“Structured”, “secure”, “protected”, now “absolute” and “all-weather”. Descriptions of investment products designed to catch your attention
Beware the way financial industry marketing works. New products, new names, same old risk and hidden agendas, names invented to resonate with investor’s emotions and more proof that you should not over react to the latest financial industry PR exercise.
This is exactly what Simon Brown’s co-authored book, “The 7 Secrets of Money” is about – the secrets kept from us by the financial establishment and the secrets needed to achieve long term investing success.
For too long the financial establishment has put its own interests above yours, resulting in a consistent failure to meet the returns you need and expect. Members of this establishment will try to persuade you to purchase the products that make them the most money and serve you poorly.
The smart way to look after your money? Focus your energies on the things you can control such as saving, spending, costs, taxes and sound financial planning.
NS&I Index-linked savings certificates
The new 5-year bonds from National Savings & Investments (NS&I) have caused a stir with the banks and are a good place to put a maximum of £15,000 for 5 years if you can afford to.
The new 5-year savings bonds were reported in Guardian Money to pay interest based on the retail prices’ index – currently 5.3% – plus an average of 0.5%. Interest paid will be tax free.
Improving your financial health
Just as bad habits can endanger your physical health, bad habits can affect your long term wealth as well.
It’s not easy to change behaviour
Our commitment to change is under constant test as examples of doing precisely the opposite are thrown in front of us to make us question whether we have made the right choice.
Relatives who smoke or drink heavily can live into their 90s. Those that live apparently fitter, healthier lives don’t. Shares soar while other more prudent investments seem to lose money.
Hold your nerve, stick to a proven set of prescriptions
Here are some guiding principles to help preserve your financial health and wealth:
- Stop reading the financial pages. Sensational headlines sell papers and magazines
- Don’t search for that super star fund. Invest in the whole market
- Pay no attention to forecasts. They aren’t possible
- Keep a long term perspective, it’s time in the market, not market timing that counts
- Invest new capital and work to your plan
- Re-balance. Buy more of what hasn’t done well recently and not what’s hot. The latter may cause you to unbalance
- Manage your emotions. This takes us back to number 1. Swap the financial news for something more interesting.
If you do find stock picking good entertainment, don’t do it with your investment capital.
Stay on track. It will pay in the long term.
You get what you pay for. Or do you?
Actually, when it comes to investing, it’s what you don’t pay for that can help to make the difference. Keeping costs low and maximising your tax advantages provides the best chance of a successful investment experience. Otherwise, you can create a major drain on your investment performance.
Dr Paul Woolley from the London School of Economics said, in a recent Panorama program, that while fund management fees had doubled for pension plan investors over the last 10 years, net returns had reduced by the amount that fees had gone up.
It’s not just pensions
When the Financial Research Corporation, an independent research company, looked at the 10 characteristics differentiating mutual funds, it found expense ratios to be the only factor to be reliably linked to net performance. (Source: Vanguard)
Another research company, Morningstar, a worldwide fund rating company, monitored five broad categories of equity and fixed income funds from 2005 to 2010. The performance of the cheapest funds was compared to that of the most expensive. The cheap funds outperformed and they found that cost was a more reliable indicator of future performance than their own “star” fund rating system.
We accept this is short term data but the details of a longer term survey of Actively Managed mutual funds in the US was provided by Dr Burton Malkiel, author of a Random Walk Down Wall Street. This survey looked at all general equity mutual funds in the US from 31.12.1994-31.12.2009 and showed that the funds in the lowest quartile of costs and trading activity achieved 8.66% return and the highest Quartile of costs and trading achieved 6.66% return (Source: Lipper data for all General Funds).
As Jack Bogle, founder of Vanguard, one of the world’s largest investment management companies says:
“The only element of fund performance of which we can be absolutely certain, in advance, is fees. This means that the most important element in fund selection is cost.”
How do you keep the costs of investing low?
We do this by adopting a ‘passive’ approach to investing. Passive investing means buying a commercially or individually defined index of investments in order to get the market return in the long term, rather than trying to forecast potential short-term returns. Re-balancing keeps the exposure to risk consistent and ensures the valuable discipline of selling high and buying low the opposite to what your emotions want to do.
There are two main investment strategies within this passive approach:
• Indexing: an investment strategy that seeks to provide returns closely linked to an underlying benchmark Index after charges
• Asset Class or Smart Indexing: an investment strategy that seeks to determine which assets classes are worth holding for the long term based on academic evidence gathered over the last fifty years. These assets are then purchased in the most efficient and diverse manner making it highly likely that the returns on the chosen asset classes are achieved without undue trading costs or stock specific risk.
The case for Indexing
Index Managers believe share and bond markets are efficient and price shares and fixed interest fairly.
They allow commercial benchmarks to define investment strategy, which in practice means that the market knows what and when they need to buy and sell and sets prices accordingly.
Annual management costs are typically very low ranging from 0.1%-1% depending on the index being tracked and whether you achieve institutional pricing or retail pricing. Much lower trading costs are also achieved compared to those incurred by active investment managers due to the constant reading of stock in an attempt to find winners.
The case for Asset Class or Smart Indexing
Asset Class Managers believe share and bond markets work and price shares and fixed interest fairly.
They capture specific dimensions of risk defined by financial science – such as small and value shares, and increase the expected return through portfolio design and reduced trading costs.
Asset Class Managers are not forced to buy or sell any stock by the decisions of an Index Committee, which is a significant advantage. This means they tend to underpay for shares and achieve better prices when selling.
Annual management costs are typically very low ranging from 0.25%-0.75% depending on the asset class being tracked with emerging markets and global small value companies being the most expensive to invest in.
Lower trading costs are also achieved due to the low portfolio turnover and patience adding value over time.
BpH investment beliefs
We believe in what the last five decades of academic research tells us. You can’t beat the market in the long term so you shouldn’t try. This is why we recommend a diversified passive, patient, long term approach to your investments whilst protecting yourself from unnecessary costs.
It is better to invest in the whole market, not in today’s best performing part.
A focus on costs is just one of the secrets of good investment.
To discover a few more we recommend that you take 5 minutes to look at the following site where there are some interesting ‘table top’ guides.
Financial planning + control = improved self esteem and happiness
85% of those with high self-esteem feel in control of their finances. Nearly half are happy about their financial situation.
In contrast, 70% of those suffering from poor self esteem, don’t feel in control of their finances. Consequently, no one in this group feels happy about their financial situation
Aviva, Feel-Good Insight Study
This study by Aviva made interesting reading for us. The research shows a strong link between financial behaviour, self esteem and happiness and proves that those who have a financial plan in place and are in control of their finances are happier overall.
It also suggests that money can’t buy happiness as the link between money and self esteem is not related to salary, employment status or age.
A salutary tale – market timing is hard
Investors almost ritually make the mistake of buying high and selling low
Dalbar, financial research group
Marketing timing is hard, so hard that even the most experienced and respected professionals struggle to exit and enter the markets at the right time.
Early in July 2010, when market sentiment was perhaps at its worst, one revered financial markets professional announced he had sold half his equity holdings. Stocks had fallen nine times in 10 days and all the talk was of a double-dip recession.
His timing was just slightly out, as that point in July marked the beginning of a turnaround in stocks that took the US top 500 up more than 8 per cent over a four week period. He then announced he’d changed his mind and started to rebuild his position in stocks.
It doesn’t really reflect badly on this professional’s skills as an investor as he has quite a following. It does show the great difficulty facing even the most experienced and well informed investors in perfectly judging when to get in or out of the market.
Recent research by US financial research firm, Dalbar, demonstrates that many investors missed the boat in 2009 by moving into ‘safe’ investments like cash and missed the upturn when it came.
The best protected investors, Dalbar found, were those who worked with advisers that put their clients first. By contrast “do-it-yourself” investors tended to under perform those advised by a fiduciary.
So it’s a familiar story. Investment advice is not about making predictions about the market.
It’s about education and diversification and designing strategies that meet specific needs of each individual. Saving investors from their own very human mistakes such as over-reacting rather than staying the course.
From an original article by Jim Parker, Dimensional Fund Advisors
Good read: "The Financial Wisdom of Ebenezer Scrooge"
5 principles to transform your relationship with money
Ted Klontz, Rick Kahler and Brad Klontz
This is a great little read. Entirely based on Charles Dickens’s classic tale a ‘Christmas Carol’ and how Scrooge left behind his miserly ways and transformed into a completely different joyful and generous man, it offers a 5 step methodology to completely transform your relationship with money.
We learn that each of the three authors, quite independently, had suffered a number of painful events around money and how these events had set them on a course of inner discovery to find out what was wrong.
The book uses Scrooge’s reluctant journey to demonstrate how experience, beliefs and habit can influence your attitude and use of money. How we often live life exactly as we think we should rather than focusing on what would make us truly happy.
A useful tale about moving on, reducing financial stress and improving financial health and well-being.
Money, meaning and striking a balance
Money plays such a vital role in our lives it’s interesting to look at why, for many, it is such a taboo subject. It is so fundamentally part of who we are that you would think we would like to talk about it easily.
‘Live within your means’, ‘no matter how much money you’ve got, it is never enough’, ‘neither a borrower or a lender be’, ‘scrimp with the pennies, save with the pounds’, ‘you can’t take it with you’ … all echoes of what may be said to us in childhood. These may be words of wisdom issued to help us when we are starting to forge our own paths in life.
All seemingly wise statements, but are they? We can’t live in our society today without any money. We need to drink, eat, sleep and clothe ourselves. We need to provide for our dependents, to educate ourselves, our children and grandchildren so that we can earn more and be successful. We tend to forget what we enjoy doing and seem to spend most our time doing things we don’t enjoy and are not necessarily naturally talented at doing. It can so easily become a never-ending cycle that serves only to drain us and sap our energy.
Having enough money should make us happy but so often it doesn’t
Why do you keep working if you don’t have to? How much to save, how much to spend, how much to keep in reserve for a rainy day? The more money you have, the greater the complexity and the bigger the decisions.
Finding out what money means to you can be an emotional task. It takes stepping back in time and looking at the earlier influences in your life. Making sense of why you spend what you do and helping isolate your priorities.
Financial planning and life planning are inextricably linked
Listening and exploring personal issues as we do, it becomes clear time and time again that having enough money doesn’t equate to being happy. It’s only with the careful plotting of life needs, goals and aspirations that people can see the possible freedom that money can bring. It is also only once this journey of self-discovery is complete that meaningful financial planning can begin.
Then it’s about striking a balance between earnings and savings, risk and reward, life and work
If you are lucky enough to have realised you no longer have to work or your financial plan shows that you can live your desired life and not run out of money, then hopefully you are feeling a great sense of inner satisfaction. You can now choose how to spend your time. If you still need to work but have a deep sense of understanding that you’re on the right track, hopefully life will be lighter, happier, more fulfilling. That’s when you can really feel at ease.