Testing Market Timing


Equity markets tend to be cyclical. Positive periods are followed by negative periods, which are then followed by positive periods. Because of this, it is common when markets are falling to ask whether it is possible to time investment decisions to sell at the peaks and buy back at the troughs.

One way to do this might be to analyse forward-looking information such as economic and corporate data and make predictions about the direction of the markets. But it is hard to make predictions, especially about the future.

Another approach might be to look back at data from previous cycles and identify patterns that could be repeated going forward. Researchers at Dimensional Fund Advisors did exactly this, running almost 800 tests on data from 15 world equity markets to identify signals that might point to a change of market cycle and simulating the trading activity that might improve investment returns.

Most of the 800 tests failed and resulted in worse performance than would have been achieved by just going with the flow of the market. But some of the tests worked and produced positive performance results.

You might think this is good news for investors—that they can replicate the trading patterns suggested by the positive tests. Unfortunately, the number of positive results was no greater than one might expect with such a large number of tests.

As the researchers explain, the odds of one-person coin flipping 10 heads in a row are small. But if you asked 100 people to try, you would expect around five of them to be successful. The same proportion of the 800 market tests were positive and the research was unable to determine if any of them were more than just a sequence of lucky coin tosses.

The research concluded that, on average, investors are better off sticking to their long-term investment goals and riding out short-term market volatility, rather than trying to time their trading to coincide with the peaks and troughs of the market. This is also the approach we advocate at volatile times such as these.

Keep it in the family- Succession Planning


As a company we deal with many family businesses. One of the key benefits of a family business is the ability to ‘keep it in the family’ for future generations. This can however lead to a succession problem when the current generation is not letting go of the power. The next generation are preparing to take over the business for many years, whilst often the current generation has to come to terms with a number of issues of their own before they can let go of the reigns.  Two of the most common issues are: –

  1. Are the seniors financially secure independent of their stake in the family business? If not, they are unlikely to take a back seat.
  2. What will they do after they spending so much time running the family business which includes them enjoying the reputation and status this enables?

These issues cannot be solved simply by spending more time and cost preparing the next generation to take over. As much effort needs to be invested into helping the seniors face up to the financial and emotional challenges they will encounter in their next stage of life. In many cases family members will often find that the answers they need in succession planning are dependent upon what the other generation plan to do, such as: –

  • Seniors cannot feel they can plan for retirement until the next generation decide about whether they want a career in the family business. This sounds pretty obvious but many of the next generation feel that whilst they want to work in the business (it could be the easy option) they do not wish to run it.
  • The next generation wants to take over and has planned to do so, but the seniors are not ready to commit to succession and retirement planning.
  • The next generation are perhaps too young to make the choice to run the business but feel pressured to do so because that suits older parents.

Age and adult development add to the intergenerational dynamics of family businesses. Transitions tend to be smoother when the generations are what we would term as ‘In sync’ in that each generation is at the age and life stage to make the personal changes required for succession planning. The transition will be smoother when seniors aged between 60 and 70 are looking to structure retirement when the next generation are between the ages of 35 and 45 than it would be if the next generation was 19 to 25. The 19 to 25 year olds are exploring the options for the life they want so settling for a role on the family business may seem unattractive. When mid-life approaches, there is a stronger desire to make choices and have a more established life structure.

The transition of a family business is therefore far easier when the generations are in sync and when this is not the case, it may be better to take time over succession rather than put pressure on the generations. It is also very helpful if both generations discuss and understand the wishes of the other which are based around their life stage. These discussions must take place together and all must be frank and honest as to what they enjoy or dislike about their current stage of life and how they feel about the succession process.


Life with LISA


The new Lifetime ISA (which is the LISA I am referring to here) was introduced in the 2016 Budget and is not to be seen as the death of pensions as many people have announced.

Firstly, some facts about LISA:

  • Any UK individual aged 18 to 40 can open one from April 2017
  • The maximum contribution to LISA is £4,000 per annum, and the Government bonus will top this up by a maximum of £1,000, although the bonus will only be added until the age of 50
  • This £5,000 LISA amount is not subject to pension allowances , it is on top of the pension limits
  • Contributions into LISA will utilise part of the individual’s ISA allowance each year, although this is due to increase to £20,000 from April 2017
  • The underlying investment in LISA will grow tax free
  • The fund built up in a LISA can be accessed from age 60 with no penalty, or on purchase of a first home (subject to other restrictions)
  • Access to the funds at other times comes with a reclaim of the Government bonus, the growth on that bonus, and a 5 per cent further penalty
  • On death, the full LISA value can be inherited tax free by spouse/civil partner.

So, LISA sounds pretty fantastic, but why this isn’t the death of pensions?

  • Any UK individual from birth can have a pension, they must be between 18 and 40 for a LISA
  • Pensions give tax relief at the highest marginal rate of the individual (i.e. 20 per cent, 40 per cent or 45 per cent), whereas the Government bonus is a set amount starting at the equivalent basic rate for pensions
  • Pension tax relief is claimable up to age 75, the Government bonus is only claimable up to age 50
  • An individual can pay a maximum contribution of between £3,600 and £40,000 gross into a pension each tax year (including the tax relief); whereas LISA is only £5,000
  • Your employer cannot pay into your LISA so, for now at least, workplace pensions (as opposed to workplace LISAs) will still be around
  • National Insurance Contributions cannot be redirected to your LISA either, but they can if your employer offers Salary Exchange with their pension
  • The lifetime allowance on pensions is £1 million, which is a lot more than the majority of the UK working population will achieve.

In our opinion, whilst LISA does not signal the end of pensions, she could carve a good niche for herself as another planning tool for individuals, namely:

  • Those who have made the maximum tax relievable pension contribution
  • Those saving for their first home
  • Those who are likely to exceed the pensions lifetime allowance
  • Non-taxpayers who don’t qualify for other tax reliefs due to no, or very little, earnings
  • Non-earning spouses who have already utilised the £3,600 gross into pensions.

Whilst there are still some details that need to be confirmed before they become widely available next tax year, I am sure you will agree that LISA could become a household name.


Brexit: the financial implications


The outcome of the in/out EU referendum on 23 June is far from certain. The bookmakers still suggest that the in campaign should prove successful but, with weeks of political posturing ahead, we have been considering what the financial implications of a Brexit could be.

There have been a range of previous studies published on the subject with a wide variety of potential outcomes forecast. Capital Economics were commissioned by Woodford Investment Management to examine the United Kingdom’s relationship with Europe and the impact of Brexit on the British economy, and their report draws a measured and neutral conclusion. The report considers several of the most important elements of the Brexit debate including immigration, trade, financial services, regulation and the public sector.

Benefits for certain industries

Annual net migration from Europe has more than doubled since 2012, reaching 183,000 in March 2015 and boosting the workforce by around 0.5 per cent. Currently, labour movement within the EU is free, whereas leaving the EU could allow immigration policy to be restricted and focused on certain skill bases, which could benefit certain industries. Restriction of low-skilled worker immigration could, however, be detrimental to low-wage sectors such as agriculture, and could increase wage growth and inflation.

Free trade with EU countries would be impacted. Under the Lisbon Treaty, a country leaving the EU has two years to negotiate a withdrawal agreement and it’s very likely that a favourable trade agreement would be reached in a Brexit scenario, albeit with some potential additional costs to exporters. Indeed, the ability to negotiate our own trade agreements with other non-EU countries may be preferred to going via the bureaucratic processes of the EU, and this could potentially offset some of the additional cost of dealing with EU members.

Saving on red tape

The City’s position as a global financial hub is certainly helped by being part of the EU, allowing unfettered access of European markets to London-based firms. The City currently exports £19.4 billion of financial services to the EU and this would be significantly disrupted in the short term. Over the long term, the UK could broker deals with emerging markets to help allay this impact.

Saving on the red tape and regulation emanating out of Brussels is often cited as a potential positive of Brexit. This might, however, prove to be a smaller boost to productivity, as exporters will still need to comply in order to easily access the EU, and the UK may therefore decide to retain many EU rules.

Similarly, the UK’s significant £10 billion contribution could be saved through Brexit, but in reality, this saving may not be fully felt. The economic impact on other areas may offset some of this and indeed the Government may have additional costs in compensating certain sectors and regions that current receive EU subsidies.

Uncertainty will dominate

In summary, the effect on the UK economy of a Brexit may not prove to be too significant in the long term. However, much will depend on how an unprecedented exit is handled and how the UK can then independently negotiate with other parts of the world.

As the vote draws ever closer, it will be interesting to see whether economic impacts draw more headlines than the current focus on political issues. However, it is hard to currently see how the debate will be dragged too far away from the emotive issue of immigration.

Until the outcome is clear, uncertainty will dominate – something which will not be beneficial for financial markets. In the event of an out vote, the uncertainty will continue for some time, whereas a vote to remain in will provide some quicker clarity. This suggests that financial markets may continue to demonstrate volatility in the weeks ahead.


All figures sourced from Capital Economics report, published February 2016 –  https://woodfordfunds.com/economic-impact-brexit-report/

Tales of the Unexpected


All investors know that risk and return are related – taking on more sensible risk should provide higher returns over time, however, there are no guarantees.

We, as advisers, will often talk to you, about target or expected returns from portfolios needed to deliver your financial goals, but these forward looking assumptions are best based on a term of 20 years or more.

It is almost impossible to make short-term guesses as to market returns over the next year or two, as that would be speculation. Putting it simply, the expected rate of return of an investor’s portfolio is the sum of the expected returns of each asset class in the portfolio weighted by the allocation made to it. It is not any form of guarantee or promise that this level of return will be delivered consistently, year on year.

The hard part is deciding what long-term returns are likely to be achieved but fortunately, investors can look at data going back to the beginning of the last century – more than 100 years’ worth of insight into the long-term investment returns of shares and bonds (fixed interest). This data shows that the long-term real returns for bonds as being 2 per cent and 5 per cent for equities (source: Credit Suisse Global Investment Returns Yearbook 2015).

Based upon these expected real rates of return, it is therefore reasonable to assume that financial planning decisions can be made using these numbers and any decisions made based upon returns materially higher than these should be viewed with caution. Sadly, it is not unusual to hear stories of less scrupulous advisers and product providers tempting investors with promises of spectacular investment returns. A good rule of thumb is that if it sounds too good to be true, then it probably is.

By and large, a return of 1 per cent to 2 per cent above inflation for bonds and 5 per cent to 6 per cent for equities is a sensible litmus test. Returns higher than these imply a material increase in the level of risk being taken. It is important to remember that nobody has a crystal ball and expected returns come with a high degree of uncertainty in the short-term, and maybe even longer. As financial planners, that is why we often run a number of return scenarios to establish what lower returns would mean to them and halving expected returns is not a bad starting point for a basic stress test.

As a result of this, please remember not to be too hard on your adviser because the portfolio has not delivered its expected return since you last met – it is not expected to!


Reasons to be Cheerful


If you’re like me, you often listen to the news or read the papers and think the world is going to the dogs! The depressing headlines appear to be endless but, if you look beyond the media, there are a lot of things that are going right.

There are many challenges to be faced in the world, as there always will be. The legacy of the financial crisis is still with us, Europe is grappling with the refugee crisis, China faces a difficult transition and we cannot ignore the entertainment that the US election is providing!

It’s easy to overlook the massive advances made in many areas, which don’t grab media attention, but they are worth keeping in mind when you are overwhelmed by grim headlines.

So, here are a number of reasons to be cheerful:

  1. Over the last 25 years, 2 billion people globally have moved out of extreme poverty according to the latest UN Human Development Report
  2. Over that same period, mortality rates among children under the age of 5 have fallen by 53 per cent, from 91 deaths per 100 to 43 deaths per 1000
  3. The world’s largest economy, the US has been recovering and unemployment has halved in 6 years from nearly 10 per cent to just below 5 per cent
  4. Global oil prices have fallen by more than 70 per cent in 2 years. Not great news for the oil companies, but great for consumers and decreases production costs to help boost profits
  5. Renewable energy sources are now accounting for 23 per cent of global electricity generation. A figure that’s expected to rise to 26 per cent by 2020
  6. We live in a world of rapid innovation and one report estimates that digital economy accounts for 22.5 per cent of global economic output, which will continue to grow
  7. Mortgages continue to be cheap and are likely to remain so for some time. It is predicted that for consumers, this year will be one of the happiest since the mid-2000s
  8. The football premier league is likely to be won this season by a team with more than 3 British players
  9. Global bank regulators recently announced that, since the global crisis, they have implemented reforms to reduce risk within the global banking system
  10. Summer is on its way!

The world is far from perfect and it faces many challenges but, just as it is important to be realistic and aware of the downsides, we must also recognise the advances we are making. So, just as much as there is reason for caution, there is always reason for hope and you only have to return to Leicester City for the inspiration for that. Keep the good things in mind when you feel overwhelmed by the bad news and besides, I would prefer Leicester City or Tottenham to win the league rather than some others. There are plenty of reasons to be cheerful and looking on the bright side of life!

Known Unknowns


Individual investors may face many ‘known unknowns’ – or, things that they know they don’t know. The UK’s referendum on EU membership is one of them, confronting people with a large degree of uncertainty.

However, it’s not necessary to ‘make the right call’ on the referendum, or its consequences, to be a successful investor. Our approach is to trust the market to price securities fairly, taking into account broad expectations of future returns.

In arguing for the status quo, the ‘remain’ campaign is able to point out familiar characteristics of membership.

The ‘out’ campaign, however, is based on intangibles that can only be resolved after the result of the referendum is known. It’s impossible for any individual to predict the implications of these unknowns with certainty.

But, this is no cause for concern. While the referendum is imminent and its implications are potentially vast and unpredictable, it’s not necessary for individual investors to make any judgement calls on the outcome. We have faced many uncertainties in the past – general elections, market crises, recessions, wars. Throughout all of them, the market has done its job of aggregating participants’ views about expected returns and priced assets accordingly.

And, while these events have caused uncertainty, volatility and short-term losses and gains, none of them have altered the expectation that stocks provide a good long-term return in real terms.

We have a global view of investing and we know that the market is very good at processing information that’s relevant to future returns. Because of this view, we don’t attempt to second-guess the market. We manage well-diversified portfolios that don’t rely on the outcome of individual events or decisions to target the expected long-term return.

The following chart illustrates this very point as it shows the long term performance of world markets from 1970 to 2015 through wars, crises and slumps. So, forget all the short term political manoeuvring and trust the markets in the long term.

Known unknowns

Live longer to enjoy your money for longer ..


As we will be letting you have our Budget summary shortly, I thought it would be good to look at something less financial this week.  So, as we all want to live long healthy lives so that we can enjoy our financial freedom for longer, I thought I would share with you some research undertaken by Dr Doug Wright, medical director of Aviva.

The research indicates that too many of us are not taking the most basic of steps to protect our health, leading to half of the nation being overweight. Dr Wright maintains that simple lifestyle changes will help us feel happier and healthier too.

The obvious changes are, of course, to maintain a healthy weight, eat a good diet, undertake regular exercise and cut down on alcohol and smoking. But, apart from these, what else can you do to help you fly past 70 and feel good in your 80s and beyond?

Here are a number of my favourites that research has indicated, some of which are quite surprising and could help.

  1. Shopping – yes, this apparently reduces mortality rates by 23% for women and over 25% for men. So, while this could make me very unpopular with you men, I must stress that it isn’t about the feel good factor of a new handbag, but more to do with walking and socialising!
  2. Going to work when you are not well.  This is a fairly obvious one in my view, as this doubles the risk of a heart attack. So, get back into bed and don’t spread your germs!
  3. Another popular one,  Dutch scientists have proved that eating 4 grams of cocoa per day can halve the risk of heart disease.
  4. Daily flossing is thought to add an extra year to your life but, in my view, you probably spend a year of your life doing it! Is that a great return on the floss time investment?!
  5. If you exercise in a group, the British Medical Journal suggests that you are more likely to burn off an extra 500 calories a week compared to those work out alone.
  6. Scientists suggest that worrying can shorten your life expectancy. That’s why one of my favourite phrases “don’t sweat the small stuff” applies here.
  7. Being challenged and enjoying your work has more health benefits than feeling bored at work and having a stressful job.
  8. Having a pet helps to lower heart rate!
  9. Walking can act as an anti-depressant giving up to seven years of life, according to a European Study.
  10. According to Californian research, marriage, in many cases, prolongs life expectancy as it means you are less likely to suffer mental health issues, are less stressed and having a spouse can speed your recovery if you get sick!
  11. Laughter lowers the chance of blood clots forming and reduces the likelihood of a build-up of cholesterol.
  12. Have breakfast shortly after you get up as Massachusetts’ scientists found that those who wait 90 minutes before eating breakfast are 50% more likely to be obese.

There are lots more out there, and these got me thinking of the ideal healthy day which I think would pan out as follows:-

  1. Wake up and take the dog for a walk for 20 minutes
  2. Have breakfast shortly after your return
  3. Go shopping with your spouse
  4. Attend a group exercise class (I think Golf counts)
  5. Have a healthy lunch out
  6. Eat some chocolate
  7. Walk the dog again (you might want to do this on your own by now)
  8. Healthy dinner
  9. Go to a comedy club.

Papers, politicians and pensions


I was moving house last week and you’ll no doubt know how stressful that can be, but it didn’t make me quite as stressed as the previous weekend’s reporting of Mr Osborne’s proposed pension changes.

This last weekend’s press put paid to the article I was planning this week about the rumoured pension changes. If the papers are to be believed, the good news at the weekend was that the Chancellor intends to leave pensions alone for the time being.  This is a welcome relief as there is a real need for some stability at the moment.  Rest assured however, there are likely to be future changes!  A frustration of mine is the quality of the media coverage, even from the so called superior press.  My recent experiences of this is that articles have not been great and have led to a number of people panicking and potentially making wrong decisions.

Let us now remind ourselves of the attraction of the current pension regime. The combination of tax relief on contributions and the freedom rules allowing flexibility to take money out again, make pensions once again the prime vehicle for saving for your future financial freedom (I prefer this term to retirement).

The additional advantage which allows unspent pension funds to become a legacy for family is hugely significant. All of these changes have removed many of the barriers to saving via pension schemes.

Tax relief on contributions – individuals contributing to pension schemes obtain tax relief on the contributions made. Personal contributions are paid in net of basic rate tax relief with any additional tax relief being claimed via self-assessment.

Income tax payable on withdrawals – The first 25% of your pension fund can be received as a tax free payment whilst the remainder can be drawn as a regular income, a lump sum, or a series of ad-hoc payments and will be subject to income tax at the time of drawing.

Let’s look at an example to illustrate how attractive that could be: –

An individual who is a higher rate tax payer makes a gross personal contribution of £10,000, so the net cost is £6,000. If the individual is over 55, in essence they could immediately draw £2,500 as a tax free payment leaving £7,500 as a taxable payment.

If the income tax payable on that £7,500 is 40%, then the net amount of income received will be £4,500, which when added to the £2,500 tax free withdrawal equates to a net payment received of £7,000 for a net cost of £6,000!

An individual earning £50,000 per annum would not pay 40% tax on all of their income, but only on approx. £7,000 of their income.  In fact, the maximum amount of income tax that a high earner, earning up to £100,000 with a full personal allowance will pay is 29% of their overall income.   This is because our tax system works in bands so you don’t pay a fixed rate of tax on all of your income.  This fact makes the figures look even more attractive.

Investment returns- the growth on investments within a pension fund is not taxable and is the same as an ISA in this respect. However, the tax relief on contributions means that investors enjoy this tax free growth on an increased fund.

Death Benefits- Pensions are generally inheritance tax free and added to this, the benefits of the inherited drawdown rules this means that funds can be retained in the pension fund for the future benefit of other family members.

That is enough for the time being, but as I am sure you can see from the numbers, some tinkering by the government is probably inevitable in the future, but for the time being, make the most of pensions in their current form.

When the SPA makes you angry


I don’t know anyone who gets angry at a Spa, it always seems a nice relaxing place to be,  not that I have been to many!  In this instance however, SPA stands for ‘State Pension Age’ , a subject which is currently generating a lot of sentiment.

Of course, this is nothing new.  The Pensions Act 1995 started the equalisation process by bringing the SPA to age 65 for both men and women; although even this has been subsequently amended by further Pension Acts (namely 2007 and 2011).

So, when will you get your State Pension; and believe me, its not quite as straightforward as you might think?

Date of Birth
SPA Range
SPA Retirement Date Range
Who is Affected?
6 March 1953 – 5 December 1953
63 – 65
6 March 2016 – 6 November 2018
6 December 1953 – 5 October 1954
65 – 66
6 March 2019 – 6 October 2020
6 October 1954 – 5 April 1960
6 October 2020 – 6 April 2026
6 April 1960 – 5 March 1961
66 – 67
6 May 2026 – 6 March 2028
6 March 1961 – 5 April 1977
6 March 2028 – 6 April 2044
6 April 1977 – 5 April 1978
67 – 68
6 May 2044 – 6 April 2046
6 April 1978 onwards
6 April 2046 onwards


The Government confirmed that a regular review of the State Pension age, at least once every five years should be undertaken. The review will be based around the idea that people should be able to spend up to a third of their adult life drawing a State Pension. The first review must be completed by May 2017.

After the review has reported, the Government may then propose to bring forward changes to the State Pension Age. Any proposals to do so would, like now, have to go through Parliament before becoming law.

So what should I do?

Review your financial position, with a particular emphasis on the at retirement portion of your cash flow.

  • Obtain a forecast from the DWP to ensure you are due the full state pension
  • Check your private pension, or join your company scheme if you haven’t already done so
  • Estimate how much income you will need to live comfortably in retirement
  • Speak to us; we will help you get on the right path for the best chance of success