Staying the Course!

With markets once again fluctuating wildly, I thought another reminder of the wisdom of not responding to short-term headlines and market gyrations might be useful.

Investors tend to see short-term volatility as the enemy and this can tempt many people to try and move money out of the market and “sit on the sidelines” until things “calm down.” Although this approach may appear to solve one problem, it creates several others:

1. When do you get back in? You must make two correct decisions back-to-back; when to get out and when to get back in.
2. By going to the sidelines you may be missing a potential rebound. This is not historically unprecedented; see chart below.
3. By going to the sidelines you could be not only missing a potential rebound, but all the potential growth on that money going forward.

I believe the wiser course of action is to review your investment objectives and decide if any action is indeed necessary. This placates the natural desire to “do something”, but helps keep emotions in check. Short-term needs should nearly always be met from cash and longer-term needs can be planned for in advance; funds can be withdrawn when conditions are more favourable.

The following charts show the Intra-Year Declines (the furthest the market dropped during each discrete year) vs Calendar Year Returns (the return an investor would have received by staying invested for the whole of that year), for the FTSE 100 Index and the S&P 500 Index since 1984.

The charts clearly show that, in most cases, investors who did not react to short-term volatility were rewarded for their patience and courage. 

As always, if you have any concerns about your own investments, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Good News, Bad News!!!

The Dow Jones Index (the mostly often quoted US share index, even though it only represents 30 companies) suffered its sharpest points fall in history yesterday and this rout was immediately replicated in Asian markets overnight and in Europe this morning. The FTSE 100 opened down 3.5% but has since recovered some ground, it’s down 1.87% as I type.

America sneezes and the rest of the world does indeed catch a cold.

It is important to put these recent falls (markets have been trading down for a week or so now) into proper perspective. The falls actually follow some very good years for investors. In 2017 the Dow was up 25%, helped by a resurgent economy and strong corporate profits and European markets have also seen solid growth without a great deal of volatility; so maybe some form of correction is overdue.

What is interesting is the cause or rather the trigger for this correction. The global sell-off began last week after a particularly solid US jobs report (good news, right?) fuelled expectations that inflation will rise, leading the Federal Reserve to raise interest rates faster than expected. This makes corporate borrowing more expensive, which is of course, not good for companies (oh, so it’s bad news!).

The following is taken from the BBC website:

‘Jane Sydenham, investment director at the stockbrokers Rathbones, told the BBC the falls did not appear to herald a serious change of sentiment: "It is always a bit too early to tell, but I think these recent market falls are in the nature of a correction.

"What we have to remember is stock markets have had a very smooth ride upwards and we've not had a fall of more than 3% for 15 months. There's been a real lack of volatility, which is very unusual."

She added that bear markets tend to happen ahead of a recession and at the moment growth forecasts were being upgraded.

Re-evaluation

Erin Gibbs, portfolio manager for S&P Global Market Intelligence, said: "This isn't a collapse of the economy.

"This is concern that the economy is actually doing much better than expected and so we need to re-evaluate."

One country whose immediate economic outlook remains stagnant is Japan. The authorities there said there was little chance of interest rates being increased.

The Bank of Japan's governor, Haruhiko Kuroda, ruled out the possibility of raising interest rates in the near future. He said it was "inappropriate" to do so with inflation still about half its 2% target.

But markets in Asia typically follow the lead from the US.’

That last point is very interesting; there is no prospect of Japan increasing interest rates as is feared in the US and yet Asian stock markets still tumble. Sometimes markets appear to need an excuse just to reassess valuations.

These falls might present an excellent buying opportunity for long-term investors but there could be some more downside before sentiment improves.

If you have any concerns about your own investments, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Festive Greetings!!!

Adam, Denise and I would like to take this opportunity to thank you for your continued support and of course to wish you and your family a very Merry Christmas and a Happy New Year!

As with a number of previous years, in lieu of sending individual Christmas cards, we have once again decided to make a donation to a worthy cause, in fact on this occasion, two worthy causes!

Sadly, over the course of the last few days I have attended the funerals of two of my lovely, long-standing clients. Their families have asked for donations to charities in their memory; the charities in question are Rennie Grove Hospice Care and The Camphill Village Trust.

Rennie Grove Hospice Care is a charity providing care and support for adults and children diagnosed with cancer and other life-limiting illness and their families. Every year through their 24/7 Hospice at Home service, their Family Support services and the range of Day Services at Grove House they give thousands of patients the choice to stay at home, surrounded by their families and friends.

The Camphill Village Trust helps to offer a supportive home and fulfilling life to over 350 vulnerable adults in nine communities. Whether they are able to live in a household with others, or more independently, they are encouraged to accept and appreciate each other for who they are and are encouraged to always give of their best.

I hope you will approve of my decision to support these very worthwhile charities.

I do hope 2018 brings you all you would wish for.

With very best Christmas wishes,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

How rich are you?

Some of the following has been taken from an article by Simon Lambert in This is Money magazine on 12th Jan 2017, although I have edited it quite considerably.

How rich are you? The highly subjective answer to this question will be influenced by your attitude to wealth, income vs spending habits, and where in the country you live. 

For the purposes of this exercise we are ignoring income in the definition of how rich one might be and are concentrating solely on the value of one’s assets.

To find out where one features on the wealth scale, we need to refer to a set of figures produced by the Office for National Statistics (ONS), although these are only produced infrequently. 

The ONS’s Wealth and Assets survey breaks down what the country owns by percentiles, to give households' net wealth. It includes in there:

• Net Property Wealth – any property owned minus the mortgage 
• Net Financial Wealth – everything you have in the bank, savings and investments, minus any debts 
• Pension Wealth – the value of a defined contribution pension pot or the future value of a defined benefit income 

Pension wealth is not to be underestimated, particularly where defined benefit/final salary pensions are concerned. As an example, an expected final salary pension of say £35,000 per annum could reasonably be capitalised to a value well in excess of £1 million. i.e. this is what it would cost to buy an index linked pension with spouse’s benefits of £35,000 on the open market. The rule of thumb I use, is to multiply the anticipated income by 30; recent examples have shown this to be conservative.

The most recent figures that run to 2014 show that the bottom half of UK households have just 9 per cent of the wealth, whereas the top 10 per cent own 45 per cent of it. 

The median (the middle point of the total distribution) household wealth was £225,100, while the bottom 10 per cent of households had total wealth of £12,600 or less and the top 10 per cent had £1,048,500 or more.  

To make it into the 1 per cent, you need £2,872,600 of household wealth – but remember, this comprises everything, including pension wealth.

The bottom 1 per cent has negative wealth - at minus £4,434 (although to me this percentage in negative wealth seems low and I would expect debts to push more people into that category).

Surprisingly, the ONS figures show that overall it is actually pension wealth that accounts for the largest chunk of the overall figure, at 40 per cent, followed by property wealth, at 35 per cent. 

However, while their median pension wealth value of £749,000 contributed 43 per cent of total wealth to the top decile of households, where 98 per cent had some, it contributed just 29 per cent to the total of the least wealthy half of households. 

Property wealth was more important for this lower half, where it contributed 34 per cent of the total, even though just four in ten owned homes. Property with a median value of £420,000 contributed 31 per cent to the total wealth of the top 10 per cent.

Whilst Simon’s figures are interesting, there are of course other, much more important measurements of one’s wealth! I am, of course, referring to the non-tangibles that enrich our lives, our families, our friends, our shared experiences and our memories; it’s impossible to put a value on these and yet I hope we would all agree, they transcend physical wealth every time!

I hope you find the above interesting but, as always, 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

Black Monday 1987 – 30th Anniversary

Today marks the 30th anniversary of the stock market crash that became known as Black Monday. The FTSE 100 fell 10.84% on October 19th and then fell a further 12.22% the following day. That event marked the beginning of a global stock market decline, making Black Monday one of the most notorious days in financial history. By the end of the month, most major global stock exchanges had dropped more than 20%.

The cause of the massive drop cannot be attributed to any single news event because no major news event was released on the weekend preceding the crash. While there are many theories that attempt to explain why the crash happened, including massively increased automated trading following ‘Big Bang’ the year before, most agree that mass panic caused the crash to escalate.

The following chart shows how the FTSE 100 Index performed from mid-July 1987 to the end of that year.

An investor with £100,000 invested in the FTSE in July would have seen their funds drop to £72,120 over that period, most of the fall occurring in the first few days after October 19th. If we look at the whole of 1987 however, the picture is not quite as bleak.

The main problem, as I recall, was that this was the time of a number of privatisations and many novice investors had been taking their very first, government assisted, foray into equity investing. As usual, long-term investors who were already in the market at the beginning of 1987 did not really suffer at all but those who piled in during the summer of that year took the full force of the crash; most sold in blind panic. Many never recovered from this shock and refused to go near shares again, a decision which, over the ensuing decades, will have cost them dear.

Now let’s look at how long an investor would have needed to wait to recover their money if they had invested at the peak of the market in mid-July 1987.

Not quite 2 years! Again, as usual, long-term investors were rewarded for their patience and those who managed to find some cash down the back of the sofa and had the courage to invest in November/December of 1987, did even better.

What lessons can we learn from Black Monday and other market crashes?

Unless it is absolutely the end of the world, a market crash of any duration is temporary. Many of the steepest market rallies have occurred immediately following a sudden crash. The steep market declines in August 2015 and January 2016 were both 10% drops, but the market fully recovered and rallied to new or near new highs in the months following.

This is the bit where I sound like a stuck record.

Stick with your strategy: A well-conceived, long-term investment strategy based on personal investment objectives should provide the confidence needed to stay cool while everyone else is panicking. Investors who lack a strategy tend to let their emotions guide their decision-making. Investors who have stayed invested in the Standard & Poor’s 500 Index since 1987 have earned an annualized return of 10.13%.

Buy on Fear: Knowing that market crashes are only temporary, it should be viewed as a moment of opportunity to buy stocks or funds. Market crashes are inevitable; buy while others are selling.

Turn Off the Noise: Over the long term, market crashes such as Black Monday show up as a small blip in the performance of a well-structured portfolio. Short-term market events are impossible to predict, and they are soon forgotten. Long-term investors are better off turning off the noise of the media and the herd, and focusing on their long-term objectives. We are here to help with this!

This next chart of the FTSE 100, starts in mid-July 1987 and finishes at close of play yesterday. This makes the point from the paragraph above, Black Monday 1987 is barely visible, when viewed from where we are now.

I hope you find this brief analysis interesting, possibly even reassuring but, as always, 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

Brief Market Update

I have just received a 24-page document from AVIVA which sets out their House View on a number of issues, including thoughts on risk, investment themes, global macro outlook and asset allocation. Clearly, there is far too much information to include in one of my ‘round robin’ e-mails but I thought you might find a couple of the major highlights interesting.

I have summarised a few of the key points below:

• Above trend global growth expected to continue.
• Recent moderation in inflation expected to be temporary.
• Risk of increased volatility as central banks reduce liquidity.
• We favour equities over bonds, but are conscious of stretched valuations in some markets.
• We are cautious on corporate credit, where spreads are tight.
• Global environment expected to support positive carry currency strategies
• Unwinding a decade of extraordinary monetary policy continues.
• Fundamentals to matter more going forward.
• Eurozone equities, emerging markets and local currency debt among preferred assets.
• Strong underweight on developed market fixed income, overweight US Treasuries to balance portfolio risk.
• Global markets at a crossroads as market structures inherited from the ‘QE decade begin to normalise.

Please remember these are AVIVA’s views, not mine and they do not constitute advice in any way.

If you would like a copy of the full report, please let me know; I should warn you, it is not exactly bedtime reading!

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

Performance Update

As we are approaching the 10-year anniversary of the onset of the Financial Crisis in October 2007, I thought you might like to see how a sample of the Model Portfolios recommended by Clearwater have performed over that 10-year period.

The following Chart shows very clearly how the higher-risk portfolios fell much more sharply during the ‘Credit Crunch’ and how they have now recovered – it took a long time though!  

The most popular portfolio is EBIP – Portfolio 60 and I don’t think it’s difficult to see why that might be. EBIP 60 provided some valuable protection on the downside when markets fell but was sufficiently exposed to high-risk assets to benefit from the recovery when it came. Although EBIP 100 now sits at the top of the table, for much of the ten-year time period illustrated, more balanced (in terms of risk) investors were doing rather better. Risk and return are clearly related but that does not necessarily mean taking ever more risk leads to correspondingly higher returns.  

If you would like more detailed information on our Investment Philosophy and the Model Portfolios, please let me know as I have just updated our Model Portfolios Presentation, with data from 1956 to 2017, and I will be happy to e-mail you a PDF.

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

Sequence Risk & Defined Benefit Pensions

 The following snippets are taken from Ian Cowie’s column in yesterday’s Sunday Times.

In the first he reminds us that the sequence in which we experience good or bad investment returns is very important and in the second he gives an example of how generous most Final Salary/Defined Benefit Pensions are, including the Public Sector, when compared to Money Purchase arrangements which are now offered to most Private Sector employees.

Sequence Risk

Leaving the security of a final-salary pension to fund retirement from stock market income is an irreversible decision, which will be right for some and wrong for others. It’s vital that everyone doing so is fully aware of the dangers.

For example, how many have heard of “sequence risk”, or the mathematical fact that the value of your fund will be affected by the order in which gains and losses occur? Here’s a pensions parable in which two investors who each retire with £100,000 both enjoy average annual returns of 7% and draw annual income of £7,000 over the next decade.

Unfortunate Fred suffers losses in the early years and gets his gains later, while Lucky Lucy experiences the same returns the other way round. As a result, despite having exactly the same annual average return, Lucy ends the decade with a fund worth more than £120,000 while Fred has less than £72,000.

The explanation is the way percentages work; if you lose 20% one year, you need to gain 25% to get back to where you started. Or, if markets fall by about 50% — as they have done twice this century — you would need a 100% rebound to recover fully. That’s worth considering while markets trade near record peaks and the next move might be downward.

Defined Benefit Pensions

There are still some 12m active and deferred members of defined-benefit schemes (of which 5.5m are public sector), but the projected cost of providing these pensions has become prohibitive.

These schemes guarantee a pension income as a proportion of the salary earned when the employee retired. All public-sector pensions are defined benefit, although much of the civil service has switched new entrants to “career average” calculations to save money.

The payments are increased in line with inflation every year and schemes typically provide a widow or widower’s pension of two-thirds of the income given to the employee.

What a worker receives in retirement will depend on the scheme. Each is different, but most typically pay between 1/40th and 1/60th of final salary, multiplied by the number of years at the company.

So, if a person worked for 10 years for a company that calculates pension income in 1/50ths and their final salary was £75,000, they would have a pension of £15,000 a year (10 x 1/50th x £75,000).

By contrast, money purchase pensions make no guarantees. A saver builds up a pot that eventually pays whatever pension the market will bear, usually by buying annuities — an income for life. And they would have to save hard to accrue a pension worth £15,000 a year with comparable benefits.

According to the annuity specialist Retirement IQ, a 65-year-old who wants a two-thirds spouse’s pension and payments that keep pace with inflation will receive on average about 2.3% a year from an annuity provider.

To provide £15,000 a year, they would need a fund worth more than £650,000. Imagine trying to accrue that in just 10 years.

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

Investing when the market is at an all-time high

A number of clients have been asking me over the past few months whether now is a good time to invest? Markets have been reaching new heights which surely must mean that a correction can’t be far away. As you know, I do not believe in market timing but even I have been keeping some cash to one side, in the hope that I may be able to take advantage of any such correction when it does come.

The following reminds us all that if we have a reasonable time horizon, we really don’t need to worry about whether the markets are at record highs or not.

It is a hypothetical example of someone who entered the markets at all the very worst points over the past 47 years; it’s interesting how it turns out.

By Buz Livingston

“In Ben Carlson’s blog, A Wealth of Common Sense, he takes a casual look at the worst market timer for the last half-century, Mr. Bob. Even though bad luck stung Mr. Bob, he devised a good plan, saved prodigiously and, most importantly, had guts. When it comes to investing, your most valuable organ is not on top of your shoulders.

Mr. Bob began work at age 22 in 1970 and planned to save $2,000 annually then invest when the time is right. Every decade he also intended to raise his annual savings by $2,000. In December of 1972, he made his first investment ($6,000) just in time for 1973-1974 bear market. After being shocked, it took Mr. Bob almost 15 years before he invested again, but he kept saving and had $46,000 to invest in an S&P 500 index fund in August of 1987 just before 1987′s Black Monday.

While he didn’t panic and sell his index fund, he kept saving; the third time is the charm he thought and held off buying shares until December 1999. Again, he purchased at the market peak just before the technology bust in 2000 and even put more money, $68,000, in the market. Mr. Bob thought about Buck Owens’ lyrics “The sun’s gonna shine on my life once more ...” and stuck to his plan, kept saving and stayed invested. Almost eight years later, he had $64,000 to spend and made the plunge in October of 2007, or perfect timing for The Great Recession.

When Mr. Bob decided to retire, you might not believe it but he had over $1.1 million saved. Mr. Carlson is Chartered Financial Analyst so I trust him with the math.

Sure, this exercise is purely hypothetical. Sharp-eyed observers likely noted there were no S&P index funds in 1972 and I freely admit a 100 percent stock portfolio is rarely appropriate. Carlson’s exercise demonstrates persistence and patience are your most valuable assets. Time in the market beats timing the market. To invest successfully, be an optimist. Losses will occur, rest assured but being an optimist keeps you on track.”

The main factor at play in this example is the length of time over which Mr Bob was investing, 40+ years, providing plenty of time for recovery after each disaster!

Many of us may not consider we have a 40-year time horizon over which to invest but don’t forget, if you are not planning on buying an annuity with your pension fund, your investment time horizon is probably the rest of your life – I hope it is 40 years!

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

With best wishes,

Yours sincerely

Graham Ponting CFP Chartered MCSI
Managing Partner

The tax system explained with beer

Now, I run the risk of being a little controversial here but I think the following it is quite an interesting (and fun) way of explaining the problems and complexities associated with a progressive tax system. I have seen this before but I have been minded to send it after listening to the various party’s manifestos and tax pledges over the weekend.

“Suppose that every day, ten men go out for beer and the bill for all ten comes to £100 (expensive beer I grant you). If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing. The fifth would pay £1. The sixth would pay £3. The seventh would pay £7. The eighth would pay £12. The ninth would pay £18. The tenth man (the richest) would pay £59.

So, that's what they decided to do.

The ten men drank in the pub every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. “Since you are all such good customers,” he said, “I'm going to reduce the cost of your daily beer by £20”. Drinks for the ten men would now cost just £80.

The group still wanted to pay their bill the way we pay our taxes. So, the first four men were unaffected. They would still drink for free. But what about the other six men? How could they divide the £20 windfall so that everyone would get his fair share?

They realized that £20 divided by six is £3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so, the fifth man, like the first four, now paid nothing (100% saving). The sixth now paid £2 instead of £3 (33% saving). The seventh now paid £5 instead of £7 (28% saving). The eighth now paid £9 instead of £12 (25% saving). The ninth now paid £14 instead of £18 (22% saving). The tenth now paid £49 instead of £59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

“I only got a pound out of the £20 saving,” declared the sixth man. He pointed to the tenth man,“but he got £10!”

“Yeah, that's right,” exclaimed the fifth man. “I only saved a pound too. It's unfair that he got ten times more benefit than me!” “That's true!” shouted the seventh man. “Why should he get £10 back, when I got only £2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn't get anything at all. This new tax system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.”

David R. Kamerschen, Ph.D.  —   Professor of Economics.

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

With best wishes,

Yours sincerely

Graham Ponting CFP Chartered MCSI
Managing Partner