Warren Buffett used an opinion piece in the New York Times newspaper to tell readers to follow his lead and start snapping up shares. The chief executive of Berkshire Hathaway has been buying US stocks for his personal account, saying the market is likely to move higher before the outlook or the economy changes.

Mr Buffett wrote: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.

“To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. “These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.” If you wait for the robins, spring will be over.

Mr Buffett admitted he had no idea what the markets would do in the short-term, but drew on the experience of previous market lows to illustrate his long-term faith. In the Great Depression and during the Second World War, the market hit rock bottom long before fortunes were reversed and people started to think more positively. In the recession of the early 1980s, the best time to buy shares was when inflation was raging and the economy was not growing. “In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price,” Mr Buffett concluded. And he had a word of warning for those seeking the comfort of cash and happy headlines.

Buying shares when the news is good means buying high, while off-loading them when the gloom sets in means selling low. And cash is “a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value”. All in all, Mr Buffett subscribes to the forward-thinking philosophy of ice hockey great Wayne Gretzky: “I skate to where the puck is going to be, not to where it has been.”

The global economy may be on thin ice, but Mr Buffet appears to believe there is an open goal for anyone brave enough to go for it.

The unwillingness of the banks to lend to each other can only be caused by their belief that if they do, they will not get their money back and they will go bust. Oddly, their refusal to trust one another has led to the very thing that they were so desperately trying to avoid. Both HBOS and RBS have now lost their independence, though maybe that was the game plan in the first place. And one of the things that has been becoming ever more apparent is that the survivors of this crisis will be in a massively more powerful position than before; what we shall end up with is a greater, more robust and very well capitalized banking industry.

The falls in equity prices, despite what is reported, have had very little to do with this supposed fear of a bit of a slowdown next year and everything to do with forced liquidation of margin positions. This means that we are seeing, at last, some totally outstanding valuations in global businesses with sensible balance sheets, from which patient investors will eventually make money.

We are also witnessing an extraordinary desire by western authorities to re-inflate economies. The co-ordinated cut in interest rates was very welcome and will be followed by more, whether jointly or severally. Bad debts are being absorbed by governments, bank balance sheets will be recapitalized, by a combination of governments, sovereign wealth funds, Asian banks, private equity and by individuals.

At the start of this week, my business partner and I had an enlightening conversation about the pro and cons of buying into the markets now and it become clear that everyone is currently terrified of short term losses, and with good reason. Where there is threat, there is also opportunity however, and, although we all need to be looking at the long term potential rewards on staying true to the initial strategy where our objectives are to obtain real returns above the rate of inflation, perhaps being brave and investing more now is worthy of consideration if you have a more aggressive investment appetite????

We hear institutional cash levels are at near record levels; surely it cannot be long before the brave move back in to the markets and there can be precious few sellers left. How long before the total fear of more losses becomes the scramble to avoid being left behind once the recovery starts? It sounds a very silly hypothesis now, but it will happen.

In conclusion, we believe that holding cash as a long solution does not work because inflation will erode the real value. Real returns can only be achieved through investment into risk-based assets and unfortunately this means that capital values will fluctuate over short periods when things are tough. For the less experienced investor or those with a less aggressive investment appetite, we don’t believe that it is possible to time the entry into markets without significant risk and this is evidenced by the considerable swings in market prices, experienced in recent weeks. The best way of avoiding losses is to sit tight and accept that the long term benefits outweigh the short term risks.

We do not have any control over what is happening in the markets and what will happen in the future, in fact nobody does but there are some lessons we can learn from history which assist us in managing the behaviours of our clients, resulting in the retention of their longer term wealth.

Dalbar Inc research shows us that reacting to market volatility and uncertainty is a sure way to erode your wealth. During the 20 year period to 2006, the annualised returns achieved by an investor in the S & P 500 was 11.8% BUT… the return experienced by the average investor in the same market was only 4.3%, a difference of nearly 7%. As we all know, this happens because investors react emotionally to the fluctuations in the market and the noise surrounding it which results in a buy high, sell low strategy being adopted without intention. Putting this into perspective, if we as trusted advisers were able to stop clients reacting to this market noise, the average investor would have benefited from a staggering increase of $1.62 million in the value of their investment.

In 1974 we experienced the 4th worst 12 month fall in the FTSE all share history -55% followed by the largest 12 month rise in all share history, +136%. This clearly goes to show that you have got to be in it to win it. These figures are a perfect example of when investors are most vulnerable and when they need to hear the words “Don’t do it”. Our advice is to stay true to the longer term strategy originally set and sit tight. Time is a great healer!

The official measure of inflation, the Consumer Price Index (CPI), hit 4.4% in July while the Retail Price Index (RPI) - which is considered more relevant to households as it includes mortgage repayments - currently stands at 5%. In reality though, we think that personal inflation is in fact higher than these levels, especially for pensioners who typically spend a bigger proportion of their income on fuel, food and council tax.

Inflation is forecast to continue to rise in the coming months as we continue to see volatility in the Crude Oil Price, which in turn puts upward pressure on petrol, gas and electricity, as well as food prices. So should you secure an annuity income that rises each year in line with inflation or secure a fixed annuity?

Well it very much depends on your outlook for inflation and also more so, on how long you expect to live. The income from a standard fixed annuity will be eroded by rising inflation and thus the value of the annuity income payable in say 10 years time, will be worth a lot less in real spending terms, than it is today. In contrast, an RPI-linked annuity protects your retirement income from inflation but as the annuity provider has to pay an ever increasing level of income as the years go by, they will penalise you at outset with a lower starting pension.

Let’s look at some numbers for a male aged 65 with £100,000 fund value.

• Level annuity £7,400 pa
• RPI annuity £4,500 pa

(Source: Money facts life and pensions August 2008)

Looking at the difference in the starting income for both options therefore, assuming that the current rate of inflation of 4.4% continues, this 65-year-old male investor would only receive more total income via an RPI-linked annuity from the age of about 92. If inflation falls, the break-even point extends further.

So, what’s the answer? Opt for a standard fixed annuity and face losing out later or pay the higher price for inflation protection.

Well if you have other assets, you may decide to opt for the fixed version and invest your other non pension assets into areas that provide some inflationary protection, perhaps a share portfolio?

Or as an alternative, you could instead opt for an escalating annuity instead of an RPI linked annuity. These annuities typically increase at a rate of say 3% per annum, thus providing some protection against inflation. As inflation rarely goes below 3%, a 3% escalating annuity could be a good bet as on this basis, the breakeven point for this type of product to pay more total income than a standard annuity is around age 85, which interestingly is broadly the average life expectancy for a 65-year-old male.

Hazel Blears was on the tv news this morning, saying that, the package will be given to honest citizens who have been caught out, not irresponsible people who have taken a risk, borrowed too much, and now want someone else to bail them out. How will this be measured? Surely, I fit that category - so where’s my money?

At the risk of turning into a grumpy old man, this episode encapsulates for me everything that is wrong with society today and Governments generally, especially this one. We live in a “blame” culture where all bad things are someone else’s fault. The population is told it doesn’t have to take responsibility for its actions, and those sensible people who have taken care of their own affairs properly, are asked to foot the bill when it all goes pear-shaped for those who are irresponsible or ignorant. That’s just plain wrong.

I’ve owned four houses in the last 20 years and three of them have fallen in value, simply because I’ve been invested during difficult markets. That’s life! Why should I now have to pay for someone else’s misfortune? You took a risk, and are finding things tough. C’est la vie, mate. And as for first time buyers? Well, as I understand it, anyone in a buying position can negotiate some fantastic deals right now. House prices have fallen so this makes it more affordable to buy doesn’t it? Why do first time buyers need help? First time buyers who bought in 1991/92 made a lot of money in subsequent years when the markets recovered. The idea that they should have been given artificial incentives to buy at the same time doesn’t make sense. There is also a reality that, it is not everyone’s divine right to own a property. Some people genuinely can’t afford to buy and that’s the way it is.

People need to take responsibility and be accountable for themselves. Yes, its hard sometimes but we all have to deal with that. Prepare for it properly - asking to be bailed out at the first sign of trouble is not a long term viable option. The expression “The value of this asset can go down as well as up” is there for a reason.

The main problem here seems to be the Government’s obsession with short term, (potentially) vote winning, artificial, manipulation of taxpayer’s money. I know, lets offer to bail out some poor unfortunate people who have taken a risk and don’t want to deal with the consequences, in the expectation that we will be more popular and win votes. Mr Brown, this is the wrong message and encourages people to subscribe to the blame culture that we increasingly live in.

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.

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.

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.

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.

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.