettled, as they inevitably do from time to time, you’ve packed your portfolio for a range of eventualities. 

Call it all-weather investing.

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Step 4 of our financial decluttering process is the part where you get to say goodbye to the unnecessary paperwork that’s been cluttering up your house and life. We’ve digitised the paperwork that can be kept as a soft copy and now it’s time to shred the superfluous.

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If you are an existing client we may have worked on decluttering your finances before. All existing clients can take up this service at any point in time.

Check out the other steps here on IFAMax:

Step 1 - How we’ll tackle your paperwork

Step 2 -Show us what you’ve got

Step 3 - Keep, scan, can

Step 4 - Lightening the load

Step 5 - A streamlined new start

What will happen in the global financial markets tomorrow, next week or over the coming month?  It’s tempting to speculate, isn’t it? Indeed, speculation about the short-term direction of shares, bonds, currencies and commodities represents a good chunk of the output of the financial media every day.

To be fair, people have a natural curiosity about the future, particularly when their is money at risk. This makes it understandable that the media would seek to satisfy that need in its coverage.

Markets are inherently uncertain

The problem is financial markets are inherently uncertain. Prices move randomly in the short term and there is little to be gained for investors by trying to second-guess them.

This point is easier to understand if you reflect on the fact that what moves prices is news. It might be an earnings report involving an individual company, a regulatory ruling affecting an industry, a data release relating to an entire economy or a geopolitical development that affects the whole world. 

Prices are always changing as new information comes into the market. And the biggest changes in prices tend to occur on the news that no-one expected. For example, opinion polls might suggest a certain political party is certain to win a major election. Markets will price for that eventuality. But if there is an upset, prices will adjust very quickly.

An impossible task

What this means is that successfully speculating on short-term movements in security prices with any consistency requires an ability to accurately forecast the news. We’re not sure about you, but we’ve yet to meet such a person.

But it’s even harder than that! Even if you could forecast the outcome of news events — say a G7 statement or an interest rate change or a merger — you still need to be able to forecast how the market will react.

Now that’s especially tough because what moves prices is the degree to which the news lines up with what’s priced in. You might get a weak employment figure, for instance, but the share market might still rally if the headline figure is not outside the bounds of expectations.

The fiendish difficulty of forecasting markets is also partly because set-piece events that dominate media attention do not tend to occur in isolation. A big economic announcement might have been expected all week, but what if it is overshadowed on the day by a development in the Middle East that upends the oil market and drives equity prices lower?

We look for tidy narratives

In fairness, we doubt the media will ever give up on constructing speculative “stories” about markets by linking fundamental news about the economy or earnings to price changes. It fills a niche and there’s a real appetite among the public for tidy narratives that link cause and effect.

But for the individual investor it is best to distinguish between the daily noise of news and security price movements from the long-term signal of capital market returns. The latter are more predictable.

We know that over time, there is a return on investment. If capital markets did not ultimately reward investors, there would be no appeal in investment!

But the returns are not there every day, every week or even every year. Timing them is tough. What’s more, we don’t need know which individual asset classes, markets or securities will deliver the strongest returns next.

Like a patchwork quilt

This is best illustrated by the Periodic Table of Investment Returns, from Callan Associates in California. This shows the annual returns for various asset classes over 20 years, defined by indexes and grouped by colour.

Each column illustrates the returns for each year. Those with the biggest returns are at the top and those with the lowest are at the bottom. It looks like a patchwork quilt, doesn’t it? In fact, it’s hard to see any pattern at all.

Sometimes, emerging markets will top the table. Other years, it will be cash or bonds or real estate. The long-term premiums from these assets are available, but they are not evenly distributed.

Diversification is key

That means to succeed as a long-term investor, you need to take a bigger picture view, focusing firstly on how you allocate your capital across different asset classes like stocks, bonds, property and cash and secondly on ensuring you are diversified within these asset classes.

By having a little bit of all those asset classes, you are guaranteed to reap the returns when they do kick in and you don’t have to worry about market timing.

Finally, success over the long-term requires discipline and sticking to the plan that is made for you, attending to what you can control (asset allocation, diversification, cost, taxes and rebalancing) and ignoring as much as you can the daily noise that preoccupies the media.

By the way, this doesn’t mean you shouldn’t take an interest in the news. We all want to know what’s going on in the world after all. But it’s a caution against using daily news headlines to drive your investment strategy. 

Prices, like news, are simply unpredictable.

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In Step 3 of our guide to financial decluttering it’s time for us to report back. You’ve delivered your financial paper trail and we’ve worked our magic to divide it into three types – things you need original copies of, things you can keep digitally and things you simply don’t need at all.

Receive the whole video series in your inbox click here.

If you are an existing client we may have worked on decluttering your finances before. All existing clients can take up this service at any point in time.

Check out the other steps here on IFAMax:

Step 1 - How we’ll tackle your paperwork

Step 2 -Show us what you’ve got

Step 3 - Keep, scan, can

Step 4 - Lightening the load

Step 5 - A streamlined new start

If your name doesn’t show up on my phone’s screen when you call, I probably won’t answer. If I don’t recognise your email address, I certainly won’t click on any links or open any attachments you send me.

Paranoid? Maybe. Maybe not. But the fact is that scams reported to consumer and finance authorities now run into billions of pounds a year worldwide. 

These scams range from the faintly ridiculous Nigerian con (“Dearest friend, I am needing your help to distribute an inheritance”) to sophisticated investment scams, not to mention full-scale identity theft.

Think you’d never fall for a scam? Researchers say it’s dangerous to assume victims have specific traits and they’ve identified five psychological reasons why people — of any age, education or socio-economic background — can be caught out. 

Let’s face it, scams are increasingly sophisticated in design and delivery. Scammers invest so much time and money in slick sales pitches, flashy websites, convincing emails and glossy brochures because the returns can be very high — for them.

So in the spirit of an ounce of prevention being worth a pound of cure, here are eight types of scam to look out for — if not for yourself, then for family and friends:

1. Banking scams – Scammers capture your personal account details in a myriad of ways — sometimes by pretending to be your bank. Guard your personal information and keep an eye on transactions via your bank’s app. Call the bank immediately if you spot anything unusual. A suspicious-looking transfer of even just a few pennies could be a scammer testing the link.

2. Unexpected money – This is the territory of those Nigerian scams, so-called because they started in that country many years ago. An email will offer access to an inheritance or some other money once you hand over your banking details, or a fee. The rule is never to send money or give banking details or copies of personal documents to anyone you don’t know.

3. Surprise winnings – This is a ploy to get your personal information or to extract a fee to arrange a payment that will never arrive from a competition you never entered. A request for payment via money order, wire transfer, international funds transfer, pre-loaded card or an electronic currency like Bitcoin is a warning sign.

4. Online shopping scams – Scammers may pretend to sell a product just to get your credit card or bank account details. One scam gave people a second chance to buy an item because the winner had pulled out but asked them to pay outside the auction site’s secure payment facility — and outside the site’s ability to help.

5. Fake charities – These often spring up after a big natural disaster. Scammers impersonate genuine charities, siphoning public donations into their own accounts. The answer here is to donate independently, using a verified website or calling a number you’ve found yourself.

6. Job scams – These offer a ‘guaranteed’ way to make big money fast and with little effort. This may involve paying for a ‘starter’ kit, a business plan or materials like training and software. The only people who make money fast out of these schemes are the scammers themselves.

7. Romance scams – Scammers take advantage of people looking for friendship or romance, then play on people’s emotions to obtain money, gifts or personal details they can use for financial scams.

8. Investment scams – If the offer sounds too good to be true, it probably is. Scammers will offer all sorts of fake opportunities, often targeting current trends such as cryptocurrency. Do your due diligence. Run it past a professional.

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 Step 2 of our series on financial decluttering, we’ll look at the most fun part of the process. It’s the part where you hand over everything you’ve got and we go away and make sense of it. It might be in folders, envelopes or a carrier bag. This is where clarity begins, so bring us what you have.

If you are an existing client we may have worked on decluttering your finances before. All existing clients can take up this service at any point in time.

Receive the whole video series in your inbox click here.

Check out the other steps here on IFAMax:

Step 1 - How we’ll tackle your paperwork

Step 2 -Show us what you’ve got

Step 3 - Keep, scan, can

Step 4 - Lightening the load

Step 5 - A streamlined new start

Whenever we have a mental block when trying to grasp an important concept, it sometimes helps to be presented with an image or a visual metaphor.

A good example of a concept that investors often struggle with is the idea that financial markets are highly competitive and that prices are the best estimate we have of future returns.

That may be because much of the financial media is built on the assumption that you can profit consistently from mistakes in share prices, despite the mountain of research showing that even the professionals struggle to do that.

One response to that is to talk about the wisdom of crowds. Remember that TV show, Who Wants to be a Millionaire? Contestants stumped for an answer are given three lifelines — 50/50 (two choices), phone a friend, or ask the audience.

According to author James Surowiecki  phoning a friend will give you the right answer about two thirds of the time — better than the 50/50 option. But asking the audience yields the right answer more than 90% of the time.

Accepting market prices is like asking the audience. They’re never going to be perfectly right, but it’s the best barometer we’ve got. And by not trying to work it out all on your own, you’re freed up to focus on all the things you can control.

A marketplace aggregates lots and lots of information very efficiently. The TV studio audience in this case is like all those buyers and sellers in the share market. No single person has got all the information, but together they get close to the truth. In investing, that truth is reflected in the price.

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Pay less attention to weather forecasts

How women view money and investing differently

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Make sense of your money, reclaim cupboard space and put your mind at ease.

In this, the first episode, we explain our decluttering process and meet our volunteer for financial clarity, business coach Nicola Wilkes. Nicola’s paperwork is getting out of hand, so we’re going to assess it, trim it and make sense of it for her.

If you are an existing client we may have worked on decluttering your finances before. All existing clients can take up this service at any point in time.

Receive the whole video series in your inbox click here.

Check out the other steps here on IFAMax:

Step 1 - How we’ll tackle your paperwork

Step 2 -Show us what you’ve got

Step 3 - Keep, scan, can

Step 4 - Lightening the load

Step 5 - A streamlined new start

One of the biggest mistakes that people make when planning for retirement is underestimating how big a life event it is.

Typically they’re so focussed on the financial side of retiring — ensuring they have enough money to fund the lifestyle they want — that they don’t give enough consideration to emotional, social and other important aspects.

For most of us, whether we realise it or not, work is an integral part of our sense of identity and self-worth. It also provides us with stimulating company and social interaction. When, suddenly, work stops, some retirees struggle to come to terms with their new existence.

Of course, making sure you have enough money to retire, and that you don’t spend it too quickly, are important functions of a financial planner. But there are other, non-financial matters that a good planner can help you with in the run-up to retirement.

Barry LaValley is a specialist in retirement planning, based near Vancouver. Robin Powell recently caught up with him on a recent visit to England. In this video, Barry explains exactly how a planner can help you to get more out of life beyond the world of work.

You will find dozens of helpful videos like this one in our Video Gallery. Why not have a browse?

Video transcript: 

In the run-up to retirement, people often say they want to try new things and get the most of out of life.

But there’s something that psychologists call continuity theory, which often stops that happening. 

To put it simply, we instinctively prefer to stay as we are. 

Retirement expert Barry LaValley says a good financial planner can help you to match words with action.

Barry says: “My view on it is, you do as much as you can as quickly as you can, and hope you can do it for thirty years. I believe life is meant to lived. Now that doesn’t mean that, in the first years of you being in control of this life, that you take all your financial resources and squander them. Because one of the big fears — and justifiably so — is you might outlive your money. 

“At the same time, you don’t want to be a prisoner to anything, particularly your financial resources. So, figure out what you’ve got — my grandmother used to call it cutting your coat by your cloth, you’ve got to figure out how much cloth you have — and then just go and live life to its fullest. Because, you see, life will change and there will come a point — may come a point — when you can’t live the life that you want. And in the meantime, I don’t want you to enter that period of life going: ‘Darn, I wished I had.’”

What, then, are the main contributors to a fulfilled retirement? Barry suggests there are five important ones. 

Barry LaValley says: “I think we should focus on what positive psychology actually tells us that happiness is, based on our responses internally to the world that we live in. And there’s five conditions that people should be aware of, each one of these contributes to happiness, and they are: one — that you should have positive engagement in life, you should really feel like you’re outlook and everything is going to be as optimistic as you can make it. So, positive energy. 

“The second is going to be your engagement in life itself: feeling that life has purpose, feeling that there’s a reason for you to get out of bed. The third one is your relationships: you know, we get more from our relationships than anything else that we do, as it relates to healthy ageing. The fourth one is meaningful activities: doing things that are important, things that make us feel relevant, make us feel like we have value. And then the fifth one is achievement: we need achievements, we need them each and every day.”

So, when planning your retirement, those are the five key things you should focus on.

No, none of them has very much at all to do with money. But they are all issues that a good financial planner can help you with.

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It’s very important, when choosing a financial adviser, that you find someone you can trust.

However, working out whether they’re trustworthy or not isn’t always easy. The size of the firm, for example, tells you very little.

Herman Brodie is a financial author and consultant who has specialist expertise in building trust-based relationships. 

In this video, presented by Robin Powell, Herman explains what you can do to help you find the right person to manage your finances.

You will find dozens of helpful videos like this one in our Video Gallery. Why not have a browse?

Video transcript: 

Just as you need to trust your doctor, you also need to trust your financial adviser.

Financial author and consultant Herman Brodie is an expert in adviser-client relationships.

Trusting your adviser, he says, will give you much more peace of mind.

Herman Brodie says: “So, if I trust my adviser or I trust my asset manager, the riskiness of the whole enterprise we’re doing together is actually diminished. So my level of anxiety is reduced. 

“Now, a lot of bad things can result when we are overanxious about the engagements we are involved in. And financial markets are fraught with all of the kinds of things that we as human beings find the most disagreeable. And this often leads us to do precisely the wrong thing at the wrong time. 

“Now if we perceive the whole riskiness of the engagement to be reduced because we trust the person who we’ve confided with our assets, then, of course, this brings an enormous amount of reduced stress for clients.”

Sadly, some advisers in the past have proved themselves to be far less worthy of trust than others.

If trust in your existing adviser has broken down, it’s very different to rebuild.

Herman says: “When you get advisers, for example, pushing products that are very expensive when there are cheaper alternatives, or because they are tied to a particular product issuer. Or even in medical professions, where doctors have been seen to be prescribing particular medicines because they are taking kickbacks from the pharmaceutical company. 

“It’s evidence therefore that they are actually not acting in my interests at all, they are acting in their own selfish interests. And this damages the perception of benevolence. And those perceptions are very very difficult to recover.”

Herman Brodie says there are two components to trusting an adviser. The first is a conscious decision: Is the adviser competent? The second is more sub-conscious: Does the adviser have my very best interests at heart? Ultimately, though, you have to trust your gut instinct.

Herman says: “At least with the conscious part of that evaluation, in terms of, you know, the skills and training, and let’s say the fiduciary responsibilities that that adviser takes on board. On paper, that adviser must stack up, so the competence measure must at least be satisfied. But, whether you are going to perceive that person as benevolent or not, it’s largely non-conscious, I cannot tell you how you are going to feel about somebody.

“Who I’m going to be able to be open with is probably going to be somebody different to you. And as a consequence, you just have to go with your gut. There is no secret formula for identifying benevolence. Everybody sees benevolence in a slightly different place."

So, you should choose an adviser who is clearly competent, but also one who will put your interests ahead of their own. Only you can decide if someone ticks both boxes.

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Your mobile phone contract is expiring soon, and there’s a new iPhone or Samsung on the way that looks pretty nifty. But along with its sharp camera is a very pointy purchase price. 

Most people will dull the pain by spreading the cost of the handset over a contract. But should you? 

Picking up a new handset as part of a deal with a network provider may mean you avoid a big, one-off hit on your bank balance, but make sure you’re not paying too high a price for that convenience.

And it’s not just about the maths. Bear in mind, too, that you’ll be giving up the opportunity to nab an even better deal over the next one to three years, depending on the length of your contract. It will also be hard to move if you’re unhappy with your provider.

Here are eight things to consider when your phone contract comes up for renewal:

Do the figures stack up? The actual cost of a handset tends not to be spelled out in the contract fee, but it’s possible to make a good estimate. Look for an equivalent plan – in terms of call, SMS and data allowances – being offered to those who already have their own handset. This may be called a SIM-only or BYO plan. Now, take that monthly fee away from the monthly cost of the plan-with-handset you’re considering. Multiply that by the number of months in the contract on offer (say, 24). You’d want the sum to be as close as possible to the price you’d pay outright. If it’s higher, you’ll need to consider what sort of ‘premium’ you’re prepared to pay for dulling the pain of an upfront payment.

Are plans going up or down in price? Just as you don’t want to lock in a high interest rate on your mortgage, nor do you want to be stuck with what will become an increasingly expensive plan over the next few years in comparison to newer, better deals.

Are data allowances going up or down? We can probably safely assume plans will only ever include increasing amounts of data – another reason you may not want to be stuck with an out-of-date plan.

Will the handset last as long as your contract? Small electronic goods tend to have 12-month warranties, but you could be committing to monthly payments for the next two or even three years. What if the phone dies outside its warranty but before your contract is up? Consumer watchdogs have been working on this, but check the warranty fine print.

Is there a new, better handset on the way? You don’t want to be paying top dollar, for two or three years, for a handset that will be out of date in two months’ time. Search for terms like ‘new iPhone’ or ‘Samsung rumours’ to see what may be coming. That said, ‘last year’s model’ can still have great ‘specs’ and become great value when discounted.

What’s not included? Naturally, telecommunications providers trumpet all the great things they’re including in their ‘hot’ offers. But, somewhere, they should also tell you what’s not included – such as calls to certain ‘premium’ numbers and access to certain types of content. Similarly priced plans may be vastly different when one includes Facebook videos in your data count, say, but the other doesn’t.

Are there any caps or limits? These aren’t as common as they once were, but look out for limitations such as only a certain amount of data being available at full speed under the plan, with the rest being slowed.

What’s the cost of ending your contract? If a better deal, or changed circumstances, mean you want or need to break your contract, check the terms and conditions to understand the process and cost of exiting your contract.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

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Picture: Tinh Khuong via Unsplash