Why you shouldn’t read the news

April 29, 2013

A client said to me very recently that financial planning must be much easier right now as the performance of the World’s stock markets were in positive territory and values of holdings would be up.

He wanted to know what I was going to be saying to my clients in the coming months after several years of telling them to maintain discipline, stay invested and keep asset allocation true.

Well, pretty much the exact same story as he’s heard over the last few years is the answer!

He was also interested in my view of a particular story in the finance section of that morning’s paper ErnestHareReadingNewspaperwhich was suggesting triple-dip recession was a heartbeat away and what steps should we take to avoid it…

The headline writers are paid to try and get our attention and shouldn’t be used as a basis for making investment decisions.

For the everyday investor, the lesson is that the closer you are to media and market noise, the harder it is for you to pay attention to the bigger picture.

Markets are moving constantly as news and information is built into prices. Sentiment is buffeted one way, then the other. Millions of participants make buy and sell decisions based on news or their own individual requirements.

The job of media and market analysts frequently boils down to creating plausible narratives around often disconnected events so that it all appears seamless. Then the next day, you start all over again.

As a broker or a journalist, whose horizons are in minutes, this approach to markets makes sense. But for investors with long-term horizons, second and third guessing money decisions based on the news of the day is unlikely to deliver sound results.

A better approach is to work with a trusted advisor in building a diversified portfolio of assets tailored for your needs and risk appetite. The portfolio is rebalanced regularly to match your requirements, not according to what is happening in the markets. Tactical asset allocation can sound tempting, but there is always a risk that the news overtakes you. Then you are left having to change everything all over again.

As a wise man once said, running inside a moving bus won’t get you to your destination any quicker.

Roland Oliver

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Spotlight on EISs – Is risky tax relief for you?

April 26, 2013

spotlightAt a time when many in the city may have just received their bonus and will be paying a healthy dose of tax with it, I thought it would be a good time to mention a couple of investment vehicles that come with tax relief.

Tax relief doesn’t come for free of course, and to obtain it you must be prepared to put up with higher levels of risk.

The first of these vehicles to be discussed is Enterprise Investment Schemes (EISs).

EISs are intended to help certain types of small, higher-risk, unquoted trading companies raise capital by providing tax relief for investors. They took over from Business Expansion Schemes in 1994.

Income tax relief on EISs at present is 30% for qualifying investments and the maximum annual amount an individual can contribute at is £1million. Interestingly, income tax relief is given in the year of assessment in which the shares are issued, rather than the year of investment. So as an investor, it might be possible to carry back income tax relief to the previous tax year.

The shares must be held on to for 3 years minimum or the relief will be withdrawn.

Capital gains can also be deferred for tax reasons by investing the gain into an EIS. There are various caveats to this and I would urge you to contact us to find out more if you think this could be useful in your circumstances.

No mention of EISs should come without a big fat risk warning. Investing in unlisted trading companies is a very high risk activity and the possibility of a company failing is very real. There is also a high liquidity risk as, even after the minimum three year period, it may be difficult to dispose of the shares.

Approach with caution, but, if you are interested in how this could work for you please get in touch.

Please note that all figures given represent our understanding of current HMRC legislation and this article does not constitute financial advice.

Come back in a fortnight for a look at Venture Capital Trusts (VCTs).

Malcolm Stewart

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It’s financial planning, stupid!

April 8, 2013

As I write there have been a few tweets this morning about managers of active funds using index or passive structures for their own investments.

Not earth-shattering news probably, but does make you really question the real worth of active management at those prices if those who do it, won’t pay!

The thread of the tweets led on to question further where the current CEO’s of investment platforms invest their own money.

Do they put their own money where their mouths are?

We await the answer to that particularly thorny question…

All this idle speculation did lead me to consider whether or not these CEO’s (or fund managers for that matter) had actually submitted themselves for some financial planning in the first place.

One question begets another as they say. What would these CEO’s or fund managers actually consider as financial planning?

Would they approach their local bank manager, accountant, solicitor or would they seek out advice from within their own industry?

Would a plain ordinary IFA be the port of call or do they require something a bit more in keeping with their status?

Wealth Management (our current transatlantic term of choice) sounds so much more sexy and enticing than plain-jane Financial Planning and might be sufficiently high brow enough to attract the CEO, but what is it?

Well…its Financial Planning I think.

Which is what we do here. I had a discussion with Malcolm our Client Project Manager today about what Wealth Management actually means and we’ve agreed it’s Financial Planning.

It’s the heart of providing elegant, efficient solutions to making sure you get the best from your money, making sure it goes to the right people when you’ve gone, and that your family won’t be compromised if you die early.

Tax efficiency and legal structures that avoid challenge are provided too.

In other words, a Financial Planning service that takes care of all your current needs and will adapt as your circumstances change in time.

We won’t be getting to carried away with changing our terminology on the website but for all you CEO’s and fund managers out there, before you get concerned about active v passive or if you should put your own money onto your own platform, please see us for some Wealth Management or our particular version which we like to call Financial Planning.

Oliver Asset Management. We do Financial Planning.

Roland Oliver

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Budget 2013

March 22, 2013

George Osborne budget

George Osborne revealed his mid-term budget on Wednesday 20th. Here is our summary of the most relevant points for your future financial planning:

Inheritance tax – As mentioned in our blog recently, the amount of an estate that can be passed to the next generation tax free will remain at £325,000 until April 2018 (anything above being taxed at 40%). Another 5,000 estates are expected to become taxpaying estates by this time. If this is you, careful use of allowances today can reduce your bill.

State pension – this will rise by 2.5% to £110.15 per week. The Basic State pension and State Second Pension will be combined in April 2016 to a flat £144 per week (in today’s money). This should make it easier to plan for the future.

Pension drawdown – From Tuesday 26th March capped income drawdown rates will rise from 100% to 120% of GAD. While this could be useful for those of you that need more income, please be aware there is no guarantee your pension fund can sustain this. GAD is also set to be overhauled which should lead to good news in the future.

Capital gains tax allowance – the amount of gains that you can make on disposal of assets before having to pay tax increases to £10,900 for 2013/14. The rate remains at 18% for non and basic rate taxpayers, 28% for higher rate taxpayers.

ISA (tax free savings vehicle) – The stocks and shares ISA allowance will be £11,520 and the cash ISA allowance will be £5,760 in 2013/14. Please contact us for details of how you could use these depending on your circumstances. If you are yet to use your £11,280 allowance for 2012/13 contact us ASAP!

Income Tax – The personal allowance, currently £8,105, will increase to £9,440 in April this year and then £10,000 in April 2014.

Pension allowances will be cut next year – Personal annual contribution allowance down from £50,000 to £40,000 and lifetime allowance down to £1.25m.

Abusive tax avoidance – The Government will publish a report on how it will tackle tax avoidance and evasion this week. Needless to say, any tax mitigation strategies recommended by OAM are not abusive and are a key part of good financial planning.

That concludes our non-exhaustive list of points to be taken from Wednesday’s budget. The above points are based solely on our understanding of intended HMRC rules and should not be used to influence planning decisions on their own.

If you are a current client and require any clarification on how the above might affect you then please get in touch.

If you are not, then we would be happy to give you a second opinion on any aspect of your planning. There’s never been a better time to contact us.

Malcolm Stewart

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2012: The year it didn’t happen

January 9, 2013

Judging by the headlines in the financial press, investors spent much of the past year anxiously awaiting one calamity after another that failed to occur. The plunge off the so-called fiscal cliff was averted. The euro zone did not fall apart. China’s economy and stock market did not crash. The bond market did not implode. The re-election of President Barack Obama did not derail the US market. Doomsday did not arrive on December 21, as some interpreters of the Mayan calendar suggested it would.

Instead, the belief that owning a share of the world’s businesses is a sensible idea appears to be alive and well, despite suggestions from some observers that the “cult of equity” is dead. For the year, total return was 16.42% for the MSCI World Index in local currency, and 16.00% for the S&P 500 Index. Among forty-five global stock markets tracked by MSCI, only three posted negative results in local currency (Chile, Israel, and Morocco), and twelve markets had total returns in excess of 25%, with Turkey leading the pack at 55.8%. Although much of the financial news over the past year highlighted Europe’s fragile financial health, most of the region’s equity markets outperformed the US, including Austria, Belgium, Denmark, France, Germany, the Netherlands, Sweden, and Switzerland. For US dollar-based investors, results were further enhanced by a modest decline in the US dollar relative to the euro, the Danish krone, and the Swiss franc.

As is so often the case, earning the rewards offered by the world’s capital markets may have required a combination of discipline and detachment that eluded many investors.

We always advocate this kind of investment approach and encourage clients to rise above the noise of day to day fluctuations and ignore the temptations of market timing and speculation.

2012 Index and Country Performance

Total return (gross dividends) for 12-month period ending December 31, 2012.

MSCI Index

Local Currency

USD
WORLD 16.42% 16.54%
WORLD ex USA 16.73 17.02
EAFE 17.89 17.90
EMERGING MARKETS 17.39 18.63
EMERGING + FRONTIER MARKETS 17.15 18.35
TURKEY 55.80 64.87
EGYPT 54.66 47.10
BELGIUM 38.56 40.72
PHILIPPINES 38.16 47.56
THAILAND 30.84 34.94
DENMARK 30.37 31.89
GERMANY 30.07 32.10
INDIA 29.96 25.97
HONG KONG 28.01 28.27
POLAND 27.05 40.97
AUSTRIA 25.07 27.02
SOUTH AFRICA 25.07 19.01
COLOMBIA 23.87 35.89
SINGAPORE 23.54 30.99
NEW ZEALAND 23.28 30.38
CHINA 22.85 23.10
JAPAN 21.78 8.36
FRANCE 20.93 22.82
AUSTRALIA 20.77 22.30
MEXICO 20.09 29.06
PERU 19.73 20.24
THE NETHERLANDS 19.35 21.21
SWITZERLAND 18.91 21.47
SWEDEN 17.11 23.41
USA 16.13 16.13
FINLAND 14.71 16.50
KOREA 12.89 21.48
TAIWAN 12.84 17.66
HUNGARY 11.86 22.79
INDONESIA 11.83 5.22
ITALY 11.72 13.46
NORWAY 11.63 19.70
UNITED KINGDOM 10.24 15.30
MALAYSIA 10.23 14.27
BRAZIL 10.14 0.34
RUSSIA 9.73 14.39
CANADA 7.46 9.90
IRELAND 4.66 6.29
GREECE 4.11 5.73
PORTUGAL 3.36 4.98
SPAIN 3.12 4.73
CZECH REPUBLIC 0.26 3.48
CHILE –0.14 8.34
ISRAEL –6.24 –3.91
MOROCCO –12.63 –11.48

 

To speak to us about how our investment philosophy could help you contact us on 0131 273 5202 or use the form on the website.

Malcolm Stewart

 

Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

MSCI data copyright MSCI 2013, all rights reserved. S&P data are provided by Standard & Poor’s Index Services Group.

 

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Building A Robust Investment Process

October 22, 2012

We had our Investment Policy Committee meeting last week when we spent a great deal of time reviewing our investment approach, the robustness of our processes and the current portfolios we run.

We favour a passive approach and work with Dimensional Fund Advisers to create our portfolios but need to constantly review our process to ensure this is still the way we want to offer investment solutions.

Malcolm Stewart has responsibility for maintaining our investment strategy and as part of our approach he looks at other investment asset classes that we could use but currently don’t.

We will look at the entire investment universe and apply a set of rules and guidelines to see if any alternative asset classes should be ruled in or out for recommendations to our clients.

For example, we don’t currently recommend Hedge Funds and on applying our screening process, we have questions over the level of fees potentially charged, the transparency of the investment strategies and some of the details of performance reporting.

So in this instance, we will not use hedge funds in our portfolios but will review this again to see if there should be any changes in the future.

Applying these processes to commodities funds, gold, property and other asset classes helps to try and avoid risks we don’t want to expose our clients to.

Unless we can quantify that the level of risk a client is exposed to is justified by the level of return, we will generally avoid this.

It takes time and effort but ultimately a sound investment policy that we understand and have confidence in is what we are trying to achieve.

We feel very strongly about our investment approach and as clients, you should be asking detailed questions of your current adviser about his or her approach and how they have arrived at their decisions about how and where to invest.

Interestingly, it’s not so long ago that I was advised to copy fund performance figures from a well known industry magazine as justification for my investment choices.

I didn’t think it was a good idea or process then and I certainly don’t think it is now!

Roland Oliver

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People who make bad money decisions can often rationalise them. Here are 10 common excuses.

October 16, 2012

Human beings have an astounding facility for self-deception when it comes to their own money.

We tend to rationalise our own fears. So instead of just recognising how we feel and reflecting on the thoughts that creates, we cut out the middle man and construct the façade of a logical-sounding argument over a vague feeling.

These arguments are often elaborate short-term excuses that we use to justify behaviour that runs counter to our own long-term interests.

Here are 10 of them:

  1. “I just want to wait till things become clearer”.

It’s understandable to feel unnerved by volatile markets. But waiting for volatility to “clear” before investing often results in missing the return that goes with the risk.

  1. “I just can’t take the risk anymore.”

By focusing exclusively on the risk of losing money and paying a premium for safety, we can end up with insufficient funds to retire on. Avoiding risk also means missing the upside.

  1. “I want to live today. Tomorrow can look after itself.”

Often used to justify a reckless purchase. It’s not either-or. You can live today AND mind your savings. You just need to keep to your budget.

  1. “I don’t care about capital gain. I just need the income.”

Income is fine. But making income your sole focus can lead you down dangerous roads. Just ask anyone who invested in collateralised debt obligations.

  1. “I want to get some of those losses back.”

It’s human nature to be emotionally attached to past bets, even the losing ones. But as the song says, you have to know when to fold ’em.

  1. “But this stock/fund/strategy has been good to me.”

We all have a tendency to hold on to winners too long. But without disciplined rebalancing, your portfolio can end up carrying much more risk than you bargained for.

  1. “But the newspaper said….”

Investing by the headlines is like dressing based on yesterday’s weather report. The news might be accurate, but the market usually has already reacted and moved on to worrying about something else.

  1. “The guy at the bar/my uncle/my boss told me…”

The world is full of experts, many of them recycling stuff they’ve heard elsewhere. But even if their tips are right, this kind of advice rarely takes account of your circumstances.

  1. “I just want certainty.”

Wanting confidence in your investments is fine. But certainty? You can spend a lot of money trying to insure yourself against every possible outcome. It’s cheaper to diversify.

  1. “I’m too busy to think about this.”

We often try to control things we can’t change – like market and media noise – and neglect areas where our actions can make a difference – like costs. That’s worth the effort.

Given how easy it is to pull the wool over our own eyes, it pays to seek out independent advice from someone who understands your needs and your circumstances and who keeps you to the promises you made to yourself in your most lucid moments.

Call it the ‘no more excuses’ strategy.

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Keeping you informed: The Grecian story so far

June 22, 2012

The Eurozone crisis has been dominating the news in recent months, and as European leaders from France, Germany, Italy and Spain meet in Rome to hold talks on the Euro, many of you may have concerns. We thought this would be a useful explanation of where things stand.

• Greece is a very small economy. According to an IMF list of the world’s economies ranked by size (GDP in purchasing power parity terms) it is 42nd.

• Greece’s public debt is large at around 160% of GDP. Athens has received a total of US$300 billion in bailouts from the IMF and the EU (the equivalent of the GDP of the United Arab Emirates). The latest US$160 billion payment on the condition of imposing austerity measures to reduce debt to 120.5% of GDP by 2020.

• In March, Greece avoided an uncontrolled default on its obligations by agreeing to a bond swap with private creditors. But after five years of recession there does not appear to be much public support for further cutbacks. Amid this backlash, national elections on May 6 failed to yield a definitive outcome.

• On June 17 the two largest pro-bailout parties won enough seats to form a parliamentary majority. This provided some immediate reassurance to markets. The incoming government still has to convince official party lenders of its capacity to push through required reforms before securing further bailout funding.

• EU governments have indicated they are willing to ease terms if a new government swiftly emerges

• Central bank officials from leading developed economies say they are standing by to flood the financial system with cash if there is any credit squeeze. Bad news for those looking to purchase an annuity, as this brings rates even further down.

 

The unknowns:

• Whether Greece will hold on and stay in the euro

• Whether European policymakers manage to hold the single currency together beyond this

• Whether a smaller currency union with France, Germany, Italy and Spain might emerge

• The process that will take us to one of these outcomes

 

The knowns:

• The benefits of remaining calm and disciplined

• Basing investment decisions on forecasts is counter-productive – something even more true in such a rapidly developing and multi-stranded story.

• Those nearing retirement must be particularly careful.

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