An increase in interest rates could be nearer than anyone thought!
Thursday’s meeting of the Monetary Policy Committee (MPC) of the Bank of England was expected to be a non-event. A Reuters poll of economists revealed that not one expected a move in base rates from the 0.25% set in the wake of the Brexit vote last year. They were all proved right, but…
Of the eight MPC members, three external members voted for a rate increase. It was the first time since 2011 that there had been three votes for a rate rise – and that was when the MPC had nine members. The 3-5 vote was a shock to the market and gave a brief boost to sterling.
The Bank’s statement noted that “CPI inflation has been pushed above the 2% target by the impact of last year’s sterling depreciation. It reached 2.9% in May, above the MPC’s expectation. Inflation could rise above 3% by the autumn, and is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services. The 2½% fall in the exchange rate since the May Inflation Report, if sustained, will add to that imported inflationary impetus.” That concern about over-target inflation seems to have been the reason why the trio voted for a 0.25% rate increase, despite recent evidence that growth is slowing.
One of those voting for the increase, Kristin Forbes, was attending her last MPC meeting. The election hiatus means that her replacement has not yet been chosen. Neither has a replacement been named for Charlotte Hogg, the deputy governor who resigned in the wake of a grilling from the Treasury Select Committee. In theory Mr Hammond could name two new members in time for 3 August’s MPC meeting, changing the voting mix significantly. Even so, yesterday’s general assumption among commentators that rates would not rise until 2019 is now probably consigned to history.
Across the pond, the US Federal Reserve increased its main short term rate by another 0.25% on Wednesday, taking it to a 1.00%-1.25% range. The Fed also set out the first steps to unwinding its bloated $4.2trn balance sheet, the result of its quantitative easing programme. The Bank of England still looks a long way behind…
Each year HMRC receives a number of unusual excuses from Self Assessment customers who didn’t complete their tax return on time. Below are the top ten excuses received for the 2014/15 tax year.
“My tax return was on my yacht…which caught fire”
“A wasp in my car caused me to have an accident and my tax return, which was inside, was destroyed”
“My wife helps me with my tax return, but she had a headache for ten days”
“My dog ate my tax return…and all of the reminders”
“I couldn’t complete my tax return, because my husband left me and took our accountant with him. I am currently trying to find a new accountant”
“My child scribbled all over the tax return, so I wasn’t able to send it back”
“I work for myself, but a colleague borrowed my tax return to photocopy it and lost it”
“My husband told me the deadline was the 31 March”
“My internet connection failed”
“The postman doesn’t deliver to my house”
HMRC will accept reasonable excuses although may require evidence to support the excuse.
Failing to submit and pay the tax owed will result in penalties. The penalties for late tax returns are: an initial £100 fixed penalty, which applies even if there is no tax to pay, or if the tax due is paid on time after three months, additional daily penalties of £10 per day, up to a maximum of £900 after six months, a further penalty of 5% of the tax due or £300, whichever is greater after 12 months, another 5% or £300 charge, whichever is greater.
Note there are also additional penalties for paying tax late which is broadly, 5% of the tax unpaid at 30 days, six months and 12 months.
Those who are submitting their 2015/16 Self Assessment return online for the first time will need to register for Self Assessment Online. Registering for online filing is simple, please see here.
Alternatively, customers can now also submit their return via their Personal Tax Account – it only takes five minutes to sign up for an account.
The Department of Work and Pensions (DWP) has recently issued a reminder to all those who have expressed an interest in topping up their Additional State Pension by up to £25 per week. The option to make Class 3A Voluntary Contributions applies to individuals who attained their State Pension Age (SPA) on or before 5th April 2016, i.e. individuals who receive, or will receive, their State Pension under the old rules.
Why It Might Be Worth Considering
It has been possible to make the Class 3A Voluntary National Insurance Contribution (NIC) payment since October last year. When the Government announced the details of these earlier, they stated that the rate offered would be in line with the market. However, even when they became available it was not possible for a healthy individual to secure a pension annuity paying the same level of income as achieved from paying Class 3A NICs. However, since then, annuity rates have been falling and then, post BREXIT, nose-dived.
So, for an individual aged 66, to secure an income of £1,300 p.a. with a 50% spouse’s pension that is index-linked would cost over £46,900, according to the MAS site on 28th October 2016.
To obtain the same level of income a Class 3 would cost £21,775 based upon the DWP calculator run on the same date.
In simple terms, the Government offer, which was generous when it was launched has, due to the changes in the annuity market, become very attractive.
It should be noted that securing a taxable pension of £1,300pa or £1,040 after 20% income tax would take almost 21 years to break even, taking the 66 year old to 87 – this exclude the indexation of the pension income and also the loss of growth on the £21,775 investment. This represents an annuity income of almost 4.8%.
Most of us have multiple roles—as business owners, professionals, workers, consumers, citizens, students, parents and investors. So our views of the world can differ according to whatever hat we’re wearing at any one time.
This complexity of people and their range of motivations, depending on their circumstances, highlight the inadequacy of cookie-cutter or automated investment solutions.
For instance, if you work for a taxi booking firm, you’re naturally going to take greater-than-usual interest in technology that allows consumers to book cabs directly. That’s because these new disintermediated services might affect how you make your living.
On the other hand, as a consumer you may welcome any initiative that increases competition, widens your choice and lowers prices.
As a taxpayer, you may look kindly on efforts to encourage user-pays systems in universities. But as a parent, you may be concerned about your teenage children taking on excessive debt to fund their education.
As citizens, we might champion a laissez faire approach to economic policy. But as investors, we may feel uncomfortable about certain policies and seek to express our values by placing limits on how our money is invested.
The point is everyone has the right to their own opinions and intelligent people can legitimately and respectfully disagree on many issues, including about what might happen in the world economy and about how policymakers should act.
The trick is in being clear with ourselves about which hat we are wearing when we make investment decisions and the trade-offs involved in reconciling our personal opinions with our desired investment outcomes.
For example, you may have an opinion on what central banks should do in normalising interest rates. But do you really want to hang your decision about your portfolio allocation to longer-term bonds on your view of the interest rate outlook?
As a worker in an industry undergoing digital disruption, you may have an aversion to the technology putting you out of a job. But as an investor, do you want to forsake earning a share of the wealth from the new forces created by this disruption?
As a resident of a suburb near the airport, you may oppose on noise grounds a government decision to build a new runway, but as an investor and a worker you might benefit from the increased productivity generated by the investment.
The point is we have many roles in life and there often can be conflicts between our personal beliefs and opinions in one area with our desires in another.
Our strong view on the economic outlook may lead us to think the market will come around to pricing assets based on that opinion. But the power of markets is such that they reflect the views of millions of people, many of whom may hold contrary views.
Keep in mind, also, that competitors in those markets include professional investors with multiple sources of information and state-of-the-art technology. And even they have trouble getting these forecasts right with any consistency.
This isn’t to say we can’t invest based on our personal principles. But we first have to start from the assumption that in liquid markets competition drives prices to fair value. Prices reveal information about expected returns. That leaves us to diversify around known risks according to our own preferences and goals.
In short, life is full of trade-offs. It is the same in investment. We may pursue higher expected returns, but we want to do so without sacrificing diversification or cost.
The over-riding principle is to understand what we can and can’t control. We can have an opinion on government policy and we can express it through our vote, but we can’t control the investment outcome. We can have an opinion on what should happen to interest rates, but we can’t control what happens. So we diversify.
The role of a financial adviser is to help you understand these trade-offs and to separate opinion from fact, to balance your risk preferences with your desired wealth outcomes, and to accommodate your personal values within a diversified portfolio.
People with many hats require many different investment solutions. And that’s a good thing.
Have you ever made yourself suffer through a bad movie because, having paid for the cinema ticket, you felt you had to get your money’s worth? Some people treat investment the same way.
Behavioural economists have a name for this tendency of people and organisations to stick with a losing strategy purely on the basis that they have put so much time and money into it already. It’s called the “sunk cost fallacy”.
Let’s say a couple buy a property next to a freeway, believing that planting trees and double-glazing will block out the noise. Thousands of dollars later the place is still unliveable, but they won’t sell because “that would be a waste of money”.
This is an example of a sunk cost. Despite the strong likelihood that you’ll never get your money back, regardless of outcomes, you are reluctant to cut your losses and sell because that would involve an admission of defeat.
It works like this in the equity market too. People will often speculate on a particular stock on the basis of newspaper articles about prospects for the company or industry. When those forecasts don’t come to pass, they hold on regardless.
It might be a mining stock that is hyped based on bullish projections for a new tenement. Later, when it becomes clear the prospect is not what its promoters claimed, some investors will still hold on, based on the erroneous view that they can make their money back.
The motivations behind the sunk cost fallacy are understandable. We want our investments to do well and we don’t want to believe our efforts have been in vain. But there are ways of dealing with this challenge. Here are seven simple rules:
Accept that not every investment will be a winner. Stocks rise and fall based on news and on the markets’ collective view of their prospects. That there is risk around outcomes is why there is the prospect of a return.
While risk and return are related, not every risk is worth taking. Taking big bets on individual stocks or industries leaves you open to idiosyncratic influences like changing technology. Think about what happened to Kodak.
Diversification can help wash away these individual influences. Over time, we know there is a capital market rate of return. But it is not divided equally among stocks or uniformly across time. So spread your risk.
Understand how markets work. If you hear on the news about the great prospects for a particular company or sector, the chances are the market already knows that and has priced the security accordingly.
Look to the future, not to the past. The financial news is interesting, but it is about what has already happened and there is nothing much you can do about that. Investment is about what happens next.
Don’t fall in love with your investments. People often go wrong by sinking emotional capital into a losing stock that they just can’t let go. It’s easier to maintain discipline if you maintain a little distance from your portfolio.
Rebalance regularly. This is another way of staying disciplined. If the equity part of your portfolio has risen in value, you might sell down the winners and put the money into bonds to maintain your desired allocation.
These are simple rules. But they are all practical ways of taking your ego out of the investment process and avoiding the sunk cost fallacy.
There is no single perfect portfolio, by the way. There are in fact an infinite number of possibilities, but based on the needs and risk profile of each individual, not on “hot tips” or the views of high-profile financial commentators.
This approach may not be as interesting. But by keeping an emotional distance between yourself and your portfolio, you can avoid some unhealthy attachments.
Global markets are providing investors a rough ride at the moment, as the focus turns to China’s economic outlook. But while falling markets can be worrisome, maintaining a longer-term perspective makes the volatility easier to handle.
A typical response to unsettling markets is an emotional one. We quit risky assets when prices are down and wait for more “certainty”.
These timing strategies can take a few forms. One is to use forecasting to get out when the market is judged as “over-bought” and then to buy back in when the signals tell you it is “over-sold”.
A second strategy might be to undertake a comprehensive macro-economic analysis of the Chinese economy, its monetary policy, global trade and investment linkages and how the various scenarios around these issues might play out in global markets.
In the first instance, there is very little evidence that these forecast-based timing decisions work with any consistency. And even if people manage to luck their way out of the market at the right time, they still have to decide when to get back in.
In the second instance, you can be the world’s best economist and make an accurate assessment of the growth trajectory of China, together with the policy response. But that still doesn’t mean the markets will react as you assume.
A third way is to reflect on how markets price risk. Over the long term, we know there is a return on capital. But those returns are rarely delivered in an even pattern. There are periods when markets fall precipitously and others where they rise inexorably.
The only way of getting that “average” return is to go with the flow. Think about it this way. A sign at the river’s edge reads: “Average depth: three feet”. Reading the sign, the hiker thinks: “OK, I can wade across”. But he soon discovers the “average” masks a range of everything from 6 inches to 15 feet.
Likewise, financial products are frequently advertised as offering “average” returns of, say, 8%, without the promoters acknowledging in a prominent way that individual year returns can be many multiples of that average in either direction.
Now there may be nothing wrong with that sort of volatility if the individual can stomach it. But others can feel uncomfortable. And that’s OK too. The important point is being prepared about possible outcomes from your investment choices.
Markets rarely move in one direction for long. If they did, there would be little risk in investing. And in the absence of risk, there would be no return. One element of risk, although not the whole story, is the volatility of an investment.
Look at a world share market benchmark such as the MSCI World Index, in US dollars. In the 45 years from 1970 to 2014, the index has registered annual gains of as high as 41.9% (in 1986) and losses of as much as 40.7% (2008).
But over that full period, the index delivered an annualised rate of return of 8.9%. To earn that return, you had to remain fully invested, taking the unsettling down periods with the heartening up markets, but also rebalancing each year to return your desired asset allocation back to where you want it to be.
Timing your exit and entry successfully is a tough ask. Look at 2008, the year of the global financial crisis and the worst single year in our sample. Yet, the MSCI World index in the following year registered one of its best-ever gains.
Now, none of this is to imply that the market is due for a rebound anytime soon. It might. It might not. The fact is no-one can be sure. But we do know that whenever there is a great deal of uncertainty, there will be a great deal of volatility.
Second-guessing markets means second-guessing news. What has happened is already priced in. What happens next is what we don’t know, so we diversify and spread our risk to match our own appetite and expectations.
Spreading risk can mean diversifying within equities across different stocks, sectors, industries and countries. It also means diversifying across asset classes. For instance, while shares have been performing poorly, bonds have been doing well.
Markets are constantly adjusting to news. A fall in prices means investors are collectively demanding an additional return for the risk of owning equities. But for the individual investor, the price decline only matters if they need the money today.
If your horizon is five, 10, 15 or 20 years, the uncertainty will soon fade and the markets will go onto worrying about something else. Ultimately what drives your return is how you allocate your capital across different assets, how much you invest over time and the power of compounding.
But in the short-term, the greatest contribution you can make to your long-term wealth is exercising patience. And that’s where your adviser comes in.
OK, we have all heard of hedge funds, but do we know what they are? They are supposed to be the holy grail of investment success, where the best of the best managers mange money for the super wealthy?
Well, Warren Buffett the renowned Billionaire investor and CEO of Berkshire Hathaway, he believes that the investors would do better, just buying the market and not using active funds of any kind, here’s what he said in his 1996 shareholder letter:
“Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals.” Warren Buffett 1996 – Shareholder Letter
Warren believes this so much that, in 2007 he personally placed a very large $1 Million bet against a New York money manager Protege Partners, LLC. The bet;
“Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”
So, after 7 years of performance data, where do we stand in the race?
Through the seven years, the S&P 500 index fund, is up 63.5%. That’s the portfolio carrying Buffett’s colours. Protégé’s five hedge funds of funds are, on the average—the marker the bet uses—up an estimated 19.6%. (The “estimated” takes into account that not all of the five funds have final figures for 2014).
So, 70% of the way through this experience Buffett looks like he’s made the right choice, so if the best New York money managers can’t choose from all of the worlds best funds to beat the market, can you beat it, with the funds you have available to you?
This was the sixth straight year that the contest has tilted in Buffett’s direction: Buffet’s shares were up 13.6% in 2014 and the average gain for the funds of funds was 5.6%. Only in the first year of the bet—which began in 2008, a year that was a train wreck for both the economy and the stock market—did the funds of funds win, so to speak. They were down, on average, only 24%. The S&P 500 plummeted by 37% that year!
But, Buffett has, over the years learned to remove his emotion from investing, he stayed with the program, and didn’t try and time the market, or bail out in 2008.
So, we’ll have to see how this concludes over the remaining 3 years, we’ll keep you updated.
But, what about LEXO, how has Lexo compared to these results?
Well, it’s only fair to compare similar risk rated portfolios. The S&P 500 is a 100% equity index, so this would be comparable to the Lexo 100 which is 100% equity – shown below at 100% Simulated, this is what we have. Remember when looking at the below, the S&P 500 is an index, not a fund, so not fees/fund management charges have been deducted.
OK, a little take off from my names sake in the investment world, Warren Buffett, but it’s true, below I have listed the 10 most important traits which, when you follow these you will have a better, more enjoyable investment experience!
So here goes:
1. Let the markets work for you
The market is an effective information processing machine. Millions of participants buy and sell securities in the world market every day and the real-time information they bring helps set prices.
2. Investment is not speculation
The market’s pricing power works against fund managers who try to outsmart other market participants through stock picking or market timing. As evidence, only 19% of US equity mutual funds have survived and outperformed their benchmarks over the past 15 years. In addition, very few managers that do perform well repeat their performance in subsequent time periods. Studies of the European fund market find similar results.
3. Take a long-term approach
The financial markets have rewarded long-term investors. People expect a positive return on the capital they invest and, historically the equity and bond markets have performed and provided growth of wealth that has more than offset inflation.
4. Consider the drivers of return
Academic research has identified these equity and fixed income dimensions, which point to differences in expected returns. These robust dimensions are pervasive across different markets and persistent across different periods. They can also be pursued in a cost effective portfolios.
5. Practice smart diversification
Diversification helps reduce risks that have no return, but diversifying within your home market is not enough. You should also use diversification to broaden your investment universe.
6. Avoid market timing
You never know which market segments will outperform from year to year. By holding a globally diversify portfolio investors are well positioned to capture returns whenever they occur.
7. Manage your emotions
Many people struggle to separate their emotions from investing. Markets go up and down. Reacting to current market conditions may lead to making poor investment decisions at the worst times.
8. Look beyond the headlines
Daily market news and commentary can challenge your investment discipline. Some managers stir anxiety about the future while others tempt you with the promise of easy profits. If you are tempted consider the source and learn to spot the difference between entertainment and real advice.
9. Keep costs low
Over long time periods, high costs such as management fees, fund expenses and taxes can drag on wealth accumulation in a portfolio. You should strive to incur only those costs that are unavoidable and those that add value to your investments
10. Focus on what you can control
A financial planner can create a plan tailored to your personal financial needs while helping you focus on actions that add value. This can lead to a better investment experience. When investing without a Financial Planner ensure you know your outcome before you start to investment process.
Well they are my 10 tenets of investing. Follow these for a nicer longer term experience. Below is a graphic which summarises all 10.
Welcome to the first blog posting for LEXO, the online investment site for intelligent investors. As I write this post, I want to set the stage for you to understand why I have created this business.
My purpose, my mission if you will, for Lexo is:
To inspire our clients to make informed decisions through
information, education & communication,
with a service that exceeds their expectations.
Let me break this down for you, INSPIRE you – I appreciate some investors have had a poor investment experience in the past, this often can be a reflection of the plethora of information you are bombarded with, the financial stories which cover the financial pages every week and the lack of clear communications. I believe given clear INFORMATION about investing, you can make an informed choice for yourself, you know how to make decisions in every other area of your life, so why should investing be any different, if you have the truth about investing.
We intend to support you in making the right decision, by providing you with INFORMATION on our site and our blog posts which will allow you to EDUCATE yourself about the world of investing, I want you to email me questions, tell me your concerns so that I can address these for you.
I hope to gain your trust and respect by COMMUNICATING with you in a clear, no-nonsense fashion, I am not a literalist but will do my best to ensure the communications I post will be clear, far and not misleading – telling you the truth about investing.
Finally, we will wrap this all up with a service that I hope will exceed your expectations, if we fail to do this, contact me, I want to know. You can email me anytime on firstname.lastname@example.org or call me on 01793 771093.
Lexo is a trading name of Lexington Wealth Management Ltd, which is authorised and regulated by the Financial Conduct Authority under reference number 440099.
With investment, your capital is at risk. The value of your portfolio with Lexo can go down as well as up and you may get back less than you invest. It is important that you understand the risks. Lexo aims to provide information to help you make your own informed decision. It does not provide personal advice based on your circumstances. If you are unsure, please seek personal advice from Lexington Wealth.
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