Coronavirus – Update

Since my last blog on this subject on 3rd February, things have moved along quickly and it is now looking increasingly unlikely that the spread of COVID-19 will be easily contained. The increasing numbers of cases outside of China is a concern, it is one thing to largely isolate a population in a Communist State like China, quite another to try and achieve the same thing in the free West!

The World Health Organisation (WHO) has not classified this as a pandemic yet but it may only be a matter of time.  

Stock markets seemed quite slow to react at first but they now appear to be in full flight, at one point this afternoon the FTSE 100 was down another 4.0%, after heavy falls earlier in the week.

Despite these falls and with possibly more bad news to come, the fundamentals of long-term investing have not changed and nor are they likely to.

The following is an extract taken from my earlier e-mail because the points remain relevant, even though the situation has deteriorated since then.

How is this likely to affect markets going forward?

We don’t know for certain. In previous outbreaks (such as SARS), economic damage wasn’t really caused by the primary effect of the disease (people getting sick & dying) but by the secondary effects of the fear of the disease (people hunkering down and not travelling, shopping, interacting with other people, all of which affects company profits and economic growth). Given China is such a strong engine for global growth and the virus is centred there, the secondary effects are particularly worrying. SARS managed to knock 2% off China’s economic growth in Q2 2003 so it’s likely that the virus will have a measurable effect on global growth in 2020, although any dip is likely to be temporary, as long as the disease is contained.

As for markets, in previous outbreaks like SARS, the market sold-off sharply but then bounced back even more strongly once the outbreak started to peter out. Selling out of the market is thus risky, as it risks locking in losses but not being present for the rebound.

Every outbreak over the last 100 years has been contained and so has had little effect on the market, so the virus petering out remains overwhelmingly the most likely prospect here. But it’s impossible to completely rule out the incredibly serious tail risk of a global pandemic. This should definitely concern us, but careful action such as that being taken by the WHO and global governments is the correct response, rather than panic.

We may have more weeks and months of this uncertainty ahead of us but, as stated above, to sell out of the market now when much damage has already been done could leave you exposed if a ‘V’ shaped recovery materialises.

As has always been the case in the past, the best thing to do when faced with market uncertainty and sharp falls such as these, is nothing, no matter how hard or counter intuitive that might seem just now. The only exception to this would be if you were in dire need of funds and had absolutely no alternative but to liquidate investments.  

As always, if you have any questions concerning this e-mail or any other finance related matter, please do feel to contact me at any time.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Would investing £100 per month in Premium Bonds give a better return than a diversified portfolio?

You probably already know the answer to this question but some figures I have seen today from the Motley Fool website make for interesting reading.

Premium Bonds, which are issued by National Savings & Investments (NS&I), cost £1 each. They do not pay any interest. Instead, each eligible bond is entered into a monthly draw for prizes ranging from £25 to £1m. However, the odds of any bond winning a prize are 24,500 to 1. Given the fact that Brits have invested over £84bn in Premium Bonds, those odds do not appear to matter to them.

It is true that the more bonds a person owns, the higher the chance of a prize. Also, the UK Treasury backs any savings and prizes won, so an investor will never get back less than they put in. Additionally, Premium Bond prizes are entirely tax-free. But what kind of returns can an investor in Premium Bonds expect?

Tried and tested

Let’s look at how a £100 per month Premium bond investment, over 25 years, is likely to perform. First, we need probabilities of winning each of the monthly prizes available, and the chance of winning nothing. The required data for calculating these is available on the prize draw details section of the NS&I website.

We will start with 100 bonds that go into the monthly draw. Any prizes won will be used to buy more bonds, and another 100 bonds are purchased each month. There is a limit of 50,000 eligible bonds – anything over this amount is ineligible for the prize draws, and we will do the same in our study.

Ten thousand trials of this experiment are enough to generate some expectations. On average, the wealth level at the end of 25 years was £36,040. 10% of the trials generated a wealth level of £36,625 or higher. 1% of trials resulted in netting £40,950 or more. The truly lucky, the 0.1% club, could expect their investment to grow to £91,825 or more, with one (0.01% of trials) sitting on £1,036,150.

99% of the time, investing £100 per month for 25 years in Premium Bonds will generate £40,950 or less. An investor can do better than this is they find an investment that returns 2.43% each year on average.

Premium returns

The good news is that there are investments out there that have long-term average returns that do indeed beat 2.43%.

EBIP 100, our highest risk portfolio, had an average annual return of 7.74% over the last 25 years, more than 3 x as much; the end value would have been £87,927.49, as evidenced by the chart below.

EBIP 60, our most commonly used portfolio for medium risk investors, had an average annual return of 6.73% over the last 25 years; the end value would have been £75,640, see chart below. 

It is important to note that we are not exactly comparing apples with apples here, there are risks with investing in diversified portfolios, you could get back less than you put in, which is of course not the case with Premium Bonds. However, I don’t believe it is controversial to say you are more likely to end up with more wealth if you invest for the long term in a diversified portfolio, compared to investing in Premium Bonds.

The most interesting thing that I take from the chart is the relative lack of volatility of even the highest risk portfolio, brought about by dripping in small amounts regularly and therefore taking advantage of (rather than being disadvantaged by) dips in the markets from time to time.

All of the above having been said, if you are looking for an absolutely safe investment with a miniscule chance of striking it rich, then Premium Bonds might still be for you.   

I hope you find this piece interesting but if you have any questions concerning this e-mail or any other finance related matter, please do feel free to contact me at any time.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Coronavirus - Update

The following is an article I received on Friday from Nic Spicer, Head of UK Investments for Portfoliometrix, given the subject matter, I thought you might find it of interest.

“Yesterday, 30 January, the World Health Organisation (WHO) declared a public health emergency of international concern (PHEIC) over the new coronavirus epidemic. The WHO flagged the risk of the coronavirus (so called because of its spiky, crown-like appearance under a microscope) spreading to countries outside of China with weaker health systems which have less ability to deal with it.

As of this morning (31 Jan), 9,692 cases of novel coronavirus (nCoV) had been confirmed worldwide with at least 82 of those outside China, Hong Kong, Taiwan and Macau (including 2 cases in the UK). In addition, there are a further 15,238 suspected cases in China, suggesting the number of confirmed cases will continue to rise. Declaring a PHEIC is an important symbolic step which, in practical terms, makes it easier for the WHO to co-ordinate the responses of governments around the world.

Should we be worried?

We should be wary, but we shouldn’t panic. So far 213 people have died from the disease, a far cry from the roughly 400,000 deaths a year caused by flu. nCov is, however, more deadly than flu, with an estimated mortality rate of 2-3% vs flu’s less than 0.1%. Whilst serious, that 2-3% is lower than the roughly 10% mortality rate of Severe Acute Respiratory Syndrome or SARS (another coronavirus which killed 774 people in 2003) and Middle East Respiratory Syndrome’s 34% mortality rate (a coronavirus outbreak that erupted in 2012). It is also certainly less than the 10-20% mortality rate of the last truly serious global pandemic, the 1918 Spanish Flu which infected about 500million and killed between 50 and 100 million.

What is troubling is that nCov is obviously quite contagious, about as much as flu, with each new case infecting on average about 2.5 other people, so it’s important that it is contained. This has been made more difficult in China because it emerged in the Chinese city of Wuhan at a particularly unfortunate time, just before Chinese New Year which sees a mass migration of people back to their family homes to celebrate.

There are some important unanswered questions though which affect how easy it will be to contain, such as how long the virus incubates for and whether it can be passed along before symptoms show.

But there are only a few cases outside China, and, after a slow start, China itself has clamped down heavily on travel, as have other countries. Advances in medical science mean that the virus’s genetic makeup could be rapidly analysed and shared with laboratories around the world. That should help with containment and development of a vaccine. Cheap face masks probably aren’t that effective, but frequent hand washing (and not touching your face) is actually remarkably effective in terms of prevention (with the added advantage of helping prevent regular colds and flu, a far bigger risk to those outside China).

How is this affecting markets?

It’s difficult to completely disaggregate the causes of market moves, but fears about the virus have certainly been a large factor in the recent pullback in global equities. So far this is only a mild sell-off, but beneath the headline figures individual stock prices have moved more materially with defensive sectors (utilities, healthcare, tech, quality as a style in general) rallying, and more cyclical sectors (autos, resources, value as a style in general) as well as China-exposed travel and luxury goods retailers selling off.

This flight to safety has also been evident in bond markets, which have rallied strongly over January as fears have risen, and yields have fallen. This also briefly led to a US yield curve inversion on Thursday 30 Jan (10-year maturity minus 3 months maturity) - yield curve inversions over an extended period have historically been a reasonable indicator of recession, so they are closely monitored. 

How is this likely to affect markets going forward?

We don’t know for certain. In previous outbreaks (such as SARS), economic damage wasn’t really caused by the primary effect of the disease (people getting sick & dying) but by the secondary effects of the fear of the disease (people hunkering down and not travelling, shopping, interacting with other people, all of which affects company profits and economic growth). Given China is such a strong engine for global growth and the virus is centred there, the secondary effects are particularly worrying. SARS managed to knock 2% off China’s economic growth in Q2 2003 so it’s likely that the virus will have a measurable effect on global growth in 2020, although any dip is likely to be temporary, as long as the disease is contained.

As for markets, in previous outbreaks like SARS, the market sold-off sharply but then bounced back even more strongly once the outbreak started to peter out. Selling out of the market is thus risky as it risks locking in losses but not being present for the rebound.

Every outbreak over the last 100 years has been contained and so has had little effect on the market, so the virus petering out remains the overwhelmingly the most likely prospect here. But it’s impossible to completely rule out the incredibly serious tail risk of a global pandemic. This should definitely concern us, but careful action such as that being taken by the WHO and global governments is the correct response, rather than panic.

How is this affecting PortfolioMetrix portfolios?

Coronavirus is a classic ‘black swan’ – an unexpected but high impact event. But the PortfolioMetrix portfolios are diversified precisely because although we don’t know about specific black swans in advance (or when they’ll occur) we have always believed that it’s best to prepare for them in advance by building robust portfolios, rather than trying to react after the fact.

It is likely, however, that portfolios will be volatile for the next few weeks as we learn more about how serious this strain of coronavirus actually is. We are not planning any knee-jerk reactions (which risk missing out on a rebound) but we are monitoring the situation closely.”

Like Nic’s PortfolioMetrix Portfolios, all Portfolios recommended by Clearwater are very highly diversified but as above, this doesn’t mean that we won’t see some volatility over the coming weeks. As always, the advice I would give is that unless you ‘need’ to cash in investments at this time, the best policy is likely to be to wait this out.  

If you have any questions concerning this e-mail or any other finance related matter, please do feel to contact me at any time.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

A transformed investor’s view of market volatility

The following is a short piece written by Dave Goetsch, Executive Producer of the Big-Bang Theory, a hugely popular US TV series. If you’ve not heard of it, ask your children, they will tell you it’s massive!

The article was written in 2018 but its message is always pertinent. A couple of very important sentences have been highlighted.

“Seeing all the recent headlines about the sudden downturn in the stock market has transported me back to February of 2009, when I was close to despair. It’s striking how different I feel now. 

In February 2009, the stock market was down around 50% from its high, and everyone seemed to feel like the sky was falling. I was familiar with this state of panic because my relationship to the financial markets was that I didn’t trust them. 

They were always going up and down in ways no one could predict, and I couldn’t trust those folks who said that they could anticipate what was going to happen. So when the market went down, I went down with it—sinking into a depression, knowing there was nothing I could do. What a difference nine years make. I haven’t changed because the stock market rebounded. I changed because I learned that there was a different way to think about investing. I was right not to trust those people who thought they could predict what was going to happen in the markets, but I was wrong in thinking that there was nothing to do. I’ve learned that I can have a great investment experience if I just accept a few simple truths.

I have to understand the uncertainty of the market. The stock market, as measured by the S&P 500 Index, has returned about 10% per year over the last 90 years, (1) but there are very few individual years in which it has ever actually returned that amount. In fact, how many of those 90 years do you think the S&P 500 was up more than 20% or down more than 20% for that year? The answer is 40. Astounding, right? I wish somebody had explained that to me decades ago. Then I would have known to look at stock market returns in terms of decades—not years, months, days, or hours. I would understand that so many of those articles and cable news pieces are just noise, designed to keep an audience obsessed and unsettled.

In order to be a long-term investor, you have to have a long-time horizon. This can be hard to remember when you’re being assaulted by noise, but if you can stay strong, the results are stunning. By results, I don’t mean the investment returns, which hopefully are good. The return I’m talking about is how I feel every day. I worry less—not just about the future, but also about the present. Of course, I know that there are no guarantees when it comes to investing, but I feel like I’m going to be okay. I have a plan. 

There’s no way I could’ve done this without a financial advisor. I needed someone who could not just talk me through what my asset allocation should be, but also help me work through how I felt about investing and what exactly I could do to change my perspective. 

I was a mess nine years ago. Now, my outlook is totally different. The markets haven’t changed; they still go up and down. The difference is, I don’t anymore.”

FOOTNOTES

(1) 1S&P data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. 

If you have any questions concerning this e-mail or any other finance related matter, please do feel to contact me at any time.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Happy Returns of the Decade

As we are now well into the first January of the new decade, I thought it might be interesting to take a look at how a range of our Portfolios performed during the past 10 years.

The graph and the table below take into account all fund charges but NOT Adviser Charges or Platform Charges. On an annualised basis these come to approximately 1.3% per annum but this does vary depending on the size of your investment.

The following table provides the annualised percentage growth of each portfolio over the decade but for true comparison purposes, please remember to deduct from these numbers approx. 1.3% to 1.4%, to take into account Adviser and Platform costs.

If you are invested in EBIP 80 and are alarmed to see that its performance fell into the 4th Quartile over the period, please remember that the benchmark against which it is being measured (ARC Sterling Equity Risk PCI (2) (2)) included portfolios containing 100% exposure to equities. Accordingly, we would expect a portfolio only containing 80% exposure to equities to significantly underperform this particular benchmark when markets are rising.

If we could have predicted these returns 10 years ago, I suspect most people would have been very happy, particularly when one remembers all of the market volatility that occurred from time to time, the uncertainty around the EU referendum, Donald Trump’s spat with North Korea and also with China over trade etc. As reassuring as these returns have been, we can of course, never use past performance as an indicator of what might happen in the future.

I will do a similar exercise in 10 years from now and we’ll see where we end up!

If you have any questions concerning this e-mail or any other finance related matter, please do feel to contact me at any time.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Withdrawals from Transact & Standard Life Wrap Platforms

Firstly, a belated very Happy New Year!

This is just a very short reminder of the withdrawal timescales for our clients who have funds invested on either the Standard Life or Transact Wrap Platforms.

If you are planning a withdrawal, it is essential that you give us sufficient notice to ensure funds are available at the required time.

In the majority of cases, if we are given 2 weeks’ notice, this should be adequate for any forms to be completed, for funds to be sold and for the proceeds to appear in your bank account. It is possible however; on the odd occasion it could take a day or two longer because of the requirement for a wet signature on some forms, the possible requirement to provide Bank ID and of course, the vagaries of the postal service.

I am afraid these timescales and the rigid processes involved are completely outside of our control and we do not have any power to circumvent them. Some of the requirements are due to ensuring appropriate levels of security, which is obviously a good thing.

We are expecting Transact and Standard Life to adopt a process involving electronic signatures as time moves on and this will only help with speeding up the process.

Have a lovely weekend.

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Festive Greetings!!!

Adam, Kim 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 quite a number of years now, in lieu of sending individual Christmas cards, we have once again decided to make a donation to a worthy cause.

Sadly, in mid-November of this year, we were informed of the passing of one of my lovely clients, a lady who I first met via her husband over 29 years ago. I know that in her last few days, she and her family were greatly assisted by Woking Hospice and accordingly, I will be making a donation to help them provide similar, excellent care to other families.

Woking Hospice, a patient-led charity, provides free care to the terminally ill in wonderful rooms with nice views and they are also provide palliative care to patients still living at home. The following is a link to their website:

https://www.wsbhospices.co.uk/about-us/

I am sure you will approve of my decision to support this much needed charity.

I do hope 2020 brings you all you would wish for.

With very best Christmas wishes,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Something to Think About!

Just a very short missive today.

Most of you are well aware of my philosophy concerning money which, in a nutshell, is that money is no value unless you exchange it for something else (lifestyle mainly), and that none of us know how long we are going to have to enjoy it.

Here’s a gentle reminder of this from the late Linda Smith:

“Remember, there were people on the Titanic who turned down the sweet trolley!”  

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

Warning of 33% tax trap in using pensions for Buy-To-Let

The following is an article from yesterday’s FT, in which journalist, Amy Austin, highlights the potential pitfalls in taking one’s pension as a lump sum in order to invest in property. It really just highlights the importance of taking regulated advice when making such a big decision.  

‘Savers are at risk of losing a large proportion of their retirement income on tax if they raid their pension to purchase a second property, Royal London has warned.

Research undertaken by YouGov for Royal London, published last week (November 2), found out of 2014 individuals polled, 15 per cent of those aged over 55 would consider investing in a buy-to-let property to fund their retirement. 

This almost doubled to 29 per cent for those aged 45-54 and approaching the age at which they can access their pension.

But Royal London warned by doing this the saver could incur a significant tax bill as by buying property, not only would they have to pay income tax on any pension withdrawals, they would also incur costs such as stamp duty. 

For example, someone living in England with a £400,000 pension would have to pay £120,000 in income tax if they accessed their pension as a lump sum. 

As they would be purchasing a second property, they would also be liable for second home stamp duty which would take a further £12,400 from their pot. This would leave them with just £267,600 of their initial investment, or 66 per cent.

Tax implications in England and Northern Ireland:

Pension fund value

Income tax

Stamp Duty Land Tax

Remaining fund

£200,000

£52,500

£4,875

£142,625

£400,000

£120,000

£12,400

£267,600

£600,000

£187,500

£23,000

£389,500

£800,000

£255,000

£33,600

£511,400

Source: Royal London

Scottish savers would be even worse off and would be left with just £261,400 as they are subject to a different tax regime.

These calculations were based on an individual who takes their 25 per cent tax free lump sum and has no other taxable income in the same year.

The second property was assumed to be for buy to let purposes and property tax is based on the fund after income tax has been taken.

Although an adviser could make individuals aware of these costs, a quarter of those who would use their pension to fund a buy to let property said they were unlikely to take financial advice.

Fiona Hanrahan, business development manager at Royal London, said: “The flexibilities brought in with freedom and choice prompted many retirees to consider taking their pension as a lump sum to purchase a buy to let property.

"However, by doing this they risk being clobbered with tax to the extent that they are unlikely to be able to afford the property they were hoping to buy and would need to look at something smaller. 

“There is little understanding of how pension lump sums are taxed and people could find out too late and lose many thousands of pounds.

"We would urge anyone thinking of going down this route to speak to a financial adviser to go through their options.”

Rick Chan, director and chartered financial planner at IFS Wealth & Pensions, agreed that for most savers buying a second property using their pension funds was not worthwhile because of the tax implications.

Mr Chan said: "Firstly, over the years the government has increased taxation of buy-to-let investments, eg, 3 per cent stamp duty surcharge (higher acquisition cost), reduction in mortgage interest rate relief (makes rental income less attractive), changes in principal private residence relief & lettings relief (potentially higher capital gains tax on a future sale).

"Also, buy-to-let investments are subject to inheritance tax on death, so this could be up to 40 per cent of the value."

Mr Chan also said there were other concerns with property such as the fact it was considered an illiquid asset.

He added: "Property is an 'illiquid' investment so capital is tied up, there could be vacant periods when the property is not let out or in the unfortunate event that of bad tenants, it takes a couple of a months to evict them.

"Choosing to become a landlord isn’t a decision to be taken lightly and my view is that most retail clients should not be relying on buy to let investments as a sole source of retirement income, as similar or better returns could be achieved with pensions or Isas without the hassle, tax implications or practical issues."

amy.austin@ft.com’

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

Active versus Passive Investing plus some comments on Neil Woodford

The following link will take you to a short interview that was broadcast yesterday at around 6.20am on Radio 4.

The former Head of the Investment Association is asked what is the difference between active and passive investing and where did Neil Woodford go wrong, it’s only about 4 minutes long and I thought you might find it interesting.

For the avoidance of any doubt, we at Clearwater believe in passive investing using highly diversified portfolios.

Radio 4 Link

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