Partners Blog

Never a day goes by without the press and the news stations continuing to talk about the decline in the residential property market. We hear talk of falling prices, estate agents going out of business, slumping sales, negative equity, and house repossessions.

So let’s jump of the cliff now shall we?

Come on, we have seen falls in house prices before and unless you are looking to try and make a quick profit which is more difficult nowadays, residential property is still a good investment over the longer term. Just look at the last 20 to 30 years as follows:

• 1975 to 2007 nominal house prices increased by 1,672%
• 1994 to 2008 nominal house prices increased by 241%

So what about the future?

In the shorter term the outlook is mixed. The Council of Mortgage Lenders (CML) revised its forecasts just last month and said that prices would now fall by about 7% this year.
Over at mortgage brokers John Charcol, their commentators are quoting more like 9% this year.

Next year is more difficult to forecast and returns will very much depend on whether we see a lowering of interest rates and whether we see mortgage availability improving. Analysts agree that the availability of mortgages and loans will be a key issue in deciding how far and how quickly the house price decline will be.

In my view though, for the majority of homeowners, falling house prices is not the end of the world. If you want to move, falling house prices will not affect you that much as whilst you will get less for your house, the new purchase is likely to be cheaper as well. It is more problematical for perhaps 1st time buyers and perhaps buy to let investors as the question is when do you dip your feet into the market? Now or later? My view is perhaps later (say 12 months) unless you are in it for the long haul.

For most of us, the days of relying upon the state to keep is in our retirement are long gone. Staying with one employer throughout our working career and building up cast iron benefits within a final salary pension scheme is also becoming a rarity and so we have to face the prospect of saving more of our money to give us an adequate income in retirement.

The following tips can help you to work out how much you need to achieve your desired lifestyle in retirement and answer the question “How much is enough?”

1. Estimate roughly how much money you’ll need to live on in retirement. Don’t get too bogged down on how to calculate the amount at this stage. A ballpark figure is a good starting point, and you can use one of a number of good online retirement calculators to get an estimate.
2. Calculate what will be available from sources other than your savings. For example, what is your expected State Pension at retirement age? (www.thepensionservice.gov.uk – form BR19). Do you or your spouse have a pension from a previous or current employer? If you have a personal pension, what is the expected value at your planned retirement age? Use a conservative rate of growth to avoid overestimating.
3. Set goals for reaching the amount you’ll need to make up the difference.
4. Get out of debt. If you carry thousands of pounds of credit card debt and pay the minimum payments each month, your potential retirement savings are going directly to your credit card company in the form of interest. Paying only the minimum payment on credit cards is one of the worst financial mistakes you can make. Start applying as much spare cash to your credit card balances initially and once they’re paid off, resolve to pay the balance in full each month. You’ll be amazed at how much money it frees up for retirement savings over time.
5. Play catch-up. The amounts that you can now contribute into a pension plan and get full tax relief is very generous, so take advantage of this, especially if you are a higher rate tax payer.
6. Consider relocating or downsizing. If you live in an area with a high cost of living, moving to a less expensive area and investing your savings for retirement could make a big difference in your ability to amass a nice nest egg.

   If your kids have left the nest and you’re still living in a big house that has appreciated in value, consider selling it and buying a smaller, less expensive home. You’ll save not only on your mortgage payment, but in less obvious places like the cost of heating, cooling, insuring, and repairing your home, property taxes, etc. You can put the savings made and cash released toward your retirement.

7. Consider a second income. If you’re worried about being able to amass enough money to retire, consider taking on a second job and investing your earnings. Alternatively, go back to point 1 and adjust your expectations downwards.

The older you are when you start seriously saving for retirement, the harder it will be to achieve your goals -but it can be done by following the advice above.

So don’t let doubt or discouragement keep you from starting right away, regardless of your age.

Having recently attended a 1 day conference about investment asset allocation at the new Arsenal football stadium in London, it became very clear to me that we are adopting the right approach when advising on investing. History has shown that 90% of long term investment returns comes from having the right amount of money in the right asset classes and only 10% comes from timing the market and individual stock picking. So what does that mean?Well, asset classes can include many things but traditionally, you would invest into Cash deposits, property, shares from around the world and finally Fixed interest securities or Bonds (loans to institutions which generate an income return). The benefit of investing across say all four asset classes is that it spreads the risk should one asset class catch a cold. Stock markets for example, have been very volatile over the last 12 months or so and we have seen the FTSE All share and the FTSE 100 fall by about 10% over the period. Had you invested all you money in these indices, you would have seen your portfolio value fall an equivalent amount. If however, you spread your money across the four asset classes, the loss would have been reduced. The amount of money invested therefore into each asset class will depend upon on the level of risk you are prepared to take and the return that you want to achieve.

History also shows that markets go up and market go down and you only make losses if you sell at the wrong time. If you sold immediately after blank Monday in 1987 or in 1999/2000 when the tech bubble burst you would have made losses. Had you then stayed in cash waiting for the recovery and the markets bounced back quickly and you were still in cash, then again you would have missed out. What’s the answer? Sit tight, stay invested and don’t panic when markets fall.

Don’t get me wrong, the future is very uncertain at present and the US credit crunch is hitting hard and effecting global markets and hence even more reason to maintain a diversified portfolio. Sadly however many traditional investment firms normally use just 3 asset classes (bonds, shares and property) when managing portfolios and thus we feel that opportunities are being lost as you can also invest into alternative asset classes such as Commodities, hedge funds and other structured products.

At this seminar, some interesting statistics came out.

If you invested from 1991 to 2008 via a portfolio of 65% UK shares, 25% UK bonds and 10% UK property, your overall annual return would have been 10.2%. The standard deviation (which measures portfolio volatility ) was 10.3% with a maximum portfolio loss of 27.4% over the period.

Over the same period, had you invested via a portfolio of 22% global shares, 25% global bonds, 15% global property, 5% emerging market shares, 8% emerging market bonds, 8% commodities, 15% hedge funds and 5% managed futures your overall annual return would have increased to 11.5%, but more importantly the standard deviation reduced to 6.2% (the lower number the better) with a maximum portfolio loss of 9.8% over the same period.

What does this show? It shows that better diversification can lead to better returns whilst reducing overall downside risk.

Having access to this level of investment diversification is almost impossible to achieve as a small advisory practice and as we pride our skills on financial planning and not investment management, you can see why we decided to outsource investment management to our strategic investment partners. Under our Master Account service, you can access the investment management skills of Tilney Wealth management, who are part of Deutsche Bank. Being such a large institution with 100s of years worth of experience, they can build bespoke portfolios for our clients which include up to 8 asset classes, so you have the reassurance of knowing that all your eggs are not in just one investment basket.

I find airports boring places and yet fascinating at the same time. I hate waiting… for anything. I’m afraid I have been suckered into the modern expectation that everything is available immediately… on demand. Including my flight! And yet, all these hundreds of people are milling around. I can’t help wondering where they are going and why. It reminds me of a line I read once. “There are those that travel, and there are those that are going somewhere”. Those that travel are doing so rather randomly. Those that are going somewhere have a destination. A purpose. There is a parallel I think with financial planning and particularly investment management.I think many investors “travel” when they would do better to have a “destination”. The problem with traveling randomly in the investment world is a lack of discipline or a desired outcome, which means the result is random and we are more likely to be dragged off course along the way. We have all seen advertisements in the press with headline rates that leap out from the page. How tempting it is to look at those rates and make a decision to invest “because that return is better than the one I have achieved from my existing investments in the last year”. Alternatively, we are tempted to make an investment decision because there are tax advantages. Such tax advantages become so important that we feel they are more valuable than the investment itself (see my thoughts on ISAs)

Often, we find ourselves some time in the future, wondering why we made the investment, and then making another set of random decisions based on the short term headline rates or tax commentary of the time. Have you ever made an investment and then forgotten why you did it, or changed your mind part way through?

For me, as a financial planner, the definition of a good investment is one that achieves the objective you have set for it. In other words, set a “destination” for this money. Determine what the money is for, what the timescale is, how much money is needed to satisfy the objective and what return is needed to achieve it, and even better, how will you feel about having achieved it? Once all of these factors have been decided, it will be much easier to understand what type of asset (or mix of assets) is appropriate for the investment, and then what type of tax planning vehicle might be suitable to ‘hold it in’.

A typical journey for an investment traveler might involve a series of short term decisions, visiting various assets, fairly randomly, based on ‘flavour of the month’ views. However, following the latest investment trends is not a successful way to invest. It is proven not to work. Indeed, there is a stronger argument to do the opposite!.

With a financial plan, we are able to design a journey, to decide when we want to arrive at a particular destination and measure what is needed to get there. This discipline allows us to construct an investment solution that is designed to specifically meet that objective. And once on the journey, we should not be dissuaded by external financial marketing that is presented through the media to distract us. And finally, we should be patient, and allow the plan to develop (this goes against today’s desire for “on demand” and is a lesson I am still learning personally!). A good financial planner will help you to see the destination (if it’s not clear already) and guide you there with a clear itinerary. It’s called a financial plan.

For most taxpayers, holding savings in tax-efficient accounts makes sense. Individual Savings Accounts (ISAs) and previously Personal Equity Plans (PEPs) have been widely used to build up a capital sum, on which individuals can avoid any personal liability to Income Tax and Capital Gains Tax (it is not possible to reclaim tax credits on dividends from UK companies).When PEPs were launched in 1996 you could invest up to £6,000 into a General PEP and up to £3,000 into a Single Company PEP. The original reason for offering the PEP allowance was to encourage investment into UK companies. In 1999, PEPs were abolished and replaced with ISAs, with an annual allowance of only £7,000. If the original £9,000 allowance had kept pace with inflation, it would now be £14,000! What’s more, the new ISAs came with rather complex rules.

This encouragement for saving is all well and good, but over the years, it seemed to me that ISAs were being misunderstood by some people. Some investors were more interested in simply using the ISA allowance itself, rather than thinking about what type of assets they bought, or why, and other investors would not consider ISAs because they perceived them to be risky.

Let’s understand that the ISA, or PEP (or pension for that matter) is just a tax planning vehicle - a wrapper in which assets are held. In other words, the wrapper determines the rules regarding things like tax treatment, charging structure and how accessible your money is. It is the asset inside the wrapper that determines whether the value goes up, down or sideways. Therefore, I feel it is wrong to say that a PEP or an ISA is risky, as it is the underlying assets that determine the nature of the risk.

The financial services industry also has a lot to answer for when it comes to selling PEPs and ISAs. The media constantly refers to an ISA “season”, which frankly I find to be irritating. What they are referring to is the period between about February and 5 April, when people traditionally buy their ISAs at the last minute, to use up the allowance. The ISA season, if there is one, is a tax year.

And then there are the banks! I believe the banks’ primary function is simply to sell us financial products. Take Cash ISAs for example. Historically, we have been persuaded by banking institutions to buy a Cash Mini ISA, as soon as the new tax year starts. There doesn’t seem to be any longer term planning involved here, just the sale of a product. I have nothing against Cash ISAs per se, but I have an issue with the lack of any planning involved in the sale. In fact, I have several problems with this.

1. I think this is generally a waste of the ISA allowance because cash only generates interest, with no possibility of any capital growth (which would be tax-free). For higher rate taxpayers who use their annual Capital Gains Tax allowance, the ISA is a very valuable tool in avoiding tax on further gains.

2. Serial Cash ISA savers then store up a pile of money in cash over a number of years. Cash is intended to be for short term liquidity. It is not for long term investment as inflation will erode its value over time. Any subsequent withdrawal from the Cash ISA means the loss of the tax-free allowance.

3. The sale of a Cash ISA automatically restricts the investor to a lower Stocks and Shares ISA allowance, and this cannot be reversed once sold. This means investors need to understand what they are doing and why, before they do it.

But there is some good news coming. From 6 April 2008, we will be able to switch Cash ISAs into Stocks and Shares ISAs. This will help people to retain the tax-free status of their Cash ISAs and invest in something more suitable as a long term investment. At the same time, we will be allowed to convert existing PEP accounts into ISAs, which will simplify the situation. The “Maxi” and “Mini” distinctions will disappear, and the ISA allowance is also rising from £7,000 to £7,200. Incidentally, I think the term Stocks & Shares ISA is misleading. This suggests that the only assets that can be held have to be shares. There is in fact a very wide range of assets that can be held with a range of risk profiles.

I would encourage you to think about your ISA allowance as a means of building a capital sum over the long term. This enables you to generate a fund from which you might draw a future income which is not subject to personal tax and which could be used to supplement taxable income, perhaps in retirement. This approach allows you to take a long term view with your ISA investments, which means investing in assets such as equities and property that are likely to generate real returns over time. Short term volatility and the timing of the initial investment, then becomes less important.

Of course, with ISAs, you always have control of all of the capital, so if you wish to spend the accumulated pot, then you can.

I read with interest the article published recently in the Financial Times that talked about the demise of the traditional financial adviser and how members of the public now look more and more to the internet as a means of accessing financial advice and in order to source financial products.According to the survey undertaken by ComPeer, the wealth management analyst, of the 2000 people surveyed, almost 50% have no financial adviser. Reasons for this include the apparent ease at which individuals can now do their own product research on line, the continued mistrust of financial advisers generally and their motives, and finally their perceived inability to add value.

I find this article both worrying and exciting all at the same time. Worrying on the basis that individuals may be basing some of their biggest financial decisions on information ( whether accurate or inaccurate ) that they find on the internet and exciting on the basis that people are now starting to realise that they don’t need to buy expensive financial products from an adviser, when they can do their own research and source a cheaper solution. This leads to opportunities for us as Financial Planners.

Here are Critchleys FPLLP, we have always stressed that the financial product is secondary to the advice process and it should not be the key determinate that plans your financial future. Many financial planning issues can be solved without the need to buy a product at all and therefore working with an adviser whose remuneration is not based on selling products, helps to counter any possible concerns about ‘trust and motivation.’

Internet based services by their very nature are very transactional based and are great for people who seek advice on event driven issues that occur in their lives. For example, they reach retirement and need to by an annuity or they receive an inheritance and need to buy an ISA. Financial planning is different. A good planner should act as a sounding board and be able to use his/ her questioning skills to help you appreciate what is important about money to you and then help define your personal goals, working with you to achieve them over time. He should take a “big picture” view of your financial situation and make strategic recommendations that are right for you. This approach should look at ALL of your needs including budgeting and saving, taxes, investments, Estate and retirement planning as any one decision relating to one area of your finances is likely to impact on another without you knowing. Without a specialist overseeing the whole situation you could end up making wrong decisions which, over time could have a knock on effect leading to serious consequences.

Whilst the internet has changed the way we live our lives and is a fantastic resource, can it really provide a dependable level of personal financial support? I am not so sure. I am after all influenced by the adage that ‘a little knowledge can be dangerous.’ And that being the case, when it comes to financial arrangements, chances are that by the time you find out whether you have taken the wrong advice - it could well be too late to turn things around.

Terminal 4, Heathrow airport, outward bound for Cape Town for a well earned rest and some southern hemisphere sun. At the gate, I’m an early arrival, courtesy of my girlfriend’s organization and a desire for a stress-free start, so I have time to watch the tv news channel. The female newscaster is telling me that “markets are in turmoil”. The FTSE100 index fell by 190 points yesterday (15 January) to 6025. That’s about 3% down. She hands over to a very excitable male colleague, who waves his hands in the air and goes on to explain that “Markets have fallen by 7% since the beginning of the year. The banking sector has been “decimated” by the credit crisis, oil prices are at an all time high, inflation is under pressure and even the ever reliable (they only go up don’t they?) house prices are falling.” The media would have us believe that the world is about to end… again!Have we not been here before? Well, yes, several times in fact. I remember the 1987 stockmarket crash, 20 years ago, the collapse of Barings Bank (Nick Leeson) in 1996, the collapse of Long Term Capital Management in 1998, the bursting of the dot.com bubble in 2000.

I also remember the property crash of 1988. Rather amusingly, I joined an Estate Agency practice as a mortgage adviser on 31 July 1988, which was the day that multiple tax relief on mortgages (remember that?) was abolished. Prior to that day, people were queuing to buy houses, and all of a sudden these buyers disappeared overnight. The market crashed on the back of rising interest rates and the loss of the artificial stimulus (tax relief) and fell by about 25% over three years. I know this because the house I bought in 1989 for £64,000 was worth £49,000 at the bottom of the cycle. That house is now worth around £200,000, and had I still been living in it, the period of temporary “loss” would be a distant memory.

These two tales have much in common. In both cases, if you read the press, the world was coming to an end, and in both cases if you had simply ignored it, you would not have lost any money. As we financial planners bang on about continually, investment in risk-based assets should be for the long term, and you should expect short term volatility to occur from time to time. If your cake mix is supposed to be in the oven for 30 minutes, don’t open the door after 5 minutes and expect it to be cooked. And if you do open the door after 5 minutes, don’t be surprised if the cake sinks!

It is human nature to want to avoid losses, and yet we have come to expect better than average returns. By definition, we cannot all have better than average returns! We all seek that rare investment which gives us all the gains and none of the risk. It doesn’t exist. In seeking to avoid losses some people (like a recent client) sell their investments when they see the market fall and move into cash, and in doing so, crystallize a loss. They then justify this by saying that they will wait for the market to improve before reinvesting again. In this process, they adopt a “sell low, buy high” strategy - a sure fire way to make losses. Often, some investors get the timing right and congratulate themselves on their foresight. However, this is no more than a lucky outcome and is not likely to be a repeatable process. Even very clever economists and investment managers with all their information and resources, get it wrong, so what chance do we have?

The lessons we can learn from history are that prices will even themselves out over time and they will find the right level. In other words markets are valued efficiently. We can also learn that the current media doom and gloom will look differently 5, 10 or 20 years from now. I don’t believe in trying to time markets, and I don’t believe in chasing a specific asset over short periods with a view to selling and moving into other assets. This is because I believe there is as much chance of getting it wrong as getting it right.
I believe you should only invest in assets like property and equities for the long term (5 years at least, probably 10 or more). I believe you should invest in a multi-asset, multi-manager portfolio which has a balance relevant to your long-term return objectives, and your capacity and tolerance to short term volatility. Once you have implemented such a strategy, I think you should ignore all the media noise and fuss about whether markets are booming or crashing. You cannot control what the market will do, so what use is the information anyway?

One thing I would put money on, is that future markets will continue to be volatile and the media will call the end of the world. And most private investors will lose money because, in fear of losses, they adopt the wrong strategies.

The legendary Warren Buffett said “The markets are efficient at taking money from the impatient and giving it to the patient.”