Financial independence is not just about retirement

The traditional view of work is that it’s something we wouldn’t otherwise do, without the financial reward of getting paid… such that the whole point of work in the modern era is to earn and save enough to get to the point where you can “retire” and not need to work anymore.

Yet research on what motivates us reveals that “money” is a remarkably inferior motivator compared to the motivation we derive from interpersonal relationships with other people. Yet due to our inability to judge our own motivations, and what will make us happy in the future, we continue to pursue financial rewards… even as a growing base of research reveals that it doesn’t improve our long-run happiness.

The reason why all this matters is that it implies the whole concept of “retirement” may be based upon a mistaken understanding of our own motivator, a realisation that most people don’t have, until they actually retire, (or at least, are on the cusp of it) suddenly discover that “not working” isn’t nearly as enjoyable as expected, despite all the sacrifices of potentially undesirable work that was done to earn the money to retire along the way.

So what alternatives have we seen from our business owners and professional clients?  Many have come to recognise that work, at least some work, can be motivating and socially rewarding, where money doesn’t have to be the driving factor. Yet at the same time, often such work does at least have some financial rewards… which is important, because if “retirement” is simply about shifting the rewards of work from “mostly financial” to “only partially financial”, then the reality is that most people may not need nearly as much to “retire” in the first place.

This is important because if it is likely there is going to be at least some modest financial reward coming from mostly non-monetary work, it means many prospective “retirees” could make this switch even sooner. Assuming the retiree withdraws 4% per annum from the accumulated savings, then earning an extra £10,000 a year in part-time work in retirement reduces the target retirement savings needed by as much as £250,000! Carpenter Rees therefore do not talk about retirement, but about reaching the point of sufficient financial independence where “work” can be chosen based primarily for its non-monetary rewards.

We have seen many of our clients retire in the traditional sense but those that continue to work because they like the work they do or they can concentrate on the areas of work that they most enjoy or involve themselves in other projects can often have the more enjoyable financially independent lives.

All that glistens …….

Gold has always held a certain appeal for humans. Its lustre (due to a lack of oxidation), makes it pleasing to look at and to handle. Yet, it is simply a lump of metal that generates no income and will only be worth what someone else wants to pay for it at any point in time.  Given the lack of cash flow, common valuation models are not useful.

Warren Buffett is not a big fan, stating: –

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Gold has suffered lengthy, negative real returns over periods as long as 20 years. Between 1987 and 2017 it delivered an annualised return of just 1.5% p.a. after inflation – around 5% lower than equities – yet with similar volatility.  In its favour, gold prices are uncorrelated to equity markets.

Yet many investors seem enamoured by Golds fabled investment properties. So, do these claims stack up?

Claim 1: Gold is a good defensive asset at times of global equity market crisis

In the period under review, there were three

10 Guiding Principles to facilitate Family Business Succession Planning

I read recently about some of the more pertinent family business succession planning principles worthy of consideration. Having first-hand experience of dealing with family businesses, we have witnessed some of these principles in action together with the problems that can occur if these are not followed.

  1. Beware of the tax driven/cost saving succession plan: Research indicates that often, far too much attention is given to technical components such as tax, trusts, insurance and shareholders agreements, whilst insufficient time is given to softer touchy feely issues like wishes and aspirations of the family members, integrating and preparing the next generation and family harmony.
  2. Creating a legacy: Most successful family businesses adopt this concept. The founders of the family business have created a family asset that the family would like to continue to cultivate to establish a lasting legacy for the founders.  Applying this principle means that the family wants the business to remain in the family with all future generations acting as ‘stewards’ to safeguard the family business, grow it and make it better for future generations.
  3. Opportunity versus entitlements: Successful family businesses ensure that future

What is Evidence-Based Investing?

Often in my blogs, you will hear me refer to ‘Evidence-Based Investing’ which reflects the investment philosophy adopted by Carpenter Rees Ltd.    This week, I thought I would share with you an Infographic which explains how this differs to ‘Traditional Active Investing’.   Whilst the two offer very different approaches to investing, at Carpenter Rees we don’t believe in timing markets, making knee-jerk reactions or acting on ‘expert’ opinions; we prefer to work with long term academic evidence in order to allow investments the time they need to do what we feel is most important to our clients ….achieve long term returns aimed at meeting their personal aspirations and financial goals.

Click here to view in detail our one page investment philosophy comparison.

 

 

Inheritance Tax rule changes

This week, I thought I would outline how effective estate planning can help safeguard your wealth for future generations.

If you want to have control over what happens to your assets after your death, effective estate planning is essential.  After a lifetime of hard work, you want to make sure you protect as much of your wealth as possible and pass it on to the right people. However, this does not happen automatically. If you do not plan for what happens to your assets when you die, more of your estate than necessary could be subject to Inheritance Tax.

The rules around Inheritance Tax changed from 6 April this year. The introduction of an additional nil-rate band is good news for married couples looking to pass the family home down to their children or grandchildren, but not every estate can claim it.

Bereaved families

 This tax year, more than 30,000 bereaved families will be required to pay tax on their inheritance[1] according to the Office for Budget Responsibility,. So, it pays to think about Inheritance Tax planning while you can and work out how much potentially could be taken out of your estate – before it becomes your family’s problem to deal with.

A recent Inheritance Tax survey conducted by Canada Life [2]  shows that Britons over the age of 45 are either ignoring estate planning solutions or they have forgotten about the benefits these can provide.   Only 27% of those surveyed have taken financial advice on Inheritance Tax planning, despite all of them having a potential Tax liability.

Leaving an estate

Every individual in the UK, regardless of marital status, is entitled to

Hi Ho, Hi Ho it’s off to Uni we go…………………

Student loans have been a hot topic of late and the promise to scrap them by some politicians really engaged the younger voter in our last election!

Additionally, it is the time of year when many parents and students are looking at ways to fund university and this blog looks at the current merits of borrowing to fund education rather than relying on this being funded by family members.

So what are the rates of interest on Student Debt?

For loans taken out before 1st September 2012 the interest rate from 1st September 2016 is 1.25% and this rate is based upon the lower of RPI or the bank of England Base rate plus 1%.

For those taken out after that date interest rates have been set at RPI plus 3%. This rate is updated each September based upon the RPI figure from the previous March and interest is applied until the April after leaving the course and then on a sliding scale based upon earnings. The full rate of interest of RPI plus 3% is charged once earning exceed £41000.

The rise in inflation since March 2016 from 1.6% to 3.1%means that those who took out loans post 1st September 2012 now face a hike in interest rates from 4.6% to 6.1% which is 24 times the bank of England base rate! So a student now graduated will pay between 3.1% and 6.1%, depending on their income.

When does the loan have to be repaid?

The loan does not have to be repaid until income exceeds £21000. Once income exceeds this figure the individual will pay 9% of earnings over this amount deducted by their employer directly from salary.

Any of the loan still outstanding 30 years after the borrower become eligible to make payments is wiped off and the vast majority of students are unlikely to pay off their entire student loan.

Do Student loans make sense?

They do have soft merits such as maintain parity with peers; this is often very important to an 18 year old!

In addition, it provides a student with

Sometimes Spending Brings a Bigger Return Than Saving

I thought it was about time we included a Sketch from our friend Carl Richards which appeared in the New York Times in his regular Sketch Guy column.

2017 06 20

Many of our clients have got used to us telling them to spend money but many of them find this hard.

Life experiences give you an incalculable return on investment every single time so why is it hard to spend money on them.

The reason is often that experiences tend to feel like an extravagant expenditure of money, time and energy but I will keep telling you that you only have one shot at life and your goal is not to leave a small fortune to HMRC!

A very adventurous Carl and his wife illustrates this well with a tale of how he and his wife had the chance to

UK General Elections and the Stock Market

Last week’s election was the first vote in the UK since the EU referendum – aren’t we the lucky ones…. and who is to say how soon the next one will be?

In this blog, we explain why investors would be well served avoiding the temptation to make significant changes to a long term financial plans based upon predictions as to who may be in number 10. The data below has been provided by investment firm Dimensional Fund Advisers.

Exhibit 1: Growth of a Pound Invested in the Dimensional UK Market Index

January 1956–December 2016

2017 06 13 - no 10
 For illustrative purposes only. Past performance is not a guarantee of future results. Index is not available for direct investment, therefore, their performance does not reflect the expenses associated with the management of an actual fund. Dimensional indices use CRSP and Compustat data. See “Index Descriptions” in the appendix for descriptions of index data.

 Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants— including expectations about the outcome and impact of elections. While unanticipated future events (genuine surprises) may trigger price changes in the future, the nature of these events cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. So it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a general election.

 The focus of this election was Britain’s exit from the EU. But,

Turn Down the Noise

The Investment and Financial Services industry is noisy and is especially so in the middle of an election. Every day, thousands of articles, blogs, broadcasts, podcasts and webcasts are published, shouting for your attention and trying to make investment sexy.

It’s easy to fall into the trap of thinking that if you do not listen to the noise carefully and sift out the best ideas, i.e. the one’s that could help you find the highest returns—then you will not achieve your financial goals. Actually, we find the opposite to be true; trying to keep up with the latest investment fads can be detrimental to your long-term performance rather than beneficial to it. The noise can drown out the signal.

So what is the alternative?

We believe that it starts with having a strong evidence based investment philosophy that, over a long period of time, will prove to be rewarding for our clients. Our philosophy is based around some of the most enduring ideas in finance, these are ideas that help us achieve your financial goals by harnessing the power of capital markets in a systematic way. At the core, these fundamental concepts have remained the same for decades, but as research evolves into how markets work, our understanding improves and we develop our approach accordingly.

Added to this, we use investment managers that really take care over the details of implementation of the ideas. They understand that investment returns are precious and easy to lose in day-to-day management. They know it does not make sense to pay 5% in fees and costs to go after a 4% return.

This combination of a robust, enduring philosophy and a steady, disciplined application has helped us provide our clients with a way to turn down the noise.

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These foolish things

I thought that this week I would share with you part of a document which was issued by Tim Hale of Albion Strategic Consulting who have recently helped us develop and refine our investment portfolios. It is a longer blog than usual but I think it is well worth the read.

We are all prone to making mistakes when investing, not because we are foolish, but because we are human. It does appear that a switch inside even the most sensible person seems to flick and rationality disappears in a cloud of emotion, when we begin to think about the markets.  This note highlights some of the dangers and provides some tips on how we can attempt to behave better.  In short, the answer lies in adopting a disciplined process.

Trap 1: I know that I am smarter than the other fools out there

The human being is, by and large, overconfident in his or her abilities. For example, out of 600 professional fund managers asked in a study (Montier, 2010), almost three quarters said they were better than average (in the same way that 80% of us believe that we are better than average drivers). A number of studies have shown that overconfidence leads investors to overestimate their knowledge, underestimate the risks involved and increase their perception of their ability to control events.

Mitigation strategy: Have some humility – plenty of very clever people get beaten up by the markets.

Trap 2: There is a distinct pattern emerging here

An easy-to-understand example of this behaviour can be seen on the roulette tables of Las Vegas. A rational gambler knows that the chance of any number coming up has the same odds as any other number of coming up.  Yet, a sequence of three or four ‘red 9s’ in a row, or other similar pattern, can create quite a stir at the table.  In investing, we often mistake random noise for what appears to be a non-random sequence.

Mitigation strategy: If you detect a pattern in shorter-term data it is probably meaningless and that includes active fund performance data.

Trap 3: Problems with probability (and maths in general)

As humans, we seem to really struggle with probability calculations and outcomes. For example, many people are willing to pay more for something that improves the probability of a specific outcome from, say, 95% to 99% than from 45% to 49%, yet the two outcomes are financially equivalent.  We shy away from even the simplest