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State pension age equalisation is here

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State pension age equalisation has taken place in the UK.

The gradual change now means that women qualify for their state pension from age 65, the same age as men.

State pension equalisation has taken a long time, 25 years in fact.  During that time, the age rise for women was gradually phased in, with women celebrating their 65th birthday on 6th November 2018 the first to qualify for a state pension at the same age as men.   Despite equal ages for state pensions, equality of retirement income remains a long way off.  Maike Currie, Investment Director at Fidelity International said:

“The pension system is relatively equal if people follow the same working pattern from age 20 to retirement, but they don’t.  Women are more likely to have fragmented careers, be self-employed or work flexibly during their working life as they continue to bear the brunt of the childcare or take a career break to care for sick or elderly relatives.

“Of course, these factors are increasingly affecting men too, however, the average women’s pension pot is already much lower than the average man’s so women need to have the ability to catch up. As the Cridland report pointed out, in the first year of retirement women are expected to have 25% less income than their male counterparts.”

The final report from the Cridland Review was published last year and made a number of recommendations in respect of the state pension.  Report author John Cridland, a business executive, proposed an accelerated increase in the state pension age.  It is already due to rise to age 68 between 2044 and 2046, having an impact on those born after 5th April 1977.  Cridland wants to see the state pension age rise to 68 between 2037 and 2039, bringing this increase forward by seven years.  As a result, anyone born after 5thApril 1970 would have a higher state pension age.

Further rises in the state pension age seem unavoidable in light of improving life expectancy.  Without a higher state pension age, people living for longer would make the state pension unaffordable for the taxpayer.

The Cridland Review also recommended abolishing the ‘triple lock’ for increasing state pension payments each year.  This currently gives state pensioners a degree of protection from price inflation, with their state pension income rising each year in line with the greater of average earnings, price inflation or 2.5%. Instead of having this triple lock in place, John Cridland proposed that state pensions in the future rise in line with average earnings.

One group who are unhappy with the equalisation of state pension ages for men and women are 1950s born women represented by the Women Against State Pension Age Inequality (WASPI) campaign group.  They are arguing for government compensation after claiming to be unaware their state pension age would rise, as the government did not routinely write to women to let them know about the change.

Your state pension is likely to form an important part of your total income in retirement.  It’s important to understand when you will start to receive a state pension income and how much this is likely to be.  A good place to start is requesting a free state pension forecast at gov.uk/check-state-pension and then speaking to your financial planner to incorporate these figures within your overall plan for retirement income.

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.

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.

The Financial Crisis – 10 Years On

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Financial Crash

The Financial Crisis – 10 Years On

Incredibly it is now the 10-year anniversary of when, in early October 2007, the American equity
market index, the S&P 500 hit what was its highest point before losing more than half its value over
the next 18 months during the global financial crisis.

Over the coming weeks and months, as other anniversaries of major crisis-related events pass (for
example, 10 years since the bank run on Northern Rock or 10 years since the collapse of Lehman
Brothers), there will probably be a steady stream of retrospectives on what happened as well as
opinions on how the environment today may be similar or different from the period leading up to the
crisis. It is difficult to draw useful conclusions based on such observations – financial markets have a
habit of behaving unpredictably in the short run. There are, however, important lessons that investors
might be well-served to remember: Capital markets have rewarded investors over the long term, and
having an investment approach you can stick with—especially during tough times—may better
prepare you for the next crisis and its aftermath.

THE BENEFIT OF HINDSIGHT

In 2008, the equity market dropped in value by almost 50%. Now 10 years on from the crisis, it might
make it easier to take the past in our stride. The eventual rebound and subsequent years of double-
digit gains have also likely helped in this regard. However, while the events of the crisis were
unfolding a future of this sort looked anything but certain. Headlines such as “Worst Crisis Since ’30s,
With No End Yet in Sight,” 1 “Markets in Disarray as Lending Locks Up,” 1 and “For Stocks, Worst
Single-Day Drop in Two Decades” 2 were common front page news. Reading the news and opening
quarterly statements or going online to check an account balance were for many, stomach-churning
experiences.

While being an investor today (or during any period, for that matter), is by no means a worry-free
experience, the feelings of panic and dread felt by many during the financial crisis were distinctly
acute. Many investors reacted emotionally to these developments. In the heat of the moment, some
decided it was more than they could stomach, so they sold out of equities. On the other hand, many
who stayed the course and stuck to their approach, recovered from the crisis and benefited from the
subsequent rebound in capital markets.

It is important to remember that this crisis and the subsequent recovery in financial markets was not
the first time in history that periods of substantial volatility have occurred. Exhibit 1 below helps
illustrate this point – it shows the simulated performance of a balanced investment strategy following
several crises, including the bankruptcy of Lehman Brothers in September of 2008 which took place in
the middle of the financial crisis. Each event is labeled with the month and year that it occurred or
peaked.

Exhibit 1. The Market’s Response to Crisis

Simulated Performance of a Balanced Strategy: 60% Stocks, 40% Bonds

WGgraph1

1. washingtonpost.com/wp-dyn/content/article/2008/09/17/AR2008091700707.html.
2. http://nytimes.com/2008/09/30/business/30markets.html.

(Cumulative Total Return)

Exhibit 2. Performance as at 30 September 2017

WGgraph2

Past performance (including hypothetical past performance) does not guarantee future or
actual results.

Although a globally diversified balanced investment strategy invested at the time of each event would
have suffered losses immediately following most of these events, financial markets did recover, as
can be seen by the three-, five- and ten-year cumulative returns shown in the exhibit. In advance of
such periods of discomfort, having a long-term perspective, appropriate diversification, and an asset
allocation that aligns with your risk tolerance, financial goals and the life you want, can help investors
remain disciplined enough to ride out the storm. A wealth manager or financial planner can play a
critical role in helping to work through these issues and in counseling investors when things look their
darkest.

CONCLUSION

In the mind of some investors, there is always a “crisis of the day” or potential major event looming
that could mean the beginning of the next fall in markets. As we know, predicting future events
correctly, or how the market will react to future events, is a difficult exercise. It is important to
understand that market volatility is a part of investing. To enjoy the benefit of higher potential returns,
investors must be willing to accept increased uncertainty. A key part of a good long-term investment
experience is being able to stick with your investment strategy, even during tough times. A
well‑thought‑out, transparent investment strategy can help you be better prepared to face
uncertainty and may improve your ability to stick with your plan and ultimately capture the long-term
returns of capital markets.