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Long Term Investments

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.

Recent Market Volatility

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Recent Market Volatility

After a period of relative calm in the markets, in recent days the increase in volatility in equity markets has resulted in renewed anxiety for many investors.

While it may be difficult to remain calm during a substantial market decline, it is important to remember that volatility is a normal part of investing.  Additionally, for long-term investors, reacting emotionally to volatile markets may be more detrimental to portfolio performance than the drawdown itself.

INTRA-YEAR DECLINES

Exhibit 1 shows calendar year returns for the US equity market, the world’s biggest, since 1979, as well as the largest intra-year declines that occurred during a given year.  During this period, the average intra-year decline was about 14%.  Approximately half of the years observed had declines of more than 10%, and around a third had declines of more than 15%.  Despite substantial intra-year drops, calendar year returns were positive in 32 years out of the 37 examined.  This goes to show just how common market declines are and how difficult it is to say whether a large intra-year decline will result in negative returns over the entire year.

Exhibit 1. US Market Intra-Year Gains and Declines vs. Calendar Year Returns, 1979–2017

Picture1

In US dollars.  US Market is measured by the Russell 3000 Index.  Largest Intra-Year Gain refers to the largest market increase from trough to peak during the year.  Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year.  Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.

Past performance is not a guarantee of future results.

REACTING IMPACTS PERFORMANCE

Further complicating the prospect of market timing being additive to portfolio performance is the fact that a substantial proportion of the total return of equities / shares over long periods comes from just a handful of days.  Since investors are unlikely to be able to identify in advance which days will have strong returns and which will not, the prudent course is likely to remain invested during periods of volatility rather than jump in and out of equities / shares.  Otherwise, an investor runs the risk of being on the sidelines on days when returns happen to be strongly positive.

Exhibit 2 helps illustrate this point.  It shows the annualised compound return of the S&P 500 Index going back to 1990 and illustrates the impact of missing out on just a few days of strong returns.  The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days.  The data shows that being on the sidelines for only a few of the best single days in the market would have resulted in substantially lower returns than the total period had to offer.

 Exhibit 2. Performance of the S&P 500 Index, 1990–2017

Picture2

In US dollars.  For illustrative purposes.  The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s).  Annualised returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global.  All rights reserved.  One-Month US T- Bills is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values.

Past performance is not a guarantee of future results.

CONCLUSION

While market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term declines could prove more harmful than helpful.  By adhering to a well-thought-out investment plan, ideally agreed in advance of periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty.