Now you can “Like it AND Lump it” …

Now that the new pension flexibilities have been with us for two months, a lot of the devilish details have now come to light.

So, what are the flexibilities? Well, that depends upon what type of pension you have:

  • Defined Benefit / Final Salary – Due to the underlying guarantees you have within these schemes, the full flexibilities are generally not available to you.  If your scheme is from the private sector, or is a ‘funded’ public sector scheme, you may have the choice to transfer out in order to access the flexibilities via a different type of pension arrangement.
  • Other Pensions – There are lots of names for the other types of pensions, but the most common are generally known as personal pensions or SIPPs.  These schemes can offer full or partial flexibility to you.

 In a nutshell, the new freedoms allow you to take what you want from your pension, when you want after age 55.  Twenty five per cent of the fund taken will be your tax free amount; the remainder will be treated as an income payment and taxed accordingly.  Generally, people already in drawdown will be able to access the new flexibilities quite easily; existing annuitants will have to wait a little longer to see if they can access a pot of cash instead of their guaranteed income.

 Whilst this breaks the issue of people not liking pensions because they cannot get their money back, it does place a lot of responsibility back on the individual to ensure that they have thought this through.

 Things you should consider should include:

  • Can you meet your cash requirement from another source?
  • Do you have sufficient other income to meet your expenditure requirements, both now and in the future, to allow you to cash your pension in?
  • Do you want to continue to pay in to a pension? By taking money out, the maximum tax efficient contribution will decrease.
  • Do you receive any means-tested benefits? The amount you take that is not tax free is deemed to be income and so should be declared and will affect these benefits.
  • Can you afford to pay the tax? Following changes introduced by HMRC, not all pension providers can accurately deduct the correct amount of tax. This usually results in a large overpayment to HMRC. You then have to reclaim the overpayment back – essentially, do not expect a straight forward 20 per cent to be deducted, it could be up to 45 per cent.

 So, at the end of all of that, yes you can ‘have your cake and eat it’, but it could add a serious amount of weight to your worries (do you see what I did there!) – both now and in the future, if you do not have all the facts and plan accordingly.

Navigating your way along the Investment Highway!

Owners of all-purpose motor vehicles often appreciate their cars most when they leave smooth city roads for rough gravel country lanes. In investment, highly diversified portfolios can provide a similar reassurance.

In blue skies and open roads, city cars might cruise along just as well as sturdier SUV’s, but the real test occurs when the road and weather conditions deteriorate.

That’s why people who travel through different terrains often invest in a SUV that can accommodate a range of environments, without sacrificing too much in fuel economy, efficiency and performance.

Structuring an appropriate portfolio involves similar decisions – you need an allocation that can withstand a range of investment climates, while being mindful of fees and taxes.

When certain sectors or stocks are performing strongly, it can be tempting to chase returns in one area. But, if the underlying conditions deteriorate, you can end up like a motorist with a flat on a country lane and without a spare.

Likewise, when the market performs badly, the temptation might be to hunker down completely. However, if the investment skies brighten and the roads improve, you can risk missing out on better returns elsewhere.

One common solution is to shift strategies according to the climate. This is a tough, and potentially costly, challenge, however. It is the equivalent of keeping two cars in the garage when you only need one; you’re paying double the insurance, double the registration and double the upkeep costs.

An alternative is to build a single diversified portfolio. This means spreading risk in a way that helps ensure your portfolio captures what global markets have to offer, while reducing unnecessary risks. In any one period, some parts of the portfolio will do well, where others will do poorly. You can’t predict which, but that is the point of diversification.

Now, it is important to remember that you can never completely remove risk in any investment. Even a well-diversified portfolio is not bulletproof. We saw that in 2008-09 when there were broad losses in all markets.

Despite this, you can still work to minimise risks you don’t need to take. These include exposing your portfolio unduly to the influences of individual stocks, sectors, countries or relying on the luck of the draw.

Examples include those who made big bets on mining stocks in recent years, or on technology stocks in the late 1990s. These concentrated bets might pay off for a little while, but it is hard to build a consistent strategy out of them. What’s more, those fads aren’t free; it’s hard to get your timing right and it can be costly if you’re buying and selling in a hurry.

By contrast, owning a diversified portfolio is like having an all-weather, all-roads, fuel-efficient vehicle in your garage. This way, you’re smoothing out some of the bumps in the road and taking out the guesswork.

Because you can never be sure which markets will outperform from year to year, diversification increases the reliability of the outcomes and helps you to capture what the global markets have to offer.

Add discipline and efficient implementation to the mix and you get a structured solution that is both low-cost and tax-efficient.

Just as expert engineers can design fuel-efficient vehicles for all conditions, astute financial advisers know how to construct globally-diversified portfolios to help you capture what the markets offer in an efficient way, while reducing the influence of random forces.

There will be rough roads ahead, for sure. But with the right investment vehicle, the ride will be a more comfortable one.


Spoiler Alert!

Guess what?  … Spoilers can actually increase your enjoyment!  It’s true!

A study by Nicholas Christenfeld and Jonathan Leavitt of UC San Diego’s psychology department, found that people who ‘spoiled the story’ by skipping to the end first actually enjoyed the story more.

This may explain the popularity of the long running TV detective show Columbo.  Viewers knew who had committed the murder and how it was done right at the start and got to enjoy watching Columbo piece it all together.

Psychologists theorise “that once you know how it turns out, it’s cognitively easier – you’re more comfortable processing the information – and can focus on a deeper understanding of the story”.

This also holds true when it comes to planning for your future – knowing where you are going can make the journey more comfortable. Working out your plans – when you want to retire, what you plan to do when retired and where you want to go – is a necessary first step.

When it comes to investing money, we are all comfortable with cash in the bank – you put your money in, receive interest at an agreed rate, and can accurately forecast how much you will get back.  Psychologically, you know how the story ends and so you enjoy the journey.

Investing in the stock markets is not as certain; they are very volatile and can go down as well as up.  How the story ends is very uncertain. There is a lot of investment theory to reduce this uncertainty and give greater comfort to investors – diversification, asset allocation etc… – but it cannot remove the risk completely.

Actively managed funds can vary dramatically from their chosen index, up and down, depending on how the manager has done; tracker funds just follow the index wherever it will go.  We prefer a more scientific way of building a portfolio that manages the risks at a level acceptable for you, and collects the returns you are entitled to for taking that risk (which could be negative, as well as positive) – giving you a greater understanding of the underlying story.

Anyone who has invested any money in their life, I’m sure will have heard the phrase that “past performance is no guarantee of future performance”, which is true.  However, if past performance can give you an expectation of the level of long term return you can expect, and a predicted level of volatility in forecasting this long term return, you may be able to sit back and enjoy your very own financial plan and investment story!

What doctors can teach investors

Newspaper reporters who interview centenarians on their landmark birthday cannot seem to avoid the temptation to ask how they have lived so long. Because most people haven’t the faintest idea how they have reached 100, they tend to attribute their good health to something like a weekly tea dance.

Medical professionals will say that the most likely reason for a long life is a combination of favourable genetic and environmental factors, access to reliable medical care and a healthy dose of good luck. It follows, therefore, that anyone serious about improving their chances of a long life is better off seeking the credible advice of a doctor, not taking speculative tips from a pensioner.

But these facts rarely get in the way of a good story.

The treatments doctors use to keep us healthy are tested by a process of empirical research and clinical trials. Considering health and wealth are both high on the list of priorities for many people, it is a shame that the investment industry is typically less rigorous than the healthcare sector.

Most people turn to the investment industry to help them research their investments. This is the same as asking a pensioner how they have lived so long. The industry’s self-analysis can range from outlandish to plausible, but it will almost never be based on scientific study.

We take a different approach; one that is based on scientific rigour and hard evidence. This approach identifies the sources of investment return and we aim to deliver them to you.

This gives us confidence that we understand why your investments behave the way they do and why we are more able to design investment portfolios that suit your needs.

To find out more about our innovative investment approach, email us at or call 03330 100777.


Worry Isn’t Something We Value

I worry about money and I bet you worry about it too.

But, here’s the interesting thing: I’ve never worked with anyone who identified “worry” as something they valued. So, why do we let worry about money drive so much of our thinking and decision making?

My experience suggests our worry comes from trying to have power over things outside of our control. For instance, we can worry about whether we’ll ever have enough money to retire. We can also worry about whether we’ll have enough money to help our kids go through university and get on to the housing ladder. All of these goals are important.

However, we’ve got to realise that even if we do everything within our power, we may still come up short. We humans have a hard time accepting this outcome. We want to believe that doing and trying will always be enough to overcome every obstacle between us and our goals. So what’s the alternative?

This leads me to a crazy idea: what if we commit to doing everything we can, then, we just let go? We let go of the worry; we let go of the fear; we let go of trying to control things we can’t control.

Yes, this idea might sound radical. And yes, telling someone to “stop worrying” is easier said than done. But I’m astounded at the number of people who’ve never considered this option.

I suggest that we treat worry as a sign that we need to revisit the things we’ve said we value most. Using these values, we can begin to work out if our worry is really worthwhile, or if we’re focused on the wrong thing.

Are we really doing everything we can, like sticking within our budget and meeting our savings goal? If so, take a step back and recognise that worry doesn’t need to play a lead role in our financial decisions.

 I understand that banishing worry isn’t easy. But there’s so little to lose, and so much to gain, if we can learn to put aside the worry and focus on what we can control when it comes to money.

Our seven hats

What is a financial adviser for? One view is that advisers have unique insights into market direction that give their clients an advantage. But of the many roles a professional adviser should play, soothsayer is not one of them.

The truth is that no-one knows what will happen next in investment markets. And if anyone really did have a working crystal ball, it is unlikely they would be plying their trade as an adviser, a broker, an analyst or a financial journalist.

Some people may still think an adviser’s role is to deliver them market-beating returns, year after year. Generally, those are the same people who believe good advice equates to making accurate forecasts.

In reality, the value a professional adviser brings is not dependent on the state of markets. Indeed, their value can be even more evident when volatility – and emotions – are running high.

The best of this new breed play many roles with their clients, beginning with the needs, risk appetites and circumstances of each individual, irrespective of what is going on in the world.

None of these roles involves making forecasts about markets or economies. Instead, the roles combine technical expertise with an understanding of how money issues intersect with clients’ complex lives.

Indeed, there are at least seven hats an adviser can wear to help clients without ever once having to look into a crystal ball:

  1. The expert: Now, more than ever, investors need advisers who can provide client-centred expertise in assessing the state of their finances and developing risk-aware strategies to help them meet their goals.
  2. The independent voice: The global financial turmoil of recent years demonstrated the value of an independent and objective voice in a world full of product pushers and salespeople.
  3. The listener: The emotions triggered by financial uncertainty are real. A good adviser will listen to clients’ fears, tease out the issues driving those feelings and provide practical long-term answers.
  4. The teacher: Getting beyond the fear-and-flight phase often is just a matter of teaching investors about risk and return, diversification, the role of asset allocation and the virtue of discipline.
  5. The architect: Once these lessons are understood, the adviser becomes an architect, building a long-term wealth management strategy that matches each person’s risk appetites and lifetime goals.
  6. The coach: Even when the strategy is in place, doubts and fears will inevitably arise. The adviser at this point becomes a coach, reinforcing first principles and keeping the client on track.
  7. The guardian: Beyond these experiences is a long-term role for the adviser as a kind of lighthouse keeper, scanning the horizon for issues that may affect the client and keeping them informed.

These are just seven valuable roles an adviser can play in understanding and responding to clients’ whole-of-life needs that are a world away from the old notions of selling product off the shelf or making forecasts.

For instance, a person may first seek out an adviser purely because of their role as an expert. But once those credentials are established, the main value of the adviser in the client’s eyes may be as an independent voice.

Knowing the adviser is independent – and not plugging product – can lead the client to trust the adviser as a listener or a sounding board, as someone to whom they can share their greatest hopes and fears.

From this point, the listener can become the teacher, the architect, the coach and, ultimately, the guardian. Just as people’s needs and circumstances change over time, so the nature of the advice service evolves.

These are all valuable roles in their own right and none is dependent on forces outside the control of the adviser or client, such as the state of the investment markets or the point of the economic cycle.

However you characterise these various roles, good financial advice is ultimately defined by the patient building of a long-term relationship, founded on the values of trust and independence and knowledge of each individual.





It’s a marathon, not a sprint

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

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

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.

2015 04 14

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

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.