Monthly Archives: April 2015

It’s a marathon, not a sprint

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For many, it’s tempting to judge their financial advisers on the recent performance of their investment portfolio. Indeed, for those advisers whose business models are based on the promise of outperforming the competition, such judgements are justified. However, for advisers such as ourselves, such comments fail to understand the value that a good adviser delivers both in terms of investments and the fact that no manager can control the returns that the market delivers.

Our aim as financial planners is to deliver a long-term strategy for our clients, which will involve a discussion about their ‘pre-race’ tactics to ensure they don’t get involved in a ‘fast start’. Instead, we advise a steady pace throughout, with the facility to change pace as the race develops. We’re happy to hold your hand along the way, rather than just at the beginning and the end.

Our role as your investment coach includes five key tasks which, when seen as one, provide significant value.

  1. Structure. The first and most critical step is getting the portfolio structure which is right for you. This must be based on your emotional and financial tolerance to take risks. This involves selecting sensible risks to take and then using high quality, low-cost funds, designed to capture the rewards that markets can deliver.
  2. Governance. You should make sure that your portfolio strategy and the funds that make this up continue to deliver the greatest chance of a successful outcome. An important element, but less obvious, part of this is our role in preventing you investing in fad or ‘too good to be true’ investment products.
  3. ‘Hand-holding.’  The hardest part of investing is having the confidence and emotional fortitude to stick with the programme through thick and thin. When markets are going up or down with great magnitude (as they inevitably do) our emotions tend to kick in. This will result in either greed or fear, often leading to the reduction of wealth through a ‘buy-high’ or ‘sell-low’ strategy. Our role is to coach you and prevent you from following the crowd or listening to the media noise, which so often leads to wealth destroying actions.
  4. Rebalancing. Over a period of time, your portfolio structures drift due to market movements. This can results in either too much risk because the equities in your portfolio have increased, or too little risk because the equities in your have reduced in value. By rebalancing you can ensure that the risk level of the portfolio remains where it is specifically designed to be. While at times rebalancing can feel counter-intuitive, it’s our role to recommend you rebalance when it is right to do so, free from emotion.
  5. The other stuff. Our job is to take care of the menial, boring – yet highly valuable – administrative functions. This includes ensuring your ISA and pension contributions are used and that capital gains are taken in a controlled manner, avoiding as little time out of the market as possible. We all hate paperwork so we aim to take care of it for you.

Carpenter Rees is there for you to provide perspective, and help you keep the faith in the investment strategy.

MasterChef of Investing

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I’m a big fan of the MasterChef TV programme and, as this week is the final of the current series, I decided to ignore all the election stuff and illustrate the similarities between MasterChef and investing.

Image courtesy of the BBC

In the programme contestants face a series of cooking challenges and many things can and do go wrong – low quality ingredients, inadequate preparation and poor implementation all play their part. Investing can be a bit like this too.

The world of investment consists of two broad approaches. The first is the traditional active one, where managers try to find mis-priced securities, or seek to time their buy or sale points in the market. This is similar to the challenge in MasterChef, when a contestant has to invent a new dish within a set time frame. The chef commits to their chosen recipe, but ends up racing against time locked into particular ingredients to create a single dish. It may work out, but if they lose attention for a moment then the dish is ruined and they have nothing to fall back on.

Likewise, the active investment manager locks in on his best ideas and finds himself with little flexibility to move; he is restricted by time as he’s trying to trade on information he believes is not reflected in the prices of the stock. If it doesn’t work, he does not have a Plan B.

If you plan to stand out from the crowd, you are going to build cost and complexity into your process. Using a cooking analogy, the price of ingredients (out of season asparagus, for example) is going to be secondary to making an impact. Once you have committed to your dish, there is no changing tack.

The second approach to investing is when the investment manager seeks to track as closely as possible to a commercial index. The goal here is not to stand out – this is most like the challenge in MasterChef, where the contestants have to cook a standard popular dish with set ingredients.

In this case, the ingredients (or investments in the case of the investment manager) are known and it is just a matter of assembling them. The drawback of this particular approach is the absence of flexibility. The dictated menu may not suit everybody; it may be the best lasagne in the world, but if your diners don’t like pasta you have a problem.

However, what if there was a system that combined the creativity of the first approach with the simplicity of the second? In this case, the focus shifts from being different for the sake of it, or following someone else’s recipe, to drawing from a range of ingredients to produce a diverse menu that suits a range of tastes.

In this third approach, our contestants do not face unnecessary constraints in terms of time or ingredients. Instead, they assemble a broad selection of dishes from multiple ingredients suitable for the season and at a time of their choosing. The difference here is that the chefs are focusing on what they can control and eliminate elements that may restrict their choices. The ultimate aim is to efficiently and reliably provide meals that suit a range of palettes.

In the world of investing, this third way is the optimal approach. Picking stocks and timing the market, like making brilliant off-the-cuff meals – in any condition, in an efficient and consistent manner – is tough even for the master. Cooking meals off a provided menu (index managers) can be inflexible and costly.

The third way is what we believe in and why we choose investment managers who do not have to outguess the market to get a good result. They do not have to lock in on a couple of their best ideas and hope they turn out, and neither do they have to contract the job out to a commercial index provider. They design diverse funds that take advantage of the aspects of expected returns and build flexibility into the system, so that an efficient and reliable investment solution is served.

The MasterChef of Investing.

We’re only human

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I thought I’d use one of the sketches by Carl Richards from his latest book, The One Page Financial Plan, which I’m currently reviewing  – so far it’s excellent.

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The illustration is making the point that the best financial plan has nothing to do with what the markets are doing, what the politicians are saying, or the hot share tip from the guy at the golf club – it’s all about what is most important to you.

We’ve all made financial mistakes, as we’re all human and being human means we’re sometimes prone to irrationality. Bad decisions about money are not failures; rather what happens when emotional creatures make decisions about the future with limited information. They are things we learn from and something we can indeed plan for.

When we develop a financial plan, we cannot expect perfection. However, we can make informed decisions and adjust them over the years. We are going to make the best decisions we possibly can based on academic and trusted research, but we cannot obsess over getting these exactly right. There is no magic formula and research shows us that we will very rarely find the next hot share investment sector or fund.

Therefore, we collaborate with you to determine what is most important to you, what does money mean to you, and then we put a structured plan together to meet your aspirations.  In other words, you become the central focus of the plan, and not the fund manager.

Fee fi fo fum

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The Pensions Minister, Steve Webb, has launched a ‘full-frontal assault’ on pension fund charges, proposing a cap on the management fees of certain new pension schemes. He points out that while management fees of small percentages sound low, they accumulate to become giant sums of money over a lifetime.

The point he makes about the effect of charges applies to all long-term investment accounts, not just pensions. This is why we take management fees and other charges seriously and when considering investment options, select companies that seek to give you the benefits of investing, without eroding those benefits through high charges and fees.

What’s important to note is that this focus on fees and charges does not stop at the annual management charge, which is only a part of the cost of investing.  It covers the manager’s costs, but not the cost of trading shares, taxes and other expenses related to running investment funds. In funds where shares are traded in high volume, these other expenses can be surprisingly high.

When selecting investments for our clients’ portfolios, we select firms who aim to minimise these frictional forces and reduce their impact. For example, their investment style means they trade very little and, when they do, it is with industry-leading efficiency.

We understand the impact of fees and charges on long-term investment returns and see it as part of our job to ensure you retain more of your wealth than the giant fund manager.