Archive: 2015

  1. Your best year yet!

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    Before your new year celebrations begin, may I wish you a very happy, healthy and prosperous 2016 Norman.

    The new year can bring various emotions to many. For some we get excited to celebrate and for others it reminds us of loved ones, who have since past.

    We cannot control the future and the events that happen, but we can prepare ourselves for them by deciding how we will live.

    Some people call these decisions ‘new year resolutions’, others goals or intentions. Whatever your terminology you are more likely to achieve what you want in 2016 if you decide what it is you want.

    Goal setting is a little like Marmite, some love it, others hate it – most people when asked why they don’t like it will tell you that it’s because ‘it doesn’t work’ – often it’s because it did not work for them when they last did it. To protect themselves and to avoid failure, it’s safer not to be disappointed.

    If life is worth living, it’s worth living by design.

    So, take a moment, before you rush back to the office and get caught up with 2016, to ask yourself how you would like to live in 2016?

    A great question to ask yourself would be:

    ‘If we were having this conversation on 31st December 2016 — and you were to look back over those 12 months to today—what has to have happened during that period, both personally and professionally, for you to feel happy about your progress?

    Your answer to the question clearly defines your “Future-Based Self” and this knowledge enables you to begin taking action towards your future reality.

    To help yourself succeed, break your 12 month goals into quarterly targets and then into monthly actions. A lot can happen in 12 months, and it’s easy to get caught up in life and forget what it is you really wanted.

    To keep the goals at the forefront of your mind, keep them posted in a prominent place, like the bathroom mirror or your desk at work – and if you really want to ensure you make it – read them each morning when you wake and night before you sleep.

    For those of you who will set goals for 2016 – I wish you every success and remember, I am here if I can help with anything.

    Happy New Years Eve and 2016 – let’s make it the best year yet!

  2. Merry Christmas!

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    Merry Christmas to you all , we hope you are all ready for the festive celebrations!

    Lexington will be wrapping up 2015 on Wednesday 23rd December at 5pm, closing through the Christmas period and reopening on Monday 4th January at 8.30am.

    We would like to take this opportunity to wish you a very happy Christmas and prosperous 2016.

    The Christmas period is a great opportunity to relax and unwind. If you, like me, want something to keep you occupied during this period, or would like a break from washing-up, GCHQ (The Goverment Communications Headquarters) have issued a festive quiz!

    GCHQ houses some of the UK’s top cryptographers, spies and intelligence agents. It’s perhaps not a surprise then, that their Christmas card features a fiendish cryptic puzzle.

    The card was sent by GCHQ director Robert Hannigan to everybody on the organisation’s Christmas card list. However, if you happen not to be a high-ranking intelligence agent, they also released the puzzle to the public.

    Click this link and have a go 

    Potential Cryptographers are invited to submit their answer via given GCHQ email address by 31st January 2016 at which point the winner will be announced (or perhaps secretly offered a job with the British Civil Service).

    If you get the position, we are familiar with the British Civil Service pension scheme!

    Enjoy and we all look forward to speaking with you in 2016!

  3. Groundhog Day

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    Dealing with a cut to the Lifetime Allowance (LTA) may seem a little like ‘Groundhog Day’ – we’ve been here before in 2014 and 2012. But each subsequent cut brings the impact more and more into the mainstream – affecting an increasing number of our clients.

    Aside from the fundamental ‘protect or not’ question, the need to review pension saving after April raises a number of other advice issues which may need urgent attention before April:

    • Should you pay a final pension top-up before opting for Fixed Protection?

     

    • Should you increase contributions to maximise the level of protection available?

     

    • Without protection could you secure a higher tax free cash entitlement by crystallising and taking your ‘tax free cash’ before April?

     

    Who should be concerned?

    A £1M limit begins to bring LTA concerns into the mainstream. An accrued £50,000 p.a. Defined Benefit (DB – otherwise known as ‘Final Salary’) pension entitlement will now hit the threshold. This pension would have been £90,000 p.a. when the LTA was at its peak of £1.8M – so it represents a considerable drop.

    Even allowing for the fact that from April 2018 the LTA will increase in line with CPI, a fund of £780,000 today will breach the LTA in 10 years’ time if it achieves a real rate of return of 2.5%. And that’s without making any further contributions.

    There’s much to consider and action may be needed before the tax year end.

    Locking into a higher Lifetime Allowance

    Shaving £250,000 off the LTA could see a tax charge of up to £137,500 for people with pension funding in excess of the reduced limit if you don’t put protection in place (£250,000 taxed @ 55%). It could also reduce the maximum ‘tax free cash’ amount that can be taken from £312,500 to £250,000. If you are entitled to TFC greater than this amount and you don’t wish to apply for protection you may want to crystallise benefits before April.

    Two new forms of protection will be available for those caught. These mirror the protection options from 2014.

    Fixed protection 2016 allows you to keep a £1.25M LTA beyond 2016. But, as before, there’s a trade-off:

    • Defined Contribution scheme (DC – otherwise known as ‘Money Purchase’) contributions have to stop after 5 April 2016

     

    • Increases in DB rights can’t exceed the ‘relevant percentage’ (normally CPI for the previous September) in any tax year from 2016/17 onwards

     

    So this only leaves a short window to maximise your tax efficient contributions and build a bigger retirement pot to protect. Don’t forget that carry forward of unused annual allowance could be used as a final funding boost. And with the amendments to the annual allowance and alignment of pension input periods in 2015/16, there could be scope for additional funding this year.

    Individual protection 2016 is only available to you if you have pension savings worth more than £1M on 5 April 2016. This gives you a personal LTA equal to your benefit value on 5 April 2016 (up to a maximum of £1.25M). Importantly, Individual Protection 2016 allows funding to continue. There’s no downside to individual protection, so anyone eligible should do it. You’ll secure an increased LTA with no trade-off. It can be used alongside any of the fixed protections to provide a safety net to fall back on if fixed protection is lost.

    Anyone close to the LTA may want to consider some additional funding before the end of the tax year to push the fund value over the £1M limit to secure individual protection.

    However, the deadlines for registering for protection will change. Individuals will no longer need to apply for fixed or individual protection before next April. New deadlines are currently under consideration and due to be announced later in the year.

    What now?

    Protection won’t be right for everyone – especially if it means missing out on valuable employer pension funding. Some will be in a better position by continuing to fund and paying the tax charge.

    Looks like we will need to wait a little longer to find out the details about pension protection against the Lifetime Allowance.

    On the 28th September, HMRC issued Pensions Schemes Newsletter 72. Of interest to firms will be the update given on the new forms of transitional protection for the reducing lifetime allowance in April 2016.

    Lifetime allowance reduction and transitional protection – delay for forms “From 6 April 2016, the lifetime allowance (LTA) for tax relieved pension savings will reduce from £1.25 million to £1 million. In Pension Schemes Newsletter 71 we said we would aim to provide further information about the transitional protection on offer. Unfortunately, we are not able to provide as much detail as we would have liked. Legislation for both the reduction in the LTA and the protection regimes (fixed protection 2016 (FP2016) and individual protection 2016 (IP2016)) will be delivered in Finance Bill 2016. As a result it will not be possible for scheme members to apply for protection until after April 2016. This means that individuals cannot notify us of their intention to rely on FP2016 in advance. Individuals who want to rely on FP2016 need to start thinking about what arrangements they need to make to stop accruing benefits after 5 April 2016. The application process for FP2016 and IP12016 will be online and will require the member (or their authorised representative) to provide similar information and declarations as for FP2014 and IP2014. The online system will provide a response to the notification along with a protection reference number. The member will need to provide this protection reference number to their pension scheme in order to take their benefits using a protected LTA. For these protection regimes, no certificate will be issued”. View the newsletter in full here:

    https://www.gov.uk/government/publications/pensionschemes-newsletter-72-september-2015

  4. Chartered Wealth Manager and a Chartered Fellow of the Institute for Securities & Investments (CISI).

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    We are very pleased to announce that our managing director Warren Shute has become a Chartered Wealth Manager and a Chartered Fellow of the Institute for Securities & Investments (CISI).

    The Chartered Wealth Manager Qualification is a postgraduate level specialist qualification which encompasses the breadth of knowledge needed to provide a highest quality service to clients.

    The qualification provides a sound grounding in economics and interpretation of economic statistics, financial statements, investment analysis, portfolio construction and applied wealth management.

    Warren became eligible to use the Chartered Wealth Manager title following the recent merger of the Institute of Financial Planning (IFP) with the Chartered Institute for Securities & Investment (CISI).

    In addition to becoming a Chartered Wealth Manager, Warren is also a Chartered Fellow of the Institute for Securities & Investments, Chartered Financial Planner, Fellow of the Personal Finance Society and Certified Financial Planner (CFP) professional.

    We take our professional qualifications very seriously here at Lexington Wealth and believe in continuing personal development.

    Financial Planning and investment management are two very technically demanding areas of professional advice which require high levels of skills, knowledge and experience.

    By achieving the Chartered Wealth Manager, Chartered Financial Planner and Certified Financial Planner qualifications, Warren is fully equipped to work with our clients and provide suitable advice on often technically complex matters.

    These professional qualifications also ensure that our people sign up to stringent continuing professional development commitments with the different professional bodies, as well as agreeing to abide by a code of ethics and conduct.

    Since the Retail Distribution Review (RDR) introduced a minimum Level 4 professional qualification standard for financial advisers at the end of 2012, we are very proud that Warren has achieved the tougher Level 7 standards with Chartered and Certified qualifications and also a Master’s Degree in Financial Planning & Business.

    We look forward to continuing to maintain and improve our Financial Planning and investment management expertise in the future.

  5. The Christmas Party & Tax

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    I am often asked what the potential tax implications are to throwing a Christmas party for employees.

    This question needs considering from two angles.  The first is whether the cost would be an allowable expense for business tax purposes, the other being whether it would be a benefit, taxable on the employees via their P11Ds.  Whilst there is a “general rule” answer to both of these queries, there are a number of pitfalls to beware of, so I shall cover each question in some detail.

    Are Christmas parties an allowable expense for business tax purposes?

    The general rule is that the cost of staff entertaining is tax allowable, as long as it is not incidental to the entertaining of others.  If you were to invite your suppliers and/or customers to attend too, careful consideration would need to be taken when apportioning the costs pertaining to staff entertaining and supplier/customer entertaining, as the latter is not tax allowable.

    Are Christmas parties taxable on my employees as a benefit?

    This area has a lot more potential problems to look out for!

    The general rule is that the party is not a benefit, so long as it is an annual event, open to all staff and the total of all such annual events in a given tax year does not exceed £150 (inclusive of VAT) per head.  Now let’s break that down and cover the potential pitfalls.

    • Annual event – pretty self-explanatory, such as a Christmas party or a summer barbecue.  HMRC seem to interpret this as a way of differentiating between this and casual hospitality occurring at frequent intervals (rather than the strict definition of annual being every year), although this has never tested in context.
    • Open to all staff – Not all staff have to attend, but they all have to be entitled to attend.  If you only offer the Party to certain members of staff, it will be taxable on those staff members as a benefit.
    • Total costs do not exceed £150 per head – This area probably has the most potential problems
    • The £150 is inclusive of VAT
    • Per head is the total headcount of attendees, including staff and their partners/family alike (if the invitation is extended to guests)
    • The cost of the event is from start to finish and includes the likes of transport costs to/from the event and accommodation costs if these are provided by the employer.
    • If the cost is in excess of £150 per head, it is the entire cost that becomes a benefit, not just the amounts in excess of £150 per head.
    • If you have more than one annual event of this nature, the £150 per head is for the tax year, not per event.  So if you had an annual summer barbecue which cost £50 per head and the Christmas party came to £105 per head, the whole £50 for the summer barbecue would be a taxable benefit for the employees in attendance (you are allowed to pick and choose which events best utilise the £150 exemption).


    Our Christmas party this year has come in at £160 per head (taking into account employees and guests).  What should I do?

    Essentially you have two options here.

    1. The cost of the Christmas party attributable to each staff member, will need including on their P11Ds (ie £320 if the staff member brought his wife along).  This will result in them paying tax on this amount as if it were normal employment earnings, which is likely to be unpopular with staff.  The business will also be liable to pay 13.8% employer’s national insurance on the total benefit cost.
    2. As an employer, you can agree with HMRC that you will cover the tax and national insurance by way of a PAYE Settlement Agreement (PSA).  This will obviously increase the cost of the party to you as a business.
    • For example, you have a Christmas party, which costs £1,600 and has 10 people in attendance.  Each staff member in attendance is a basic rate taxpayer.  With a PSA in place, the total cost to you as a business would be £2,276 (£1,600 grossed up for tax at 20% to £2,000 plus 13.8% employer’s national insurance).
    • In the same example, if all staff members were higher rate taxpayers, the total cost to the business would be £3,035 (£1,600 grossed up for tax at 40% to £2,667 plus 13.8% employer’s national insurance).
    • If there was no PSA in place, the total cost to the business would be £1,821 (£1,600 plus 13.8% employer’s national insurance) and the staff would suffer the tax personally.

    It is clear, that this subject is not as clear cut as many people believe, and there are many issues to be aware of.

  6. Start with what we know

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    Anyone seeking evidence that investment decisions can be hard often needs to look no further than the front page news. China, oil, VW and Glencore are among the assets that have made the headlines in the past few months after suffering sudden, unexpected and dramatic changes in price.

    Investors with exposure to those volatile assets might be licking their wounds and reconsidering their positions. This is because many investors have an investment strategy that relies on their (or someone else’s) forecasts about the future. In the simplest terms, their starting point is a blank sheet of paper, where they build a portfolio of assets they think will do better than the alternatives. Sometimes those decisions are right; sometimes they are wrong.

    We have a different starting point. Our investment philosophy is based on things we know rather than things we don’t know. For example, we know that financial markets do a good job of setting prices, so we don’t try to second-guess them. Instead, we begin with the belief that investors will, on average and over time, receive a fair return for investing their money.

    Our aim is to give our clients access to that long-term return through broadly diversified, low-cost portfolios of assets that aim to beat the market average. The portfolios do this by using information in market prices that tells us about a security’s characteristics and its expected future returns.

    The decisions we make about what assets to hold are based on decades of academic research rather than short-term hunches. This means we can focus on meeting your long-term goals rather than becoming absorbed by short-term market movements.

    Generally speaking, investment decisions are hard, but if, like us, you start with information you know is backed by decades of evidence and build an investment philosophy and strategy around it, we think you can improve your chances of being a successful investor.

  7. Sticking with it!

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    It’s often said that the secret of success in any endeavour is “stickability”, your capacity for staying committed to a goal. But success also depends on having goals you can stick with. Managing that tension is what an adviser does.

    Inspired by the impressive weight-loss of a work colleague, a portly middle-aged man decides to copy the programme that gave his friend such results. It’s a crushing regime, involving zero carbs, 5am sprint sessions and mountain biking.

    You can guess what happened. The aspiring dieter lasted about a week on the programme before throwing it all in and returning to sedentary life, donuts and beer.

    It may have been better for this individual to get some advice first, starting slowly, swapping the mountain biking for brisk walks around the block and dumping the zero carb diet for light beer. He may not have shed weight as quickly as his friend, but he probably would have had a better chance of sticking with the plan in the longer term.

    Similar principles apply with investment. You envy acquaintances who seem to have succeeded with high-risk strategies, but that doesn’t necessarily mean those are right for you. And in any case, their barbecue talk may leave out key information, like how they sit up all night watching the market and worrying.

    Just as the want-to-be weight loser can’t live with 5am sprints, not everyone can stick with highly volatile investments that keep them up at night or that cause them to constantly second-guess themselves. And few people can do it without a trainer.

    On the other hand, reaching a long-term goal like losing weight and building wealth requires accepting the possibility of pain and uncertainty in the short-term.

    The trick is finding the right balance between your desire to satisfy your long-term aspirations and your ability to live with the discomfort in the here and now. Quite often, this tension can be managed through compromise. In other words, you can accept some temporary anxiety or you can moderate your goals.

    The point is you have choices. And the role of a financial adviser is to help you understand what they are. So, for example, an adviser can assist you in clarifying your goals and setting priorities. Which is more important—the family holiday or the education fund? Perhaps you can do both by swapping the overseas resort for a camping holiday without dipping into the education fund.

    It’s just like a personal trainer would be unlikely to recommend an out-of-shape sedentary business executive to start running marathons or try to halve his body weight in six months. The job of the trainer, or an adviser, is to manage your expectations and ensure the goals you are pursuing work with everything else you want to achieve in your life.

    An adviser can also assess your capacity for taking risk. Not all of us are thrill seekers. And that’s perfectly OK. A portfolio that’s right for one person may be all wrong for another. That’s because each individual’s circumstances, risk appetites and goals are different. A financial plan shouldn’t be a cookie-cutter approach.

    A third contribution an adviser can make is to help you manage through change. Our lives are not static. We change jobs, our incomes evolve, we take on new responsibilities like children and mortgages, we deal with aging parents, we move cities and countries. Nothing stays the same and a financial plan shouldn’t either.

    So not only do different people have different goals, but each person’s own goals evolve in unique ways as they move through life. Reaching those goals requires a detailed and realistic plan, plus a commitment to stay with it. Some people may be up for the triathlon when they’re young and fit. But in later years, they might just need a more conservative programme of stretching and walking.

    You can try doing this on your own, of course. But it makes it easier if you have someone to keep you focused, keep you disciplined and help you change course when the circumstances of life require it.

    Now that’s stickability.

  8. Which hat are you wearing?

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    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.

  9. Unhealthy Attachments

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    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 unlivable, 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.

  10. The Patient Principal

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    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.