Monthly Archives: November 2018

Brexit and your Portfolio

This week I thought I’d hand over the floor to a guest writer. So, if like me you are becoming a bit of a BOB (Bored of Brexit), here are some words of wisdom from our Investment Analyst – Tim Hale of Albion Consulting.

Whichever way one voted, it is hard not to be dismayed by the shambles that is Brexit, concocted by all sides. In the event that the current deal agreed gets voted down in Parliament, or there is no deal, there is a material chance that the government could fall. One or both of these events would come with great uncertainty.

We set out three key investment risks relating to Brexit and how sensible portfolio structures can mitigate them.

Risk 1: Greater volatility in the UK and possibly other equity markets
In the event of a poorly received deal or no deal, it is certainly possible that the UK equity market could suffer a market fall as it tries to come to terms with what this means for the UK economy and the impact on the wider global economy. A collapse of the Conservative government and a Labour victory would add further uncertainty.

Risk 2: A fall in Sterling against other currencies
In 2016, after the referendum, Sterling fell against the major currencies including the US dollar and the Euro. There is certainly a risk that Sterling could fall further in the event of a poor/no deal.

Risk 3: A rise in UK bond yields (and thus a fall in bond prices)
The economic impact of a poor/no deal and/or a high-spending socialist government could put pressure on the cost of borrowing, with investors in bonds issued by the UK Government (and UK corporations) demanding higher yields on these bonds in compensation for the greater perceived risks. Bond yield rises mean bond price falls, which will take time to recoup through the higher yields.

Mitigant 1: Global diversification of equity exposure
Although it is the World’s sixth largest economy (depending on how you measure it), the UK produces only 3% to 4% of global GDP, and its equity market is around 6% of global market capitalisation. Well-structured portfolios hold diversified exposure to many markets and companies. Changing your mix between bonds and equities would be ill-advised. Timing when to get in and out of markets is notoriously difficult. Provided you do not need the money today, you should hold your nerve and stick with your strategy.

Mitigant 2: Owning non-Sterling currencies in the growth assets
In the event that Sterling is hit hard, it is worth remembering that the overseas equities that you own come with the currency exposure linked to those assets. Remember too that a fall in Sterling has a positive effect on non-UK assets that are unhedged. The bond element of your portfolio should generally be hedged to avoid mixing the higher volatility of currency movements with the lower volatility of shorter-dated bonds.

Mitigant 3: Owning short-dated, high quality and globally diversified bonds
Any bonds you own should be predominantly high quality to act as a strong defensive position against falls in equity markets. Avoiding over-exposure to lower quality (e.g. high yield, sub-investment grade) bonds makes sense as they tend to act more like equities at times of economic and equity market crisis.

Some thoughts to leave you with ..

Even if you cannot avoid watching, hearing or reading the news, it is important to keep things in perspective. The UK is a strong economy with a strong democracy. It will survive Brexit, whatever the short-term consequences that we will have to bear, and so will your portfolio. Keeping faith with both global capitalism and the structure of your portfolio and holding your nerve, accompanied by periodic rebalancing is key. Lean on your adviser if you need support.

‘This too shall pass’ as the investment legend Jack Bogle likes to say.

If you would like to chat to us further about Tim’s words of wisdom or indeed our model portfolio’s, please do contact us.

Warnings – This article is distributed for educational purposes only and should not be considered to be investment advice.  The article contains the opinions of the author but not necessarily the firm and does not represent a recommendation of any security, strategy or investment product.  Past performance is not indicative of future results.  The value of investment can fall or rise.  

If You’re Retired; Do You Have to Travel?

A lot of people I meet say that they want to travel when they retire, so I was quite interested to read a blog I came across recently covering this point. The article touched on the fact that it almost seems as if travel is a prerequisite for a fulfilling retirement, like it’s part of the package of the successful middle-class retirement lifestyle. Individuals say, I’ve been to China and India, or walked the El Camino de Santiago, and chartered a river boat down the Rhine.

But for some people, travel is not a priority and they don’t really want to travel all that much. And when they do travel, they stay close to home. Does that make them a failure at retirement? Do people feel sorry for them, because they don’t have the imagination or the curiosity to want to visit strange, foreign lands or can’t afford to travel?

Some people do not like to fly; there’s getting to the airport, then the crowds and the process of being herded through security and corralled into a narrow aluminium tube flown by a stranger.

Many may have travelled around Europe in their younger days or maybe even the Far East, but that was when they didn’t mind sharing a bathroom with random strangers. It didn’t faze them to arrive in a city and not know where they would be sleeping that night and didn’t mind struggling to communicate with people in a different language.

To retirees who like to travel, their sense of adventure must be admired. But those that don’t shouldn’t feel that they are missing something by not liking to travel, or that they are somehow cheating themselves in their retirement years. Travel is one thing to do in retirement; but it’s not the only thing, and it’s not something we should feel required to “check off” in order to fulfil our retirement dreams.

Besides, there’s plenty to see, even if you never travel more than a couple of hundred miles from home and to some people, sharing great experiences with family and friends or pastimes within their community are just as rewarding.

So, No, you don’t have to travel in retirement. For some, retirement can indeed be fun without it.

Did You Inherit Your Beliefs About Money From Your Parents?

Parents know that children hear, see, and pick up on everything that is going on with the adults in their lives. And when you were a child, you were no different.

Many of the attitudes we have about money were formed at a very early age as we absorbed how our own parents dealt with their finances. Some of these beliefs, such as a commitment to disciplined saving, are positive. Others, like skepticism about the stock market, can be more harmful than helpful as we try to build wealth in our own lives.

Answering these four key questions can help you look at your financial upbringing with a fresh perspective. When you’re done, think about which money beliefs you want to pass on to your own kids, and which might be preventing you from living the best life possible with the money you have.

1. What was money like growing up?

Your childhood experiences of money are a composite of details both big and small.

You probably compared the comforts of your home to what you saw next door and drew some conclusions about how comfortable your family was.

Did your parents get a new car every couple of years or drive around in the same car until it died? Did you take frequent holidays? What were holidays and birthdays like?

Watching mum and dad carefully balance their bank account or set next week’s grocery budget also might have made a strong impression. And at the more serious end of the spectrum, an unexpected job loss, debilitating medical condition, or death could have had a profound impact on your family’s finances.

2. What was money like for your parents growing up?

Many baby boomers were raised by parents who had to tighten their belts during the Great Depression and World War II. They probably impressed upon your parents the value of the hard work, the importance of saving, and perhaps some real apprehension when it comes to money. Your parents may have passed on these same values to you or swung in the opposite direction and tried to make money as stress-free as possible.

How much do you know about your parents’ childhoods? If they’re still living, ask some questions that will fill in your family’s history a little more clearly. You might learn something surprising. And you might gain some insight into how their experiences of money are still affecting you.

3. What specific lessons were you taught that you have continued?

Some people grew up in households where money was tight and may have viewed people with large amounts of wealth with suspicion or resentment. In other cases, hard-working adults have admiration for such people but underestimate how much hard work, risk and discipline it takes to build greater levels of wealth. Their children can learn to do the same.

On a more positive note, your parents may also made decisions that taught you what was more important to them than money. Perhaps they sacrificed their own leisure and comforts so that you could attend a good private school.

4. What was the best thing you were taught about money?

As a child you probably rolled your eyes whenever your parents passed on their beliefs about money or started reminiscing about what money was like when they were growing up.

Now that you’re the one doing the earning, some of those lessons probably ring true. “Live on less than what you make” is hard to hear when it’s used to explain why you can’t have a new bike or take a big holiday. No child wants to sacrifice their weekends or summers working part time because their parents insist on it. But the lessons that were hard to swallow when we were young often create attitudes and habits that benefit us as adults.

The sum of all these memories, the positive and the negative, is a blueprint to your financial thinking. It’s also the schematic that we use to build your life-centred financial plan. Come in and share your blueprint with us so that together, we can lay a strong foundation for your family’s future.

Corrections and the Nature of the Markets

Currently, markets around the globe are ‘selling off’ due to worries ranging from trade policies and tariffs to rising U.S. interest rates to geopolitical concerns. Rather than be alarmed, however, we should consider whether this is merely a return to more “normal” conditions and not necessarily a sign of worse to come.

Why do we say a return to more “normal” conditions?

First, let’s think about the nature of investing and the relationship between risk and return. Also, remember that risk and uncertainty are related: the latter brings about the former, and with more uncertainty, the potential for future payoff may also be greater.

We have all been vulnerable to forgetting the nature of risk and uncertainty in the markets; the Central Banks interventions into the markets has pushed the stock market seemingly straight up since March 2009, with just a couple of corrections in between.  With higher expected returns, we should expect volatility, as that is the mechanism through which investments ultimately find their true value. When discussing corrections, we should consider three basic issues:

Why they exist,
Why they are natural, and
Why they are necessary.

Corrections (when they occur) exist because facts become more widely known and understood, or alternatively, they change altogether. News flows are constant and are almost always unpredictable. Random events confound even the most carefully-made forecasts, which then must be discarded. Conventional wisdom is re-examined, and new data provides investors with deeper ways of thinking about an investment, or even the markets as a whole. Armed with fresh knowledge, investors may change their minds. And that may mean responding with “sell” instead of “buy.”

Market movements are natural because the data does change and people, in turn, change their minds in response. In a static world, there would be no corrections – nor would there be many opportunities, either. In that world, all investments would always be priced at their “fair value” and would never deviate in a way to provide an entry point to buy a new opportunity. Investors constantly research, analyse, and evaluate investment opportunities. Information on those opportunities is constantly being released and thus is constantly changing.
Being early to capitalize on that changing information means some investors are quick to act – and when they all act at once, then the market may either surge higher or plunge lower. It is a natural course of action for market participants, upon realising the same new information, to act quickly to buy or sell.

Corrections are necessary because it is through this mechanism that risk is fairly priced. What do we mean by this? Quite simply, stocks, bonds and other investments are determined by what investors are willing to pay for them; this depends in turn on what people expect will happen in the world. The more uncertainty there is, the lower the price one is willing to pay for an investment, because there are more ways that the investment can be pushed off course. In this situation, most investors want a greater degree of protection when buying a stock – and that means a lower price. A correction, thus, is a way in which a sign that says “Special! Sale Now On!” is hung over the market, perhaps signalling buying opportunities. Indeed, it’s often the time when many investors go shopping for things they might not otherwise have bought when they were more expensive. It’s simply how the market works, much as in a department store.

In fact, it’s completely abnormal not to have corrections. We’re quite overdue, in fact. We’ve become complacent, forgotten how they feel or even what they look like. Having one, or even more of them would be a return to normal. In this case, “normal” means an environment with more volatility; that is, the very thing which investors undertake in order to receive the returns they expect. It’s a natural, expected, and customary trade-off.