A Summer Holiday without Headlines: The Holiday Challenge

This is a version of an article I read recently which struck a chord with me.

Did you read, listen, or watch the news in the last 24 hours?  If so, you probably came across one or more of these headlines:

  • Grexit remains the likely outcome of this sorry process
  • Carney hints at move in interest rates
  • Commodity prices head for 13 year low
  • Dollar rise threatens US growth.

Any one of these items could keep you up at night. But they shouldn’t, because you can’t do anything about any of them. These events, and others like them, are completely out of our individual control. However, that won’t stop the 24/7 news channels from trying to convince us otherwise.

That’s why I’m suggesting something sort of radical for your summer holidays of 2015: go on a ‘media fast’.

Specifically, you should ignore the top headlines and the breaking news for the period of your holidays. Instead, read something interesting – something that you really want to read.

If you’re feeling really crazy, go outside. Play with your kids, or grandkids. Go on a walk or spend time with your partner. But whatever you do, avoid anything that’s ‘trending’ for those vital weeks.

For some of you, I know this fast will be really difficult. I, for example, will still look at the football gossip every day. You soak up news like a sponge – you probably can’t imagine going without it for more than an hour or two, never mind a week or two! If you fall into this camp, you should ask yourself one question: does knowing what just happened make me any happier, or does it just increase my stress?

If we’re being honest, I suspect it’s the latter for 90 per cent of the time. We have no control over these events, yet we’re encouraged to devote attention and energy to things that make us feel bad.

Let’s hit the pause button for a short time and see how it feels. How do we feel during a day when we focus on what’s right in front of us, versus what’s happening halfway around the world?

To be clear, I believe there’s a huge different between being well informed about current events and staying glued to news channels. I think we’ve got into the bad habit of confusing one with the other. This media fast will help us do a better job of separating the two and identifying the situations we really care about as opposed to the steady stream of nonsense masquerading as ‘important news’.

I think this summer should be memorable for a lot of reasons, but I’m hoping it’s because of the memories we choose to make, instead of what we happen to read or see on the news.

Now, I’m off on holiday for two weeks, so there won’t be another blog until 11 August. I will practise what I preach, with the exception of the football gossip…..


First they cut the rates, and now the protection!

Last week, it was announced that from January 2016, the amount of standard savings protected if your bank, building society or credit union goes bust will fall from £85,000 to £75,000.

This cut means that savers with cash holdings close to the current £85,000 limit should start to think about how to redistribute their money soon.

Under FSCS rules, if your deposit holder goes bust, you currently get up to £85,000 per person, per financial institution within seven days (or £170,000 for joint accounts).

The €100,000 Europe-wide limit is not changing, but the legislation states that the Euro-Sterling exchange rate must be reviewed every five years.  The strengthening pound means that €100,000 is now roughly £72,000 (down from £86,000 in late 2010); hence, from 1 January, the limit will fall to £75,000 per person, per financial institution (£150,000 for joint accounts).

Whilst this is a reduction, it is worth remembering that the £85,000 limit started in December 2010, prior to which it was £50,000.

The FSCS says the move “will still protect more than 95% of all consumers, as the majority tend to have £50,000 or less in savings because the pound has got stronger”.

So, what if my savings are locked into a fixed account?

The Bank of England has launched a consultation on proposals to extend the higher protection for people who are “contractually tied into products” such as those with a fixed term.  The consultation runs until 24 July and the Bank of England hopes the proposals will take force from 1 August.

Is anything else changing?

Alongside today’s news, the Government is introducing temporary £1 million cover for lump sums attained under specific circumstances.

This cover would be for a period of six months after depositing cash, as long as you can prove it came from selling a home, divorce, personal compensation or other major life event – thus allowing investors plenty of time to decide what to do with the money they have received.

If you would like further information on these changes, please contact us on hello@carpenter-rees.co.uk






Stop Worrying About How Much you Matter

Mike Carpenter and I were discussing a recent article we saw in the Harvard Business Review which struck a chord with us, as we have seen it happen to a number of clients and friends and, yes, it is true to say that Mike is reading fewer cycling magazines since he started on the Goldman Sachs Management Course!

The article emphasised that some people who are highly successful in busy careers and have enough money to live more than comfortably for the rest of their days become seriously depressed as they retire and become older. So what is going on here? The typical answer is that we all need a purpose in life and when we stop working we lose that reason for being. However, that is not necessarily the case as some of these people continue to work.

It may be the getting older element that is depressing, but we all know people who continue to be happy well into their nineties.

The article implied that the problem is much simpler and the solution more reasonable than continuing to work, or being Peter Pan.

People who achieve success are masters at doing things that keep them relevant as their decisions affect many others and their advice lands on eager ears so what they do and say matters to others and this gives them a strong feeling of self-worth. The maintenance of this relevancy is rewarding but when we lose it withdrawal can be painful.

The cure? We need to master irrelevancy. At a certain point in our lives we will matter less, but it is vital to be able to cope with that. Many of us can go for a few days without having a particular purpose, such as solving other people’s problem or making important business decisions, but can we survive for a longer period?

The advantage of being able to do so is; freedom, as you can do what you want, when you want in the way that you want. This freedom and its enjoyment can be the anti-depressant needed to enjoy life after retirement, even for those who have been defined by their jobs.

It is important to practice this irrelevancy and here are ways you can start:

  1. Check emails when at your desk and just a few times a day.
  2. When you meet new people avoid telling them what you do. You will then notice the difference between speaking to connect, which is far more enjoyable and important, rather than speaking to make yourself look important.
  3. When someone shares a problem listen without offering a solution (if you do this with employees they will become more competent and self-sufficient).
  4. Try sitting outside without doing anything.
  5. Talk to a stranger with no purpose in mind other than to enjoy the interaction.

As a result, you will notice that even when you are (career) irrelevant you can feel pleasure in simple moments and purposeful interactions. And even though you feel irrelevant, you can matter to yourself. Do the things that matter to you not what matters to somebody else and enjoy the freedom that gives you.

Keep it in the family…

We have had many years of dealing with families and their businesses and certainly one of their biggest worries is ensuring that family wealth remains within the family and is not dispersed out to potential outlaws…. sorry I meant to say ex- in-laws.

A recent FT article indicated that following a 2010 Supreme Court decision, whilst not enshrined in legislation, pre-nuptial agreements are now recognised by the English Courts and are therefore becoming more popular in the UK.

Also of interest, the same article highlighted  that Law firm Slater and Gordon had seen a significant rise in the number of pre-nuptial agreements it had drawn up since the 1990s. The typical entry-level cost for an agreement is quoted as being in the region of £5000. This is a cheap price to pay to ensure that  the wealth passed to the next generation stays with the next generation rather than being passed on to a future ex-wife or ex-husband.  In addition the existence of such a document could save a fortune in legal fees should the couple divorce.

The main driver, as you can imagine, is often the parents of the couple trying to protect pre-existing wealth. One eminent divorce lawyer has indicated that among the wealthy, a pre-nuptial agreement is almost as commonplace as having your wedding invitations printed!  But these tools are not just for the fabulously wealthy, they are a great tool for the family and especially for those with a family business.

It’s imperative, therefore, that when gifting monies to the next generation, a pre-nuptial or post-nuptial agreement is considered as a condition of such a gift. It’s understandable that some families may find it difficult to raise this particular matter with the future or current in-laws, however, this process can be facilitated by your professional advisers (i.e. solicitor or financial adviser…. we don’t mind being the bad guys in these situations!).

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 hello@carpenter-rees.co.uk 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.