Get ready for property tax changes

HM Revenue & Customs’ (HMRC) capital gains tax (CGT) communications research report reveals how woefully unaware taxpayers are of significant changes to CGT rules on the disposal of second homes. Owners apparently do not understand the jargon used in HMRC information and end up consulting friends or even YouTube. You can imagine what might go wrong there.

The new rules from April 2020 say that when a second home is sold, the owner will have to file a return and pay the CGT due on the sale within 30 days. This is a significant change to the status quo, in which the tax must be paid by 31 January following the end of the tax year (5 April) in which the property was sold.

Experienced landlords may be reasonably familiar with the current rules and aware of the forthcoming changes; in general, though, people who own a second property are unlikely to understand the new rules and obligations.

Second-home owners, often in attractive rural or sea-side locations, are a popular target for government tax reformers. In recent years, several changes to the taxation of this category of property have been introduced, causing confusion and uncertainty for those affected in some cases.

In addition to the forthcoming CGT changes, the amount of tax-deductible interest from rental income has also been increasingly restricted year by year.

No more exemption

However, other changes are on the way for all property owners and it does not just affect people with second homes. The government is proposing to change the rules on private residence relief from April 2020. One of the proposed changes is a reduction in the final period exemption from 18-to-nine months. The final period exemption is one of several non-occupancy exemptions in the private residence rules, which ‘pretend’ the property was occupied as a main residence. This applies even if the owner was elsewhere, meaning the capital-gains tax is not due on that period.

When it was introduced, the policy aim of the longstanding final-period exemption was to allow people to have a period of non-occupancy at the end of ownership. This meant they were not charged capital gains tax for that period if there were delays to sale. That sounds pretty sensible.

With the increase in second home ownership, though, it is no surprise the final period exemption has come under scrutiny from HMRC. In response to perceived abuse, the original 36-month length of the exemption was reduced to 18 months from April 2014, and will halve again from April 2020. The net is tightening without doubt.

‘Lettings relief’ from tax is also in the firing line. This boon currently applies where a house that was once a person’s main residence is subsequently rented out. The proposal is this relief will only be available where the owner shares the home with the tenant. If this rather unlikely arrangement ever happens, perhaps the relief would be better described as a ‘lodger relief’. Whether it is nicknamed that or not though, there is potentially a lot of change on the way that property owners may need to come to terms with.

If you have any concerns or questions about any finance related matter, please do not hesitate to call me at any time.

With best wishes,

Yours sincerely


Graham Ponting CFP Chartered MCSI

Managing Partner


Woodford’s Equity Income Fund remains suspended – Could this happen to your investments?

As covered in my last blog, news of the suspension of Neil Woodford's Equity Income fund came as a shock to many investors - the immediate catalyst was Kent County Council's decision to redeem their £250 million investment in his flagship portfolio, disappointed as they (finally) became with its performance (see below).


In truth, he had little choice but to "gate" investors as the composition of the portfolio, heavily invested as it is in illiquid companies made an orderly selling off of his holdings well-nigh impossible.

There is a lot of blame to spread around; the FCA was, as ever, asleep at the regulatory wheel, Hargreaves Lansdown, (along with St James’ Place), are also culpable, endlessly promoting his investment prowess, the former only removing the fund from its Wealth 50 list of recommended funds AFTER the suspension of the fund. The financial media do not come out of it well either, as they were as keen to fete Woodford as "the UK's answer to Warren Buffett" as any broker, though they now seem to be rapidly distancing themselves from the fall-out, all claiming to have seen it coming. Last but not least, there is Woodford himself, whose strategy of investing in very small (sometimes unquoted) shares was clearly incompatible with the requirement to allow continuous trading in the fund. It was a recipe for trouble, which duly arrived.

But we are where we are and for those still holding the fund, it is likely to be a long way back, though Woodford's reputation may not survive the journey. Questions of trust are now paramount, as investors wonder whether this can happen elsewhere. Advisors (and their clients) are understandably worried.

Could this happen to our EBI Portfolios? The short answer is yes, in theory - nothing has a zero-probability of occurring, but the circumstances of its happening are so unlikely as to have a negligible risk of eventuating.

Here's why:

EBI portfolios consist of two types of funds; mutual funds (OEICs and Unit Trusts) and Exchange Traded Funds (ETFs), although Clearwater do not use the ETF option. They are all index trackers or rules-based index funds, dedicated to tracking the returns of specific Indexes, or capturing the returns of a specific factor from a revised universe of stocks within an index, which as I note below, have pre-defined limits on what can be invested in.

As Index funds are merely tracking an Index, it makes little difference to the managers (or to an extent ourselves), where the market goes, as long as they track it closely, (as that is the job of the Index manager). There could be redemptions from investors but the fund would sell off the Index in the same proportion as the market capitalisation of the underlying holdings to maintain the fund's exposure.

Assets and markets can become illiquid at times - this is a feature of markets, not a bug. But it is hugely less likely in an Index fund constituent than investing in Start-Up firms or SME loans etc. It is also (theoretically) possible for an individual asset to rise such that it reaches or exceeds 20% of an Index's total value, (which would mean that under UCITS rules it must be sold down to below that threshold). But should such an event transpire, the Index provider would most likely change the Index weightings to prevent this - it is not good for their reputation to have chaos erupt as a result of mass selling of an individual asset because it has outperformed.

What about Platforms such as Transact or Standard Life? The assets are held by a ring-fenced Trustee company, to which neither Clearwater or the Platform have any access. Should either of these organisations fail, the assets are protected from any claim by creditors of the platform itself. So, for example, if Transact or Standard Life were to go out of business, they could not raid the assets of clients to pay off their debts. If EBI (the designers of our portfolios were to go under, the same would apply. The assets will remain owned by the clients (to which neither we nor the Platforms themselves have access) via a nominee account and all that would change would be the identity of the DFM/Platform running the portfolios. Any cash held via a platform would be covered up to the FSCS £85,000 limit (per person).

EBI Portfolios DO NOT hire "star" fund managers, they do not buy illiquid assets and they do not concentrate their portfolios. There is no guarantee that for example, the Vanguard FTSE All-Share Index unit trust or their Emerging Markets Index fund will not fall in price - they can and do from time to time. But to suspend dealing in these funds would imply a market collapse of such epic proportions that, frankly, we would all have much bigger problems on our hands. They have, as part of their Index construction rules, limits on how liquid an investment must be - they MUST trade above a minimum average daily trading volume for an asset to be included in an Index (as a consequence of Index providers' "free-float-adjusted" Index compositions). If an asset does not meet those requirements they are not included in the Index - full stop - and thus EBI cannot buy it, even they wished to do so, (which they wouldn't).

Meanwhile, the arguments for Active Management are looking increasingly threadbare - Woodford has been described (repeatedly) as Britain's equivalent to Warren Buffett (as this gushing BBC article did in 2015), but that praise has been seen to be misplaced. The confusion of skill for luck has been widespread, something that many (private) investors are beginning to realise. The idolatry will presumably move on to someone else - Nick Train (who recently bought a large amount of Hargreaves Lansdown shares prior to current events) is next in line for this role, but it is very likely that he will "blow up" in exactly the same fashion sooner or later and the whole cycle will begin once again.

Plus ca change...

If you have any concerns or questions about any finance related matter, please do not hesitate to call me at any time.

With best wishes,

Yours sincerely


Graham Ponting CFP Chartered MCSI

Managing Partner

How the Mighty are Fallen! The Dangers of Following a Star Manager!

You will doubtless be aware of the problems faced by ‘Star’ investment manager Neil Woodford over the past couple of weeks and I have been meaning to write one of my blogs on the subject; well my good friend from Northern Ireland, David Crozier, has beaten me to it and I am sure he won’t mind me sharing his piece with you.

“Spare a thought for anyone invested in the Woodford Equity Income Fund, managed by Neil Woodford. The fund was suspended this week, following an unexpectedly high level of clients taking their money away from the fund. When Kent County Council wanted to withdraw the £263 million they had invested, Mr Woodford suspended trading in the fund, to protect all of the investors in the fund, which means that no-one can get their money out.

The Woodford Fund invests in some unquoted companies, which cannot be easily sold, and does so in a much a higher proportion than most other funds. When investors lose confidence and start to sell, these illiquid investments can’t be sold quickly or easily, and therefore to pay out the redemptions, mainstream, liquid, lower risk companies have to be sold. This means that the proportion of risky, illiquid stocks rises – it was up to 18% of the fund at one point.

There is absolutely no doubt that Neil Woodford has in the past delivered returns to investors in excess of what they could have obtained from simply investing in the market.

The question is, At what cost?

It is an immutable law of the universe that risk and reward are related, at least when it comes to investments. Attempting to achieve higher returns inevitably involves taking extra risk; it follows that taking extra risk should, in itself, lead to a higher return – the technical term for this extra return is called beta (β).

The difficult bit is achieving returns that are better than are due to investors simply for turning up and taking risk. The technical name for this excess return is alpha (α) and the evidence is that on average, over time, and after costs, α is very elusive.

The question is, has Mr Woodford consistently generated excess risk-adjusted return, alpha, through skill, or was there an element of luck?

If we could be reasonably sure that a particular investment manager’s outperformance is due to skill rather than luck it would make sense to use that manager, however this is also incredibly difficult to recognise. There is a mathematical reason for this; it’s all to do with statistics.

Suppose we have a fund that has experienced annual returns of 5%, and volatility of 20%. How long do you think it will take until there are enough data points to give any confidence that the results are due to skill rather than luck? A year? Two? Five?

How about 65 years!

Nobody, but nobody, has a track record that long, which is why it is very unwise to use a manager’s track record to judge whether he will be any good in the future.

Oh, and in case you are concerned about it, none of our client portfolios are invested in any Neil Woodford fund (or indeed any actively managed fund.)”

Like David’s firm in Northern Ireland, none of the Clearwater Portfolios have any exposure to Neil Woodford funds or any other actively managed fund, where the manager may be tempted to take greater risks in pursuit of elusive alpha!

If you have any concerns or questions about any finance related matter, please do not hesitate to call me at any time.

With best wishes,

Yours sincerely


Graham Ponting CFP Chartered MCSI

Managing Partner


-7% Falls are Commonplace!

The following is an article by Ethan Wolff-Mann (great name!) at Yahoo Finance and I thought you might find it interesting, at a time when we are once again experiencing some market volatility.

‘In 19 of the past 21 years, investors were whiplashed by market drops of over 7%, a number high enough to cause discomfort or even panic.

But as a recent Oppenheimer note points out, the market has only had a negative annual price return in just six of those years. In other words, the turbulence during the year usually doesn’t harm the bottom line.

It also means last year’s results — which saw an annual negative 7.03% price return for the S&P 500 index amid a drop of 19.78% at the market’s worst — is uncommon.

The reason why, according to Oppenheimer analysts, is because the markets have undergone “dramatic technological changes” and “have become much more prone to rotation, rebalancing, and profit-taking. Adding to these trends is globalization and more central bank transparency.

Investors get over good and bad news more quickly

Today, Investors have a ton more information at their fingertips and are making decisions much more quickly, and all these changes have made markets “quicker to discount both good and bad news and developments,” Oppenheimer’s note says. In other words, markets get over things quickly and move on.

Another note from Bank of America Merrill Lynch out Friday shows how this has changed over time: “Once upon a time (between 7th Sept 1929 & 22nd Sept 1954) it took 9,146 days for the S&P 500 to reach a new high following a >20% bear drop; this time S&P 500 took just 215 days to recover & surpass its old high.”

Though big picture economic cycles aren’t happening more frequently — on the contrary, the current expansion is exceptionally long — the pace for the market’s short-term ups and downs has quickened significantly.

The historic whiplash can be striking, especially around the financial crisis. The market was a disaster in 2008, with the S&P 500 index down 38.49%, the worst annual return in recent memory. But the following year it finished 23.45% higher — even when you factor in a horrible first quarter in which the market fell another 27.19%.

Market timing is even harder

Market timing is incredibly difficult already and ill-advised.

The stakes are high to get this right for those who do try. As the JPMorgan Annual Retirement guide says — many have noted this over the years — missing the best 10 days in the market absolutely kills portfolios over the long run. From 1999 to 2018, annualized return is 5.62%. If you missed out on the 10 best-performing days, your return would drop to 2.01%. Missed out on 20 of the best days in the market? Your return would sink to -0.33%.

It goes downhill from there; staying out of the best 60 days would give an annualized return of -7.41%.

All this becomes important to think about when confronted with the temptations of a market high. Right now, the S&P 500 (^GSPC) is near its all-time high, in sight of the 3,000 barrier, posing a temptation to wait until the market goes down a bit and then buy the market at a discount on the dip. But there may not be a dip.

Ditto for waiting it out longer. As recently as the end of 2018, financial Paul Reveres were crying “coming is the recession.” The index is up more than 16% year-to-date as of Friday morning. Sure, someone who bought at the bottom would be up big, but so would the person who bought a year ago and stayed in. It’s a fair bet that the market will be higher in 10 years. But in a month? Who knows?’

If you have any concerns or questions about any finance related matter, please do not hesitate to call me at any time.

With best wishes,

Yours sincerely


Graham Ponting CFP Chartered MCSI

Managing Partner


Cash is still not King!

The Yahoo! Finance headline just after Christmas was quite clear: ‘The sexiest investment for 2019: Cash.’

Thus far, the article could hardly have been more wrong. Year to date, global equities have gained about 15%, while cash has made hardly anything. Not so sexy now, Yahoo!

But it was expressing a widespread view. When times are tough and markets have been falling, as they were in the final quarter of 2018, many investors run to cash. Cash feels cautious. Cash feels sensible. Cash is king, right? You can sit and wait in cash until times get better.

Now it’s always useful to have some cash in your portfolio. Cash helps you to deal with unexpected demands and everyday crises. Cash is a buffer against the uncertainties of life.

But cash is also a danger, which investors often don’t appreciate. One problem is that it can get eaten up by inflation. In the UK, for example, returns on cash has been lower than inflation in every year since 2009.

If you had put £100 in the bank in January 2009, it would now be worth about £79 in real terms (taking consumer inflation into account). Over the last ten years, holding cash would have chomped up one fifth of your buying-power – even before taxes and bank charges. (source – 7IM)

A Loser Since the Financial Crisis

Normally, cash earns more than inflation. In the UK, this was true in every year between 1980 and 2008. Since the global financial crisis, though, cash has been a consistent loser. With cash rates still low, it’s downright reckless to hold a cash ISA for a few years.

The huge advantage of cash is that it’s immediately available. You can go to the bank and get your money right away. But most investors don’t need this facility. If you’re in your thirties your expected lifespan is another fifty to sixty years. You are a very long-term investor indeed.

If you retire in your early sixties and are reasonably healthy, you can expect to live for twenty or thirty years more. Many retirees should be investing a portion of their pension pots for the long term.

And long-term investors should be trying to maximise their long-term returns. Most of them should hold big chunks of equities; the best performing asset class over a decade or two.

Between 1900 and 2018, for example, it’s been estimated that UK equities gained 4.5% per year after inflation. Even after expenses and costs, long term investors have done well. There were disaster years, of course, like 1974 when UK equities fell by 44%, but they recovered handsomely in due course. (source – 7IM)

By contrast, cash returned only 0.46% per year after inflation over this 119-year period. The cost of safety and security was returns one tenth of those of equity investors.

For long term investors, then, cash is an expensive luxury. Most people would be better off holding as little cash as possible and buying a chunk of equities instead.

If you have any concerns or questions about any finance related matter, please do not hesitate to call me at any time.

With best wishes,

Yours sincerely


Graham Ponting CFP Chartered MCSI

Managing Partner


The time has finally come!

It is with more than a little sadness that I am writing to confirm that my faithful and long-term PA, Denise, has decided to retire; her last working day will be Thursday 15th March.

Denise came to work with me whilst I was still running my small business from home, approximately 23 years ago, since when she has provided me with unwavering support through the good times and the bad and I think it no exaggeration to say that, the business would not be what it is today without her calm demeanour, her gentle sense of humour and her genuine affection for all our clients.  

From a personal perspective, over the years I have come to know Denise’s wonderful family very well and I hope that we will all remain lifelong friends. I am sure you will want to join me in wishing her a long and very happy retirement.

Denise leaves large shoes to fill but you will be pleased to know that she is currently working with her successor, Kim Lewis, to ensure that the transfer of duties and responsibilities will be as seamless as possible. Some of you may have already spoken to Kim, she is a very friendly and capable lady and we are very excited that she has decided to become part of the Clearwater team.

Kim has worked with an IFA previously and so she is already familiar with the workings of a firm such as ours and the services that we provide to our clients.

You will doubtless be speaking with Kim at some point over the course of the next few months and I know she is looking forward to getting to know you all.

If you have any concerns or questions about any finance related matter, please do not hesitate to call me at any time.

With best wishes,

Yours sincerely


Graham Ponting CFP Chartered MCSI

Managing Partner


It’s that time of the year again!

As we approach the end of the 2018/19 tax-year, thoughts inevitably turn to end of year tax planning and any unused allowances (ISA, Pensions etc.) that may be available.

The ISA allowance for 2018/19 is £20,000 and if you have not made a subscription (or perhaps you have only made a part subscription), there is still time to use this allowance, if you have the funds available.

Since 6th April 2016, in addition to the subscription, it has been possible to top-up ISAs by any amounts withdrawn during the tax-year, including any charges deducted. This means that even if you have not made a subscription this year but have ISAs from previous years, your personal ISA Allowance may be more than £20,000 because of charges deducted during the year. If you made a subscription at the beginning of the tax-year, you may still have a residual allowance left because of these deductions which can be utilised by 5th April 2019.

If you have a Standard Life Wrap Account, the scope for top-up (in addition to any unused subscription) does not apply, unless you take physical withdrawals from your ISA. This is because Standard Life deduct ISA charges from the cash held in your Portfolio and not from the ISA itself.

If you have a Transact Wrap Account and you would like to know your personal ISA allowance for the remainder of the 2017/18 tax year, you can access this information on the Transact website. From your home page, select reports and from the drop-down menu, select ISA Subscriptions.

If you would like to use the balance of your allowance before 5th April, please ensure you advise us of your intentions before the end of March; we will be very pleased to assist. If your ISA is with Transact, please give us as much notice as possible, as a form may be required, if you have not made a subscription since Tax year 2017/18.

Just for information, the ISA Allowance for 2019/20 will remain £20,000 each, so £40,000 per couple.      

If you have any concerns or questions about the above or indeed any other finance related matter, please do not hesitate to call me at any time.

With best wishes,

Yours sincerely


Graham Ponting CFP Chartered MCSI

Managing Partner


Performance Update – 5th February 2019

I saw the following article in the Sunday Times at the weekend and thought it would provide the context for a Performance Update on a selection of the EBI Portfolios, which most of our clients use.

I have underlined a few of the numbers from the article, as I wish to comment on these at the end.

The article is by Holly Black under the heading ‘Worst Year for Pensions since 2008’.

Savers saw the value of their retirement pots drop last year as pension funds suffered their biggest loss in a decade.

The average fund’s value fell by 6.2%, due to markets tumbling in the final three months of the year. Fewer than 1 in 10 funds rose over the year as technology stocks fell out of favour with investors and Brexit worries increased.

Figures from the data firm Moneyfacts show pension funds in the UK smaller companies sector suffered the greatest loss, down 13.9% over the year, while those in European equities, including the UK, fell 13.6%. UK direct property was the only sector to finish in positive territory, up 4.4%.

The poor performance will be a particular blow to retired people who have moved their savings into drawdown since the pension freedoms were introduced. They withdraw an income in the expectation that investment returns will replenish their pot. This is much harder to achieve when stock markets fall.

Jason Hollands of the financial adviser Tilney Bestinvest said: “The stock market turbulence in 2018 serves as a stark reminder that income drawdown is not for those of a nervous disposition.

“These retirees need to be sure they are not taking out too much, otherwise they run the risk of draining their pensions of assets too rapidly. No one wants to run out of money partway through retirement.”

Last year was the first time since 2011 that the average pension fund shrank in value. In 2017, the average return was 10.5% and in 2016 it was 15.7%.

However, while the average fund fell 6.2%, losses were far greater at the height of the financial crisis. In 2008, the value of the average pension fund plunged 19.7%.

The negative returns of recent months are a worry for people due to retire in the near future, who may now have less money saved than they had planned for.

Hollands said: “Anyone who anticipates retiring soon is likely to find the pot they may have intended to use to purchase an annuity won’t go as far as they may have expected just 12 months ago. They may require a rethink of their plans.”

The article provides a useful reminder that the level of investment returns required for a successful retirement strategy are seldom delivered in a nice steady, easy to predict way. In the article we can see that the average fund’s value fell by 6.2% last year but returns in 2016 and 2017 were positive 15.7% and 10.5% respectively. In 2008 however, the average fund fell by 19.7%.

Just for comparison purposes, the following chart shows how a range of the EBI Portfolios fared between 1st Jan 2018 and 31st December 2018. Unsurprisingly, the worst performer was EBI 100 which registered a drop of 8.34% (ouch, that’s where my money is invested) but EBI 60, the most popular portfolio fell by just 4.92%.  


The ups and downs above represent anything but a smooth ride and yet the average annualised return from EBI Portfolio 60, over the past 10 years, to the close of business on 4th Feb 2019, is 8.79%*. After allowing for inflation and charges, that looks like an annualised real return of something around 5.0% per year.

The point is, we have to take ‘the rough with the smooth’, accepting that there will be occasional spectacular years which are offset by occasional catastrophic years.    

In closing, I thought I would cheer everyone up by showing how the same portfolios have performed since the beginning of 2019. It’s disappointing that we don’t hear this kind of positive reporting on the news.


Heartening though the above is, it is entirely possible that markets could fall again before they eventually test new highs, whenever that may be.

As always, if you have any questions about the contents of this e-mail or any aspect of your financial planning, please do not hesitate to get in touch.

Yours sincerely


Graham Ponting CFP Chartered MCSI

Managing Partner

* Source: FE Analytics 5th Feb 2019.

Where are we now, following last night’s votes in Westminster?

I do appreciate some of you (and me) are becoming an odd combination of bored/nauseous with Brexit. However, with uncertainty remaining the ever- present fear in most clients minds I hope this might arm you with a few up to date comments to assuage any knee jerk reactions.

What happened?

Parliament couldn’t decide. Here we go again. The Prime Minister backed an amendment that rejected a deal she had negotiated and instructed her to go back and try a bit harder. Meanwhile, Labour tried (and failed) to get a delay without really knowing what that would achieve.

How did this happen? When the legally binding amendment (the Cooper amendment) to extend Article 50 failed, a non-binding version, the Spelman amendment, was passed. So, Parliament has said it doesn’t want No Deal but has refused to take it off the table. Then through the Brady amendment, backed by the government, it decided it doesn’t like the indefinite “Irish backstop” and would like to find “alternative arrangements”. What would those be? Nobody knows, other than some yet-to-be-identified technological solutions.

What next?

On the surface, the possibility of a No Deal Brexit has risen. Even if it’s an outcome that Parliament has rejected, as we get closer to 29 March no deal becomes less unlikely, if only by mistake. To make matters worse, the Prime Minister has promised something she claimed was impossible a few weeks ago – renegotiation of the Withdrawal Agreement. Meanwhile, the EU instantly rejected reopening negotiations.

In reality, the spread of outcomes remains as wide as ever. For starters, Parliament feels it should have been able to give a steer to the government long ago. It is finally learning how to flex its muscles on Brexit. Better late than never. Also, this was an opportunity to patch up a brewing civil war within the Conservative Party while allowing Labour more space to not make a decision. Think temporary “win-win”. But as we get closer to the March deadline, there will be less space for this kind of indecision.

The Prime Minister has promised another Commons vote in mid-February, possibly on the 14th. What exactly might she bring back to the table? Behind the EU’s bluster, it’s an expert at kicking cans down roads. If the UK thinks the way around an indefinite backstop is some technological solution at some point in the future, maybe the EU might be open to agreeing on what kind of parameters it would expect these solutions to meet. Such parameters “could involve test runs, agreed levels of border security (such as maximum levels of smuggling) and milestones for building the necessary infrastructure for behind-the-border controls.” It’s a long shot but we shouldn’t reject the idea of an updated Withdrawal Agreement.

Time will tell but it looks as though this thing is going to go right to the wire!

As always, if you have any questions about the contents of this e-mail or any aspect of your financial planning, please do not hesitate to get in touch.

Yours sincerely


Graham Ponting CFP Chartered MCSI

Managing Partner


How to avoid the urge to sell everything when the going gets tough!

Firstly, a very Happy New Year! I hope you enjoyed the Festive Period in the company of loved ones and great friends.

 The following is an article I read this morning by Craig L. Israelsen, Ph.D., a Financial Planning contributing writer in Springville, Utah, he is an executive in residence in the personal financial planning program at the Woodbury School of Business at Utah Valley University.

The article is aimed at US Financial Planners but during this uncertain period, I thought you might find the central message reassuring and interesting. I have highlighted the most interesting statistics, just in case you don’t have time to read the entire piece.

“Ask your client this question: "What was the last movie you watched?"

They probably didn’t have to think too hard to remember. Then try this one: "How about a movie you watched in 1985?"

No dice — right?

Clients recall the performance of their investments similarly; that is, they remember recent performance with greater clarity. This trait, called recency bias, leads them to extrapolate into the future the good or bad they are experiencing in the moment. That skews their expectations — for better or worse — and distorts their view.

But there’s one notable exception to recency bias: the period in which your client’s portfolio suffered a significant loss. Referred to as loss aversion, this sentiment is also quite real. Investors simply don’t like big losses. Case in point: Have your clients forgotten about 2008?

So a recent loss in portfolio value can trigger both recency bias and loss aversion, and that can lead to “sell everything” phone calls. In the worst case, this type of fear cycle can wreak havoc if long-term plans are abandoned abruptly.

A recent loss in portfolio value can trigger "sell everything” phone calls.

In the chart called “Big Picture” we see a summary of the annual returns of seven core asset classes (indexes) over the past 49 years — as well as two portfolios. The first portfolio included all seven indexes in equal allocations; the second was a 60/40 portfolio consisting of 60% U.S. large stock and 40% U.S. bonds. Both portfolios were rebalanced annually over the 49-year period of analysis from 1970 to 2018. The calendar year losses of each individual index and both portfolios are shaded in pink. It’s these pink boxes that test the resolve of investors. But, as can be seen, the losses are relatively infrequent.

For example, over the 49 years from 1970-2018, large cap U.S. stock has produced positive nominal calendar year returns 80% of the time and generated an average annualized return of 10.21%. If we consider the impact of inflation, large cap U.S. stock had positive real returns 71% of the time and an after-inflation (or real) average annualized return of 6.00%.

By comparison, U.S. cash (as measured by the 90-day Treasury bill) had a 49-year average annualized return of 4.80% and positive nominal annual returns 100% of the time. But, after factoring out the impact of inflation (as measured by the CPI) the average real return was 0.80% and real annual returns that were positive only 57% of the time.

More importantly, let’s consider the performance of the two portfolios. First, the seven-asset portfolio had positive nominal returns 86% of the time and a 49-year average annualized return of 9.48%. After inflation is factored out, the average annualized real return has been 5.30% with positive real returns 73% of the time. The 60/40 portfolio had positive nominal calendar year returns 80% of the time and a 49-year return that was 5 bps lower at 9.43%. After inflation, the 60/40 portfolio had positive returns 71% of the time and a real return of 5.25%. This information puts performance over nearly five decades into perspective.


The 49-year historical performance of large-cap U.S. equities was represented by the S&P 500 Index, while the performance of small-cap U.S. equities was captured by using the Ibbotson Small Companies Index from 1970-1978 and the Russell 2000 Index from 1979-2018. The performance of non-U.S. equities was represented by the Morgan Stanley Capital International EAFE Index (Europe, Australasia, Far East) Index. U.S. bonds were represented by the Ibbotson Intermediate Term Bond Index from 1970-75 and the Barclays Capital Aggregate Bond Index from 1976-2018. As of late 2008, Lehman Brothers indexes were renamed Barclays Capital indexes.

The historical performance of cash was represented by three-month Treasury bills. The performance of real estate was measured by using the annual returns of the NAREIT Index from 1972-1977 (annual returns for 1970 and 1971 were based on research in the book “Real Estate Investment Trusts: Structure, Performance, and Investment Opportunities,” Table 2.2). From 1978-2018 the annual returns of the Dow Jones U.S. Select REIT Index were used (prior to April 2009 it was the Dow Jones Wilshire REIT Index). Finally, the historical performance of commodities was measured by the Goldman Sachs Commodities Index. As of Feb. 6, 2007, the GSCI became known as the S&P GSCI.

There is a key observation that should not be obscured by so much data: Each index (i.e., asset class) that we are evaluating had positive calendar year returns more than 68% of the time (based on nominal returns) and at least 57% of the time if using “real” inflation-adjusted returns. More importantly, the two portfolios we are evaluating had positive calendar year real returns at least 71% of the time.

Having a clear understanding of long-term asset class performance (as demonstrated in “Big Picture”) can minimize the potentially negative impact of recency bias during and after periods of market volatility — particularly when the volatility results in portfolio losses. The reality is that a broadly diversified portfolio will generate positive nominal returns nearly 90% of the time over time measured in decades, not months. Of course, a person who only invests in a diversified portfolio for two years should not expect positive returns in 90% of the 24 months. Even a diversified portfolio can experience two consecutive negative calendar year returns, such as in 2001 and 2002.

In summary, the impressive performances of the asset classes and portfolios in this study are over a 49-year period. Said differently, long-term results take a long time to replicate. The key to achieving long-term results is to stay in the saddle for a long time. The challenge is our natural instinct to avoid losses (loss aversion) and our tendency to over-emphasize what we have experienced most recently (recency bias). (For more discussion about portfolio losses see “You Can’t Win if You’re Afraid to Lose” in the October 2018 issue of Financial Planning).

The solution to countering recency bias is accurate information and proper perspective. This article has provided you with nearly five decades of information. With that information, work to help clients develop a proper perspective about the impressive performance demonstrated by a diversified investment portfolio over the past 49 years.”

Although this study concentrates on US data, results for diversified portfolios with UK equity bias, are similar.

As always, if you have any questions about the contents of this e-mail or any aspect of your financial planning, please do not hesitate to get in touch.

Yours sincerely


Graham Ponting CFP Chartered MCSI

Managing Partner