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Long Term Investments

How to keep your investment head during Brexit

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As the old Chinese curse has it, “May you live in interesting times”.  With Brexit negotiations ongoing, it’s certainly interesting times in British politics, with likely consequences for investment markets.

There’s still a great deal of uncertainty over the outcome of Brexit. The anticipated ‘decisive vote’ has been postponed, for now, so Theresa May can seek more reassurances around the Irish border backstop.  We’ve also had confirmation from the European Court of Justice that the UK can unilaterally withdraw its Article 50 notice and effectively cancel Brexit, without seeking approval from other EU countries.

We can’t know for sure what is going to happen next.

One possible scenario is a lost vote in the House of Commons followed by the resignation of Theresa May, and then a new leadership election within the Conservative Party; possibly even a General Election in the New Year.

We do know that investment markets dislike uncertainty.  As we move ever closer to the 29th March departure date, that uncertainty only grows.  With global markets already displaying some volatility in recent months, that growing uncertainty could result in greater volatility, market corrections and (understandably) nervous investors.

Despite this uncertainty and its potential impact on investment portfolios, at Wells Gibson, we are clear about how we will navigate any choppy investment market conditions ahead.  In simple terms, our approach towards investment planning and management remains unchanged.  Here’s why.

The portfolios we recommend for clients are globally diversified. This means that we don’t recommend putting all of your eggs in one basket, instead spreading portfolios across several investment asset classes, sectors and themes.  This diversification is a really important aspect of risk management when investing money.  Furthermore, it’s probably the only free lunch available when investing.

From the perspective of any Brexit induced volatility, diversification means our clients are not overly exposed to investment assets which are most likely to respond to domestic turmoil.  It means that, when the newspapers and newsreaders are being sensationalist and screaming about billions of pounds being wiped off the value of the FTSE 100, this is only one part of your investment portfolio.

In recent years, this diversification within the portfolios we recommend and manage has moved further from the UK to include a higher proportion of global assets.  Thinking about the UK equity holdings within client portfolios, there’s an interesting consequence of the high proportion of overseas earnings from FTSE 100 companies, for example.  In the aftermath of the Brexit referendum, many investors were surprised to witness the FTSE 100 rise by more than 10% in three months.  During this time, the weakness of Pound Sterling was boosting the profits of FTSE 100 companies with overseas earnings.  Around 70% of FTSE 100 earnings come from outside of the UK, making a weak Pound Sterling beneficial for these companies.

We’re not suggesting that a Brexit meltdown, leading to a collapse in the Pound, will have the same positive impact on UK equities next time, but it’s worth keeping in mind that things aren’t always as simple as they first seem when it comes to investing money.

Our approach towards investment advice and management also remains unchanged because our clients are long-term investors.  Any increased volatility we experience over the coming days, weeks and months will likely be short-term, having little meaningful impact on the long-term performance of portfolios.  One exception could be where clients are making withdrawals from their portfolios in retirement and in this case, we can allocate a sufficient amount to cash in order to avoid needing to drawdown from invested assets during periods of extreme market correction.

We’re staying the course because we know that attempting to time investment markets is futile.  When markets are volatile, there’s always a temptation to try and sell before they have fallen to the bottom and then buy again before they rise to the top.  Nobody can do this consistently well. The more likely outcome is selling low before buying high and, if you do this on enough occasions, this can lead to wealth destruction.

We understand that it can be unpleasant to watch investment market volatility and experience falls in the value of your portfolio.  Regardless of how often we remind investors and our clients that volatility is a normal part of the long-term investing journey, our heart is bound to overrule our head on occasion, especially when the media does its level best to be sensationalist.

If you’re feeling nervous about investment markets in the wake of the Brexit news this week, talk to Wells Gibson.  We’re always happy to discuss any concerns you might have.

Why market timing is futile and it’s time in the market that counts

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There’s a lot for investors to worry about.  High market valuations, rising interest rates, the prospect of a no-deal Brexit and escalating trade tensions fuelled by Donald Trump, all raise the likelihood of greater market volatility.

When markets are more volatile and investor sentiment turns negative, resulting in short-term falls in value, it can be tempting to try and time the markets.  Timing the markets involves attempting to sell before equity markets hit the bottom and then buying before they start to rise.  This sounds good in theory but, in practice, it doesn’t usually work out that way.  Instead, investors can find themselves selling low and buying high!  If investors repeat this process enough times they will soon run out of money to invest.  At the very least, the value of their portfolios will take a big hit.

One of the biggest problems with attempting to time the market is that you can easily miss out on a few of the best days of returns.  Do this, and your overall long-term returns will be significantly worse.  According to a study from Fidelity International a couple of years ago, an investor who invested £1,000 in the FTSE All-Share index 30 years ago, but missed the best 10 days in the market, would have achieved an annualised return of 7.09% and ended up with a total investment of £7,811.55.  This compares with an annualised return of 9.38% and an investment worth £14,733.64 if they had stayed in the market the whole time – an opportunity loss of £6,922.09.  If an investor had missed the best 20 days, their annualised return would be 5.55%, which would have resulted in an even worse shortfall of £9,676.56.

This research should remind us that volatility is the price we pay as investors, for long-term outperformance from equities, relative to other investment asset classes.  The potential for long-term returns comes from risk in the form of market volatility.

There are significant risks associated with trying to time the markets.  This is because it is so difficult to predict the best time to get out and then get back in to equity markets, during periods of market volatility.  These risks are magnified by the impact of the very best and worst days of market performance tending to be grouped together during periods of increased market volatility.

A more sensible approach to investing is to keep your money exposed to the markets throughout the entire market cycle, during the ups and the downs.  There’s an old stock market adage which says time in the market matters more than timing the market.  At Wells Gibson, we would tend to agree.

When markets are especially volatile, the value we add as financial planners, is to guide our clients and keep them focused on their long-term, lifestyle, financial and investment objectives.  Furthermore, because we can demonstrate the value of time in the market, and the futility of market timing, we are able to secure the best long-term results for our clients.

If you have been tempted to try market timing in the past or perhaps, during the current bout of market volatility, why not give us a call and see if we can keep you on the right track.

Investing can bring you closer to your financial goals than cash

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Should you invest your money to achieve long-term financial goals or keep the money safely in cash?

This is a common dilemma and can be a difficult decision, especially for first-time investors who are yet to experience the ups and downs of stock market investing.  Yet, history tells us that investments typically outperform cash over longer periods of time.

New research has shown that those who invested in a stocks and shares Individual Savings Account (ISA) 15 years ago could have enjoyed gains of almost double those experienced by individuals leaving money in cash over the same period.  The research from Fidelity International also pointed out a gender difference when it comes to the preference to invest or leave money in cash.  Almost half of women prefer to save in cash, which could be detrimental to achieving their long-term financial goals.

This is supported by new figures from HM Revenue & Customs (HMRC) which show more women subscribing to cash ISAs than men.  More men than women were shown to invest their ISAs than open a cash ISA.

Fidelity carried out the analysis based on using the full ISA allowance invested in an index tracker fund which aimed to track the performance of the FTSE All Share and compared this to average cash savings rates over 5, 10 and 15 years.  This analysis demonstrates the cost of cash, with the investment worth £20,174 more over 5 years, £55,541 more over 10 years and £104,217 more over 15 years.  They concluded that, by investing in the stock market, women (and men) can reach their financial goals sooner.  These financial goals might include building up a deposit for a first home, paying school fees or saving for retirement.

Earlier research from Fidelity in their Financial Power of Women report found that 43% of women were likely to save using a cash ISA in the next two years compared to the 19% who said they would invest via a stocks and shares ISA.  This finding was based on a survey of more than 1,000 men and 1,000 women, who were asked about their views on money and investing.

Maike Currie, Investment Director at Fidelity International, said:

“Many women will have long-term goals and diligently stick to these whether saving for a child’s education or putting something away for a comfortable retirement.  But while we tend to be diligent and committed savers, we often steer clear of the stock market altogether.

“Factors such as the gender pay gap, time off work to cover childcare and more women engaged in part-time work already contribute to a significant gap in women’s’ earnings versus their male counterparts.  That’s why it’s important not to put yourself at a further disadvantage by not making your money work as hard as you are.  With interest rates at record lows for almost a decade now and inflation rapidly rising, anyone holding an investment in cash will struggle to achieve a decent real return – that’s a return that keeps abreast of rising prices.

“Granted, the stock market is a riskier option than cash, but it is a well-established fact that over the long-term equities tend to outperform cash.  Women risk falling into a glaring ‘investment gap’ by leaving their money languishing in cash.  Don’t lose out over the long term and run the risk of missing out on your long term financial goals – take the plunge and get invested.”

There is of course an important role for cash in long-term financial planning.  It’s usually recommended to hold a short-term cash emergency savings fund in order to cover between three to six months essential expenditure.  Cash is also often preferable to investments where there is a short time horizon for your financial goals, such as buying a property in the next few years.

As investments can go down as well as up in value, the certainty of cash is important where a known amount of money is required in the short-term however, for longer-term financial goals, including retirement planning, the buying power of cash will typically be eroded by price inflation over time.

Investing money does involve risk and exposure to volatility, so you need to have sufficient tolerance for risk, capacity for any losses and the need to experience investment returns to achieve your financial goals.

Please get in touch if you would like to talk about the difference between saving in cash and investing your money, and how to determine a suitable allocation of cash and investments within your portfolio.

Cost of pension and investment advice revealed

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What does it cost to get professional financial advice in respect of your pension pot or investments?

According to some new research, the average cost of pension financial advice is close to £3,000.  The research, carried out by consumer group Which?, looked at the fees charged by more than 100 financial advisers.  Its findings tell us about the typical cost of pension financial advice but also about the range of charging structures used by different financial advisers.

In order to carry out the research, Which? presented five different advice scenarios to 102 different independent financial advisers.

According to their research, it costs an average of £2,897 to get advice on the consolidation of a number of pension pots worth a total of £150,000 into a single pension plan.  This average covers a wide range of different charging levels for the same activity, with the highest fee quoted at £6,000.

For retirement advice on a pension pot worth £100,000, the average cost of advice was £1,837. Which? found the lowest price quoted for this type of advice was £300 and the highest was £4,000.

In respect of taking tax-free cash from a pension pot worth £150,000 and then entering into a drawdown plan, the average price quoted was £2,383.

The average advice charged quoted for investing an inheritance worth £60,000 was £1,472, and the advisers surveyed quoted an average of £524 for an annual review of a portfolio of investment funds valued at £60,000.

Which? also found that only one in five of the advisers they looked at published full details of their advice charges on their websites, in respect of the five different advice scenarios they considered. This meant the researchers had to call the advisers to determine the level of fees that would be charged.  They found that a further 34% of advisers had published a rough indication of costs on their websites, or alternatively had published their key facts document which details of some fees and charges.  However, nearly half of adviser websites contained no information about advice fees.

Calling the advisers who were included in the survey resulted in a better experience, with 87% of those called prepared to offer a rough idea of the charges involved for a scenario during an initial telephone conversation.  Most of the advisers called offered this price information without being specifically asked.

In terms of advice charging structures, which differ between advisers, the survey found that most advisers are charging an upfront fee which is calculated as a percentage of the amount to be invested. In fact, 79% of the independent financial advisers charged a fee on this basis.  The average upfront fee being charged was 2.9% of the amount invested which incidentally compares to Wells Gibson’s typical initial charge of 1%.

Which? found that a similar proportion of advisers were using this same method of charging for ongoing advice and annual reviews, with 87% charging based on a percentage of assets under advice.  The average rate being charged for ongoing advice and annual reviews was 1.3% and this compares to Wells Gibson’s typical ongoing charge of 1% for comprehensive Wealth Planning.

When considering financial advice costs, it’s important to keep in mind the value it can bring especially if your financial adviser or planner stops you making the wrong decisions, at the wrong time and for the wrong reasons!  There are some free alternatives, including the government-backed Pension Wise service but these can only offer information or guidance, rather that financial planning and advice which is tailored to your personal and financial position and lifestyle, financial and investment goals.

Pensions can be complex, with a wide range of choices and options to consider.  When you have worked hard and saved money for your entire working life, making the best possible decisions about your pension pots is essential.

Where’s the Value?

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From 1975–2017 the value premium[1]in Europe has had a positive annualised return of approximately 2.2%.[2]In six of the last ten calendar years, however, the value premium in Europe has been negative. The same trend has been seen across developed markets globally.

[1]. The value premium is the return difference between stocks with low relative prices (value) and stocks with high relative prices (growth).

[2]. Computed as the return difference between the Fama/French Europe and Scandinavian Value Research Index and the Fama/French Europe and Scandinavian Growth Research Index. Fama/French indices provided by Ken French. Index descriptions available upon request.

This has prompted some investors to wonder if such an extended period of underperformance may be cause for concern. But are periods of underperformance in the value premium that unusual? We can look to history to help make sense of this question.

There are numerous empirical studies documenting the value premium using different empirical techniques on 90 years of US data as well as over 40 years of data for developed markets outside of the US that point to reliably positive premiums in the long term.

SHORT-TERM RESULTS

Exhibit 1 shows yearly observations of the US value premium going back to 1928. We can see the annual arithmetic average for the premium is close to 5% in USD terms, but in any given year the premium has varied widely, sometimes experiencing extreme positive or negative performance. In fact, there are only a handful of years that were within a 2% range of the annual average—most other years were farther above or below the mean. In the last 10 years alone there have been premium observations that were negative, positive, and in line with the historical average. This data helps illustrate that there is a significant amount of variability around how long it may take a positive value premium to materialise.

[1]. The value premium is the return difference between stocks with low relative prices (value) and stocks with high relative prices (growth).
[1]. Computed as the return difference between the Fama/French Europe and Scandinavian Value Research Index and the Fama/French Europe and Scandinavian Growth Research Index. Fama/French indices provided by Ken French. Index descriptions available upon request.

1

In US dollars. The one-year relative price premium is computed as the one-year compound return on the Fama/French US Value Research Index minus the one-year compound return on the Fama/French US Growth Research Index. Fama/French indices provided by Ken French. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actualportfolio.  Past performance is no guarantee of future results.

LONG-TERM RESULTS

But what about longer-term underperformance? While the current stretch of extended underperformance for the value premium may be disappointing, it is not unprecedented. Exhibit 2 documents 10-year annualised performance periods for the value premium within the US market, sorted from lowest to highest by end date (calendar year).

This chart shows us that the best 10-year period for the value premium was from 1941–1950 (at top), while the worst was from 1930–1939 (at bottom). In most cases, we can see that the value premium was positive over a given 10-year period. As the arrow indicates, however, the value premium for the most recent 10‑year period (ending in 2017) was negative. To put this in context, the most recent 10 years is one of 13 periods since 1937 that had a negative annualised value premium. Of these, the most recent period of underperformance has been fairly middle-of-the-road in magnitude.

  • Exhibit 2. Historical Observations of 10-Year Premiums, Value minus Growth: US Markets 10-Year Periods ending 1937–2017

2

In US dollars. The 10-year rolling relative price premium is computed as the 10-year annualised compound return on the Fama/French US Value Research Index minus the 10-year annualised compound return on the Fama/French US Growth Research Index. Fama/French indices provided by Ken French. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.Past performance is no guarantee of future results.

While there is uncertainty around how long periods of underperformance may last, historically the frequency of a positive value premium has increased over longer time horizons. Exhibit 3 shows the percentage of time that the value premium was positive over different time periods going back to 1926 for the US market and 1975 for developed markets outside of the US. When the length of time measured increased, the chance of a positive value premium increased.

  • Exhibit 3. Historical Performance of Premiums over Rolling Periods, US Markets, July 1926–December 2017

3

Historical Performance of Premiums over Rolling Periods, Developed ex-US, January 1975–December 2017

4

In US dollars. Based on rolling annualized returns using monthly data. Rolling multiyear periods overlap and are not independent. Fama/French indices provided by Ken French. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

For example, we can see that the realised value premium over a one-year horizon (using overlapping periods) has been positive around 61% to 69% of the time across US and developed ex US markets. When the time period measured is lengthened to 10 years, the frequency of positive average premiums increased to 84% and above.

CONCLUSION

What does all of this mean for investors? While a positive value premium is never guaranteed, the premium has historically had a greater chance of being positive the longer the time horizon observed. Even with long-term positive results though, periods of extended underperformance can happen from time to time. Because the value premium has not historically materialised in a steady or predictable fashion, a consistent investment approach that maintains emphasis on value stocks in all market environments may allow investors to more reliably capture the premium over the long run. Additionally, keeping implementation costs low and integrating multiple dimensions of expected stock returns (such as size and profitability) can improve the consistency of expected outperformance.

Source: Dimensional Fund Advisors LP.
The views and opinions expressed in this article are those of the author and not necessarily those of Dimensional Fund Advisors Ltd. (DFAL). DFAL accepts no liability over the content or arising from use of this material. The information in this material is provided for background information only.  It does not constitute investment advice, recommendation or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision.
The content, style and messages the material delivers are presented for consideration and should be tailored to your firms own beliefs, message and brand.
DFAL issues information and materials in English and may also issue information and materials in certain other languages. The recipient’s continued acceptance of information and materials from DFAL will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.
Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to an affiliate of Dimensional Fund Advisors Ltd.
The Dimensional and Fama/French Indices reflected above are not “financial indices” for the purpose of the EU Markets in Financial Instruments Directive (MiFID). Rather, they represent academic concepts that may be relevant or informative about portfolio construction and are not available for direct investment or for use as a benchmark. Their performance does not reflect the expenses associated with the management of an actual portfolio. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Descriptions of the Dimensional and Fama/French indexes available upon request.
RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. Results shown during periods prior to each Index’s index inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.