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.

And the family pension fund nomination goes to……………..

It’s always been an important part of estate planning for us to discuss what’s going to happen to any remaining pension fund on a client’s death. This discussion is never just a one-off, as circumstances change over time.

Following the new rules included in the very aptly named Taxation of Pension Act 2014, the nomination of who should receive any remaining pension fund has taken on even greater significance.

From 6th April, any remaining pension fund can be used to provide a dependant’s or nominee pension, so basically it can be paid to any individual(s) nominated by the member.

A typical case study to illustrate this may be that John has a pension and Helen, his wife, would inherit enough non-pension assets, ensuring she would not need to access his pension fund. Therefore, John could nominate his son Richard, and daughter Emma, both in their forties, to receive his pension. The unused pension fund on their subsequent death can then be nominated by Richard and Emma to their children.

The diagram below illustrates the options and tax implications very adequately. penion nomination pic

It will be our aim to ensure clients update their nominations and these are reviewed regularly, so they fit in with the family’s financial plan. These nominations will be in writing and they can be updated at any time, as family circumstances change.

This is great news for the family pension fund. At last, pension funds can effectively be passed on to future generations. Let’s just hope future that governments don’t keep kicking the pensions football around, although that may be too much to ask….

If you can keep your head when all those around you are losing theirs…

It has been quite a year for stock markets. In the past 12 months, shares have soared to record highs; higher than the tech boom and the credit bubble of 2008.

But let’s not get carried away. Being disciplined with an investment strategy is as important when times are good as when times are bad – in some ways, the excitement of a rising market makes it harder to do. Here are three things that investors should remember while they are enjoying a rising market – and what we do about each one.

  • Maintain the right balance of investments.

Every investor should have a carefully considered mix of assets, with the appropriate proportions of (and within) cash, bonds, shares, property and so on. However, as the value of each asset class rises and falls at different rates, these proportions drift. Maintaining the intended balance is important, because your allocation of assets is one of the bedrocks of the strategy that will help you reach your goals. So, we rebalance our investment portfolios regularly, by trimming the things that have performed well and adding to the things that have lagged. This might seem counter-intuitive, but it helps to keep your investment portfolio in the best shape to achieve your long-term goals.

  • Avoid getting swept along with the market.


When the market is rising, it is easy to be tempted into taking more risk to increase your returns. The pain and uncertainty of a falling market can quickly be forgotten when shares are on an unbroken year-long rally, as they have been. But, sticking to your guns and remembering your original goals and strategy are essential. Chopping and changing your approach when the market shifts can detract from returns rather than enhance them. Our investment philosophy is not influenced by the cyclical nature of the market; it evolves over time as the science of investing evolves.

  • Guard your gains.


When money is tight, people tend to watch their expenses more closely than when they are feeling flush. In the same way, some investors can neglect to monitor their fees and transaction costs when markets are rising. Letting expenses slip is like trying to fill a bath with the plug out. This is why we keep portfolio expenses low in good and bad markets.

Sometimes, the key to successful investing is simply to remain disciplined; to remember to stick to your well-considered decisions; and to keep your head when all around you appear to be losing theirs. It’s as important to remember this simple philosophy when markets are rising, as it is when they are falling.

Enough is enough, is enough

What is enough?

This is a question we are often asked by both new and existing clients; we have to say, it entirely depends on what ‘enough’ means for them.

It is an incredibly personal thing as it will mean different things to different people, based upon their personal values and lifestyle.

This could be any of the following:

  • Being able to continue your lifestyle (minus the mortgage and school fees) when you stop work.
  • The freedom to stop work and do the things you dreamt of doing.
  • A lump sum to buy a boat and sail around the Mediterranean, buy a holiday home, or go travelling in style….
  • Helping children through university, or getting on the housing ladder.
  • Leaving a legacy to your family or favoured charity.

There are, of course, many more personal definitions of ‘enough’ and one person’s definition is not necessarily yours. It’s also not surprising to find that many people have never thought about it until asked.

We spend a lot of time at Carpenter Rees getting to know our clients and asking the questions that help to define what it looks like to them. As financial planners, we will tell them if they need to make compromises and take tough decisions in order to secure enough for the future. Our job is to develop a long term plan and manage it year on year, to help them ensure that they reach their idea of ‘enough’. That is what makes our job, and your interaction with us as your advisers, interesting.

In addition, we have some clients who have more than they need and that can lead to some very interesting discussions too.

So, what is your ‘enough’? Let us help you get there and if you have more, then let us plan to use the surpluses in an interesting and meaningful way.

If you, or someone you know, might benefit from a discussion about their ‘enough’ please feel free to pass on our details.




Freedom, Freedom, Pension Freedom and Dinosaurs

The first line of the classic Wham song Freedom: ‘Every day I hear a different story…’

It seems to me, and no doubt to you, that those lyrics ring true when we read about the new pension freedom legislation that comes into force on 6th April 2015.  We’ve all seen press coverage about people going out and blowing their pension funds on cars and holidays, and I’ve even read an article about someone deciding to withdraw their entire fund and invest it in dinosaurs for their museum – classic coverage from one of the heavyweights.