Archive: Nov 2019

  1. Friday the 13th… Should you be scared?

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    If it wasn’t so important, politics would be a joke. We are experiencing unprecedented uncertainty and tension in the political system with Trump’s impeachment hearing, US/China trade tariffs, Brexit and the British elections on the 12 November, which for some will be a scary announcement on Friday 13th.

    Does all of this, and who sits in Number 10, affect your investment strategy?  If it does, do you need to rethink your plans ahead of the election?

    Surely, the economic policy of a Conservative Government will affect the economy and the returns we achieve on our investment portfolio differently than a Labour, Liberal Democrat or coalition government.

    Their fiscal policies are often completely different; the left-wing governments are known for taxing the higher earners and greater Government spending, whereas right-wing parties are better known for reducing taxes and simulating businesses, or that’s what traditionally we have seen.

    So, how has the stock market performed under the different parties?

     

    The above chart shows the total return of the FTSE All Share from inception in 1962 to the present day and the relative government in office during the period.

    Although the chart makes the earlier years difficult to distinguish, the resulting trend is positive, through Conservative (grey), Labour (blue) and Coalition (green) periods in office the FTSE All share index, a bellwether of the British economy, has risen.

    So what is in the data; can we see any trends of party led returns?

    The average FTSE All Share monthly returns for each party is shown in the table below;

    The data shows that over this sample period of 691 months, or 57 ½ years, a Conservative Government has produced a 34% higher monthly return in the FTSE All share than under a Labour Government.  This is the difference in you doubling your money every 15 years to doubling your money every 11 years.

    When Warren Buffet was asked his favourite holding period for an investment, the legendary investor replied, “forever”, however, forever is a long time.

    Fidelity did some interesting research, which shows the impact of market timing with your investments.  They showed the effect when you missed best 10, 20, 30 or 40 days in the market and compared this to the overall return if you had remained fully invested all along.

    Over a period of fifteen years, the message is clear.  If you try and time the market and get it wrong by just ten days over a fifteen-year period, you could be looking at a reduction in your annualised return from 7.7% to 3.5%pa.  Miss the best 30 days in the fifteen-year period and you’ve gone from making money to losing money.

    Timing the market, switching your investments around, increases the costs and taxes associated to your portfolio which has a further drag on your returns not included in this research.

    A Conservative Government has shown to improve the investment returns, when they sit in Number 10, and holding your nerve during the investment ride and not trying to time the market, weather an election or recession, significantly improves your chances of a successful investment experience.

    Develop a plan which reflects your personal needs and goals, work with a Certified Financial Planner to support you, because when the markets are climbing, any fool can make money in the market, it’s during times of uncertainty, like this, when we need a coach, a sounding board to ensure you stay on track and don’t waiver.

    Warren Buffet would say, ‘it’s only when the tide goes out do you discover who has been swimming naked’.

    So maybe it is who’s sat in the Financial Planners chair that will have a greater affect your outcome, not who’s in Number 10.

     

  2. Lexington’s 2019 Third Quarter Market Review

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    Please see Lexington’s 2019 Third Quarter Market Review which we thought you might find useful.

    This report features world capital market performance and a timeline of events for the past quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the UK and international markets.

    Please click the image below to open up the report.

    We hope you enjoy the read and if you have any questions please do not hesitate to contact us.

     

  3. Good-bye Help to Buy

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    Let’s face it, buying your first house is expensive, it’s never been easy, Nicky and I purchased our first house in 1996 and it was expensive then, thanks to her parents generosity, they made it a little easier for us, but what if you don’t have this kind of benefit?

    Well, in December 2015 the government launched the Help to Buy ISA, an ISA savings plan, that gives a bonus when you buy your first home.  The government announced in 2017 that over 1 million Help to Buy ISAs have been opened, and more than £1.8 billion has been saved into these ISAs, to help first time buyers get onto the housing ladder.

    If you want to open a Help to Buy ISA, you will need to be quick because the Help to Buy ISA is due to close to new customers on 30th November, but if you already have an account open, don’t panic you can continue contributing.

    However, don’t despair the successor to the Help to Buy ISA was launched back in April 2017 and is well underway, so until the end of the month, you have two options to help you save for your first home, the Help to Buy ISA and the Lifetime ISA, often referred to as the LISA.

    So, what’s the difference between these two ISAs?

    What’s the youngest age?

    The youngest age you can open a Help to Buy ISA is 16 which is younger than the LISA, so if you’ve just finished your GCSE’s and you’re wanting to save for your first pad, open a Help to Buy ISA.  The LISA can be opened from age 18 to 39 and you can continue saving until you’re 50.

    How much can I save?

    You can save up to £4000 pa into a LISA (subject to the overall ISA limit of £20000) and you’ll receive a generous government bonus of 25% on whatever you contribute, if you were to encash, or use the LISA within the first 12 months, this bonus is removed.

    The Help to Buy ISA is stricter on the contributions, with an initial contribution limit of £1200 when the account is first opened, then a maximum monthly contribution of £200, no additional lump sums are permitted, however there’s no penalty if you withdraw money, you just don’t get the bonus.

    At the point the Help to Buy ISA is used to buy your first home, a 25% bonus is added to all the money you have paid in, including interest.  However, there are some exceptions, which include;

    • You will need to have saved at least £1600 (to get the 25% or £400 bonus)
    • The maximum you can receive a bonus on is £12000 (or £3000 bonus), additional money in the account does not attract a bonus.

    The bonus scheme is set to run until December 2030, but I can’t see there being many Help to Buy ISAs around then.

    What’s the minimum term?

    Technically there is no minimum term, but to get or keep the bonus, there is.  With the Help to Buy ISA, you need to save at least £1600 to get the 25% or £400 bonus, so a minimum term of three months (£1200 in the first month plus two months at £200pm)

    To keep the bonus with the LISA, you must have the account for at least 12 months.

    Can I have two?

    You can only have one Help to Buy ISA provider, period.  However, you can have a new LISA provider each new tax year, if you wish.

    Remember, if you are buying with your partner, or friend, you can have a Help to Buy, or a LISA each.

    What is the ISA used for?

    The LISA allows for your savings to be used towards the purchase of your first home, like a Help to Buy ISA, but also it allows you to keep the investment and use the money for retirement too.  So, if you decide that it is just too expensive to buy a house all is not lost, the money can be used to top up your retirement income from age 60.

    House price limits

    There are limits on the value of the house you can purchase the Help to Buy ISA limits the purchase price to £250,000, outside of London, or £450,000 in London.  For most first-time buyers, this is a nice problem to be faced with, however with the LISA, the London differential has been removed and your purchase limit is £450,000 regardless of location.

    Can I get my money back?

    If things don’t work out and you need your money back, the Help to Buy is a better choice as no penalty is applied for withdrawing your money.  However, with the LISA you’ll face a penalty of 25% on the amount withdrawn, this is not quite as bad as it initially looks, because after repaying your bonus, the way the numbers work, it relates to about 6.25% penalty on what you paid in.  The cynic in my says that the government hates exit charges on any other regulated product, other than it’s own!

    What happens to the money in the ISA?

    With he Help to Buy ISA, it is a cash-based ISA and will be opened with either a bank, or building society.  The LISA can either be cash-based (ideal if you have less than 7 years until you need the money), or investment based (perfect for longer term savings).  Therefore, banks and investment providers are offering LISAs.

    One of the best Help to Buy ISA at present is with Barclays, paying 2.55%.  A good LISA provider would be my own Lexo or MoneyBox

    What happens when I purchase the property?

    With the Help to Buy ISA, you will close your account down, transfer the fund, usually to your conveyancer’s client account.  You will need to provide your conveyancer your closing letter from your Help to Buy provider, so they can claim your 25% bonus, between exchange of contracts and completion.  This can take some time, and you can be charge £50+VAT for the work.

    The Help to Buy money you have saved, plus interest, can be used on exchange, but not the bonus, this can only be used on completion.

    The LISA, is a similar process, don’t just withdraw the money you’ll be penalised, you need to apply to the LISA provider for the money to be sent to your conveyancer.  The money can be used for your exchange deposit (the money you hand over when you “exchange” contracts). However, this must be done less than 90 days ahead of your completion, when you hand over the rest of the money and get the keys.

    If the sale falls through your conveyancer will be able to put the money and bonus back into your LISA – though it must be the exact same amount.

    However, if there was mistake and you weren’t eligible to use the bonus, say the property actually cost more than £450,000, then you’ll be hit with withdrawal charges – so make sure you can use the cash before it’s taken out of the LISA.

  4. Styles of Investing; Active or Passive

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    Before I became a financial planner, investing was all about making money and buying a ‘hot stock’, 25 years later, I reflect on my naivety and appreciate how others may also be thinking this and asking themselves what is the right way to invest?

    Over the years there has been so much research in how stock markets work, this makes sense since there’s a lot of money at stake, it seems sensible to understand it.  You’re unlikely to trust your neighbour on medical decisions, preferring to rely on a qualified doctor, so why would you trust your neighbour over your qualified financial planner, or what some of the leading business schools have been telling us for decades, on investment decisions?

    There are, at a top level, two ways to access the stock market; directly by buying a share yourself, or via a fund, which is a collection of shares, managed by a fund manager.  If we agree that you want to entrust an expert to manage your investments i.e. a fund manager, because of the benefits this brings, you have a choice in the type of manager you choose, as they manage money differently;

    • They can manage your money actively, or
    • They can manage your money passively

    Active vs Passive Investing

    After reading this ask yourself which would you prefer, an actively managed fund, or a passive fund?  Surely, all our life we have been taught that doing something i.e. being active, is better than doing nothing, i.e. being passive, so why would investing be any different?

    I think this is a reason so many people have chosen active management in the past, however recently we have seen more and more institutional (big players) and retail (you and me) investors buy passive funds.

    Buyers of active funds say things like the fund managers are entrepreneurs, they believe in capitalism and making money, they surely know what they are doing.  The passive guys just ‘buy and hope’.

    Nothing could be further from the truth, and after decades of research and hundreds, possibly thousands of academic studies conclude that it’s too difficult, to consistently outperform the stock market or in another way, active funds are unable to consistently outperform passive funds.  I even wrote an article about a $1m bet Warren Buffett placed to prove this.

    But rather than tell you, let me try to explain the differences and how each works.

    How the managers work

    The manager of the fund has a mandate which explains what and how they should manage the fund.  An active fund manager will buy and sell shares with the hope that their decisions make a profit, which is in excess of the index.  The index is their benchmark or the league ranking they are measured against, to give a sporting analogy.

    Each day the manager will arrive at their office and trade (buy and sell) shares in the fund, because they think (often based on some research or meetings) the shares that they sell are going down in price and the shares that they buy are increasing in price.  This is the activity, of active fund management.

    Now let’s compare this to passive fund management.  Their remit may be, for example, to buy every share in the index, like buying each team in a league, and therefore rather than buying shares than rise and selling shares than fall, they buy both.

    You may say that’s silly why do both? Well long term overall, share prices increase in value, historically this has been by c.9%pa, so the shares that rise often increase by more than this, and the shares that fall, fall by less than the risers, so the net effect or average is 9%.  They don’t return 9% every year, sometimes the risers win, sometime the losers win, but overall the winners win, they win by an average of 9%pa.

    I appreciate that logically it makes sense to only buy the winners, but if you think about it, the fund manager doesn’t know for certain that they are winners, until they have won, then it’s too late.  It’s like being at the bookies, you may have a favourite, but the favourite doesn’t always win.  When you talk about the future, you’re giving an opinion, nothing is certain.

    A picture can paint a thousand words, and below is a chart of the average active fund (in blue) and the UK stock market (in red) from January 1990 to November 2019.

    active versus passive investing

    Diversification

    Some shares win and some loose, in fact, some loose so badly they go out of business and you lose your money.  This is why we buy funds rather than one or two individual shares; it spreads our risk.

    So, how much does it spread your risk, investing into a fund?  If you are an active manager, typically your portfolio will have about 300 shares, therefore the fund manager, will need to know the ins and outs of all 300 companies, what they are doing, how they are trading and their challenges…a difficult job, if one or two go bust, you’ll feel it, not massively, but you would.

    Whereas some passive funds, like the ones we operate at Lexo.co.uk have over 10,000 shares, so if a couple go bust…we’re less likely to be effected by it, and when you must own all the companies, it’s less essential knowing everything about them.

    When investing, unless you have a crystal ball, diversification is your friend.

    Charges

    There’s a cost to investing, these costs are rarely explained in detail, but as a summary you have a manager’s fee, a custodian fee and trading fees, which includes the buy sell spread.

    The managers fee pays for the management of the fund, the fund manager, the offices and marketing etc of the fund.  This is referred to as the Annual Management Fee (AMC)

    The custodian’s fee is the price for your money to be held safely, in a custodian’s account, away from the fund manager.  You see, your money is not held in the fund managers account, encase they go bust, it’s held in a custodian’s account, so it’s safer and protected for you.

    Finally, there are trading fees to include.  When you buy a share, there are several costs some of which are;

    • The difference, or spread, between the buying and selling price, which if you sold immediate would be a cost.
    • The stockbroker receives a brokerage fee for placing the trade.
    • HMRC receives stamp duty on every purchase.
    • There is also a cost referred to as slippage, which is where the agreed purchase price moves from the actual price paid hence the term slippage, this is also a factored costs.

    If you are holding a share for a long time, you can loan the shares out to another fund, who has security and pays an income to you for the loan period they hold the shares.  Why they do this, is probably beyond this article, but they are hoping to make money on the shares if they fall in value!  Irrespective of their plans, you’re making money whilst you hold onto the shares, often whilst they are rising in value.

    These are the charges, lets see how they effect the different managers; active managers are often paid substantially more than the passive managers, mainly because the passive managers are guardians and a computer programs makes decisions, so passive funds tend to have a lower management fee.

    Custodian fees are generally similar for both active and passive funds, because this is a storage/safe keeping charge.

    If you’re an active manager, your trading costs are substantially more, because you’re always buying and selling, hence active manager.  The turnover ratio (how much you sell of the fund and replace it) can sometime be over 100% in a year for an active fund, and less than 10% for a passive. Therefore, a passive fund has much lower trading costs.

    If you’re always buying and selling and not holding on for long periods of time, you can’t really loan your shares and receive an income for this, but passive managers can, and this income effectively reduces the other fees charged.

    It’s fairly typical for the total costs to be in excess of 2% for an active fund, and less than 0.5% for a passive fund.  Charges are a guaranteed (negative) drag on your investment returns each year.

    Emotions of the manager

    We’re all human and effected by our emotions, and market turmoil is a great example that effects our emotions, when the markets fall it can be worrying.  If you see your shares falling in value, selling them and holding cash seems a sensible decision, but when do you buy back in? It’s one thing to get out, but you can’t stay out, your job is to manage money, so when do you buy back in? When it’s recovered, so you have the cost of the trade, and you could end up buying back in at a higher price.

    An argument against passive is that they follow the market down, it’s true they do, but to complete the sentence, they follow the market back up again too and without additional trading costs.

    Summary

    So in summary, with active fund management you are betting that the person managing the money has skill and insight to beat the collective market as a whole plus the additional cost incurred to achieve this.  Or you could accept that it’s virtually impossible to beat the market, why take the chance with your retirement money, and accept that a market return of c. 9% is acceptable.

    The challenge is that you don’t know that you can beat the market, until you have given the manager a period of time to prove it, say five years.  So, you could look back and say over the last five years, you’ve done well, so you will in future?  However, Morningstar researched this and found that the top fund managers over one period, did not repeat their success over the following period, so novice investors were buying funds based on a track record, not knowing the probability the funds were about to go down!

  5. Early Retirement with a defined benefit pension

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    What is a defined benefits pension?

    A defined benefit pension is the gold standard of pensions, the scheme promises you a guaranteed income at your agreed retirement age for the rest of your life, the amount of income you receive will rise in line with inflation and the amount you receive is based on the number of years you were a member of the scheme and your pensionable salary.

    These schemes offer benefits, which for the majority of cases mean that they are best left alone until your scheme retirement date, however, if you wanted to retire early, should you take benefits early?

    What happened to me this week?

    This is the situation I found myself in this week with a client, they needed access to capital and an income, about 12 months earlier than expected and their scheme retirement date, which is when they had planned to retire.  Due to health reasons, they have both decided to retire now, the main pension was a defined benefits pension due to become payable in 12 months’ time, however they needed capital and income now.

    We reviewed all their options, which included early access to their defined benefits pension, however this early access involved suffering a 5% reduction/penalty on the pension income for the privilege of taking benefits now, rather than in 12 months, was it worth it?

    Our first thoughts were that it would be silly to pay a penalty of 5% on a c.£30,000 pension just to access it early, because this would reduce the pension not only in year one, but in every single year in payment, the client was 64, so for an estimated 36 years, that’s a lot of 5%’s!

    What did the numbers show?

    In financial planning it’s important not to prejudge a decision and an open mind has options, so we ran some numbers.  We assumed an indexation rate for the pension in payment and forecast this to age 100, next we reduced the initial pension by the 5% penalty and ran the numbers again, with the same indexation, on the reduced pension.

    The calculation showed that the pension taken early would never catch up with the normal retirement age pension, so it seemed silly to access it early.  However, what I also showed the client was the cumulative value of the pension received over the years.  Taking the defined benefits pension 12 months early, gave a full year payment head-start and the cumulative figures showed that it would take about 20 years to receive more pension income cumulatively taking the pension early, than at normal retirement date.  In other words, for the first 20 years you would have received more money, each year, by taking the pension early.

    Chapters in our life

    The client is age 64 so from 64 to 84 she would have received more income.  I often speak to my clients about chapters in their life, your retirement years I find has three distinct chapters; the first where you’re newly retired, active and hopefully healthy enjoying the fruits of your available time traveling, family and activities.  The second chapter tends to include less long-haul flights, more European travel and time at home, the third chapter is the least expensive (care fees excluded), and little flying is involved.  Therefore, a front end loaded retirement income, taking more money in the first two decades, rather than later, is a lifestyle financial planning decision which would work for them, also if their health does deteriorate, they have 12 months more memories to value.

    It’s important you calculate the numbers, reflect on any decision before it’s made and discuss the decision with everyone effected, but doing what everyone else does, may not be the right thing for you.  Because of the complexities surrounding this, I recommend you seek independent financial planning advice before making a decision, even if you can crunch numbers, having a professional review your calculations and acting as a sounding board is invaluable, you won’t get a second chance at this decision.

    State pension deferral

    The case is similar when considering the deferment of the state pension, every year you defer, you effectively give up as you are unable to get that year back and this has been the case for retirees since April 2016, yes I appreciate you receive a higher indexed pension amount, but the 5.8% increase takes about 15 years to make up the missed year.  Make sure you run the numbers first, maybe I’ll cover state pension deferral in a future article.

    Pension Tracing Service

    If you know you had a defined benefits pension, but have lost the details, you can use the government’s Pension Tracing Service by clicking the link below, please don’t use any service, there are companies charging for this free service provided by your tax paying £’s!

    https://www.gov.uk/find-pension-contact-details