Monthly Archives: June 2015

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!