Now that summer is finally upon us, we hope you’ve been able to find some time to get outside and enjoy the sun! Whether you prefer a hike in the hills or to sunbathe in the comfort of your garden, there’s no better time to be outside in the fresh air.
It’s been a busy few months for us here at Brunel and there’s certainly a lot to talk about, so read on for your latest team update.
Kate’s night trek up Mount Snowdon
Kate Harris, our operations manager, undertook the challenge to climb Mount Snowdon to raise money for a charity very close to her heart. 18 months ago, Kate tragically lost her mother to chronic obstructive pulmonary disease, a serious breathing disorder.
Given her mother’s Welsh heritage and love of hiking, Kate and her sister decided that the best way to honour their mother’s memory was with a sponsored night walk up Mount Snowdon. The proceeds of their incredible effort would be donated to the Lung Foundation charity to help other sufferers of the disease.
While the two were no strangers to long hikes, doing it at night was a new challenge. Setting off in the late evening, the group began their long trek. There was an incredible spirit of teamwork, with everyone helping and encouraging the others, so after only three and a half hours of hard work, they finally reached the summit.
For Kate, one of the most memorable moments of the hike was on the return. As the group were halfway down the mountainside, the sun began to rise over the far hills. The view, and her sense of achievement, was unforgettable.
Not only had her challenge created amazing memories, but it had raised an incredible £1,600 for the Lung Foundation. We are all very proud of her achievement and are sure you’ll join us in congratulating her for her efforts.
Director Peter Hill’s retirement
In May, we said goodbye to Peter Hill, a director and one of the original founders of the business. Having spent his whole career working in financial services, he is now leaving for a well-deserved break.
For the last 10 years, Peter has poured all his energy into developing our business, putting together a first-rate team to deliver high-quality service for all of our clients.
We were lucky enough to give him a proper send-off at his home in Bishop Sutton, with a great afternoon of fun and games in the lovely weather.
Peter’s drive, ambition, and boundless enthusiasm will be greatly missed and we’re sure that everyone who knew him will join us in wishing him a long and happy retirement.
The re-opening of our offices
The coronavirus pandemic has been very challenging for us in recent months and so, like most other businesses, we’ve had to adapt.
In the past few months most of our team have been working remotely, aside from a small presence who remained in our offices. Now that the government has eased the restrictions, we are delighted to tell you that our staff have been able to return to the workplace.
Like many firms, we have given our team the option to work flexibly, depending on their preferences. We are all looking forward to experiencing the buzz of the office again, being able to enjoy each other’s company and bounce ideas off one another to deliver high-quality client service.
If you’re visiting us in Wells, you’ll also get to meet our newest team member, Sally Brooks. She has just joined our client services team and will now be the first point of contact for our clients.
While our offices have reopened, we’d like to assure you that we’re taking appropriate measures to keep both you and our staff as safe as possible while returning to some level of normalcy.
As always, if you ever need to speak to us for any reason, please don’t hesitate to get in touch. Please email email@example.com or call us on 0117 214 0870.
The pandemic has been a difficult time for many people but, at long last, some of our freedoms have been returned. After many long months, the UK has taken its first step on the long road out of the pandemic restrictions.
One of the best ways to relax in summer is by sitting down in the sun with a cold drink and a good book, whether on the beach or in your back garden. So, to celebrate the loosening of lockdown restrictions, here are our top seven books about freedom.
1. The Great Escape by Paul Brickhill
Starting off with the classic story of one of the most well-known escapes in history, The Great Escape is the exciting tale of how hundreds of captured British soldiers worked together to organise an incredible breakout from Nazi captivity during the war.
Their task was no easy feat, as the infamous prison camp was supposedly escape-proof. But right under the noses of their guards, they dug tunnels, forged passports, and stitched German uniforms to help them make a break for it.
The escape was well-organised and timed to the second but, of course, sometimes not everything goes according to plan…
This book is an incredible account of ingenuity and courage in the face of danger, proving that real life can be just as exciting as fiction.
2. The Backpacking Housewife by Janice Horton
When ordinary housewife Lorraine Anderson comes home one day to find her husband in bed with her best friend, she decides to put on her coat, set off for Gatwick airport, and never look back.
A heart-warming novel, this book follows Lori’s journey of self-exploration as she slowly discovers who she really is under the titles of wife, mother, and business owner. As she encounters new opportunities, the reader gets to watch her blossom to her full, realised self.
A brilliant book that’s hard to put down, The Backpacking Housewife is an excellent read for anyone craving a bit of summer escapism.
3. Brave New World by Aldous Huxley
In New London, everyone is happy. A perfect society has been achieved through mind-altering drugs, hypnotic conditioning, and the destruction of family bonds. Happiness itself has been distilled down into a pill that can make you forget about anything bad that ever happens.
But there is one person who is unhappy, a scientist called Bernard Marx, whose job in hypnotic conditioning gives him some perspective on how flawed their society really is. His journey to find meaning in this world leads him to explore what it really means to be happy.
Huxley’s classic dystopian novel is a thrilling read and sits at number five on the Modern Library’s 100 best English-language novels of the 20th century. Even though it was written in 1932, its vision of the future is both terrifying and believable.
4. Persuasion by Jane Austen
One of the great Victorian novels, Persuasion was Jane Austen’s last novel and is generally thought of as her most mature.
The heroine of this book is the 27-year-old Anne, who, as an unmarried young woman, is effectively a prisoner of her overbearing father and is trapped in the gilded cage of her family mansion. Worse still, she has no true companions and is surrounded by some of the worst people that high society has to offer.
But when Anne reconnects with an ex-fiancé, whom her family pressured her to leave, this gives her the opportunity for a second chance at love and the possibility of escape from her family.
A beautifully written novel, Persuasion is full of humour and is sure to warm the heart of any reader.
5. The Thing Around Your Neck by Chimamanda Ngozi Adichie
Number five on our list is The Thing Around Your Neck by Nigerian author Chimamanda Ngozi Adichie. This collection of short stories explores a variety of topics, from romantic heartbreak to the difficulty of immigrants to adapt to life in their new country.
A compelling book that addresses many difficult topics, such as religious tolerance, sexual freedom, and economic exploitation in modern Africa, it is as engaging as it is thought-provoking.
6. Freedom by Daniel Suarez
In the much-talked-about sequel to the 2006 novel Daemon, Detective Pete Sebeck returns to help lead a small band of enlightened humans fight against the odds in this terrifying techno-thriller.
Leading on from the prequel, the malicious computer program known as the Daemon is firmly in control, silently using a network of spies to tear down society and rebuild it according to its own wishes.
As civil war breaks out in the American Midwest, Sebeck is forced to lead a populist uprising and fight against the powers that be. In a world of conflicted loyalties and rapidly crumbling authority, humanity’s freedom itself is at stake.
An excellent read for any fans of the cyberpunk genre, Freedom is definitely worth a read this summer.
7. The Long Walk by Slavomir Rawicz
Slavomir Rawicz was a young cavalry officer in the Polish army, but when the Soviets occupied eastern Poland in 1939, he was arrested by the communist secret police. After they beat a confession out of him for things that he had never done, he was sent to a work camp in the farthest reaches of Siberia.
Camp life was brutal for the prisoners and so he and several others formulated an escape plan. They trekked over four thousand miles through Siberian forests, Mongolian deserts, and even the Himalayan mountains to reach freedom in British India.
Rawicz’s incredible journey is a breathtaking true story of survival against the odds and resourcefulness in the face of danger.
Learning how to manage your money effectively is a key life skill. If you want to build your wealth, it’s important to start from a solid foundation of financial sense.
While you will already have these necessary skills, you may have loved ones who don’t. According to the National Student Money Survey, 71% of respondents said they wish that they’d received better financial education when they were younger.
If you want your loved ones to know how to manage money once they’re old enough to fly the nest, there are a few things you can do to help them. Here are three useful financial lessons to teach them.
1. The importance of developing good saving habits
If you want to instil good financial habits, one of the most important lessons that you can teach your younger relatives is the importance of saving money for a rainy day.
While something as simple as a piggy bank can be a great way to introduce young children to the concept, when they get a bit older, you may also want to consider something a bit more sophisticated.
Setting up a junior savings account on behalf of your child can be a great way to encourage good habits and build their financial knowledge. You could also help them to pick an account, which would give you an opportunity to explain aspects of saving such as what the interest rate is. Junior savings accounts tend to attract a better rate than those for adults and they could monitor the rate and let you know if it changes.
Once it’s set up, it can be a good idea to talk to them about how much of their pocket money they’d like to save each month and how much is available to spend.
Once they get a bit older and get their own phone, you may want to introduce them to apps such as RoosterMoney, which can teach them more about managing their money. This allows them to transfer pocket money and set savings goals so they can see the benefits and rewards of saving.
2. How to budget effectively
Another useful skill to teach younger family members is how to budget effectively, as this is one of the cornerstones of sensible financial planning.
This can also be particularly useful if your loved ones may one day go to university. According to the National Student Money Survey, 1 in 10 of the respondents said they had never budgeted before leaving home.
Many of us have experienced how growing children (and especially teenagers) are never full, which is why food can be one of the easiest ways to teach lessons about budgeting.
One example is to make a snack list for your weekly shop and letting your younger relatives pick which items they want within a budget. You can also use this method to encourage healthy eating by making a piece of fruit cheaper and junk food more expensive.
When they get a bit older, you can also get them involved in meal planning and preparation. Not only is knowing how to cook a useful skill for any child to learn, but it can also teach them important lessons about budgeting and substitution.
3. How overdrafts and credit work
As your loved ones get a bit older, you may want to start teaching them more complicated lessons about managing their money. Explaining to them about overdrafts and credit can be useful, as it may prevent them making costly mistakes.
It can be easy, especially for younger people, to view the overdraft as essentially free money. This is particularly true for students, who often benefit from 0% interest on their overdrafts.
Of course, this isn’t the case and that’s why it’s important to teach your loved ones that an overdraft should only be relied upon as a last resort. If they fall too deep into their overdrafts, they may rack up hefty charges.
Another important lesson can be how to use credit effectively. While many young adults don’t feel the need to get a credit card as soon as they are eligible, it can still be helpful for them to know more about how they work.
Credit can be useful, such as when making large purchases, it can also have potential downsides too. Getting too deep into debt is an obvious one but relying on credit can also leave them open to one major problem – the risk of missing payments.
If they do, it could harm their credit score. This would seriously impact their financial wellbeing and could make it more difficult to purchase a home later in life.
Sitting down with your loved ones and explaining to them the risks of relying on credit can help them avoid running into problems later on.
Get in touch
No matter what stage of life you’re at, there are always financial lessons that you can learn. If you have questions about your or your family’s financial affairs, get in touch. Please email firstname.lastname@example.org or call us on 0117 214 0870.
11th June 2021
As we move into summer and a welcome period of warmer weather, I thought it would be a good time to reflect on the last year from a ‘markets’ perspective.
The stock market’s response to Covid-19 was breath-taking in its speed. On 17 January 2020, the FTSE 100 closed at 7,674. We did not know it then, but that was to be its high point for the entire year. By 23 March 2020, it closed at 4,993. And while we did not know it then, that was to be its low point for the entire year. Investors should give serious thought to the speed at which the markets reacted, declining at high speed, and going from peak to trough in a matter of weeks. Compare this to the events of the financial crisis which saw stock markets go from their highs in June 2007 to its lowest point in March 2009, a period of almost 20 months. Now while the two events are of course completely different, the financial crash of 2007-2008 now seems to have been almost pedestrian in its reaction when compared to a global pandemic.
As you know, we are firm believers in how ‘markets’ work; investing is for the long term and most importantly we believe that ‘no one size fits all’ and that you should have your own personal investment strategy that meets your individual goals, needs and risk profile. To support this belief, I have used a chart produced by Columbia Threadneedle Investments.
By staying the course and not being tempted to time your investments, the benefits are clear. What is surprising is the level of lost growth by missing the best 10 days in the last 23 years!
As you know, I like to introduce a few relevant articles which may have caught your eye in the past week:
Sausage fight: is the UK heading for a trade war with the EU?
The EU is said to be threatening a “sausage trade war” with the UK if it fails to comply with the “international law obligations” set out in the Brexit agreement 17 months ago. I know we should not smile or even laugh but you cannot help it can you?
G7’s ‘seismic’ tax deal: what will it mean for the world’s biggest companies?
The G7 group of wealthy nations struck a deal at the weekend that would create a global minimum corporate tax rate of at least 15% and make the world’s largest multinational companies pay more tax in each country they operate in.
Finance ministers met in London to discuss the tax reforms and the UK’s Chancellor of the Exchequer Rishi Sunak hailed the agreement as “seismic” and “truly historic”.
The deal announced between the US, UK, France, Germany, Canada, Italy, Japan and the EU could see “billions of dollars flow to governments to pay off debts incurred during the Covid crisis”, the BBC reports. And according to estimates from the Organisation for Economic Co-operation and Development (OECD) as much as $81bn (£57bn) in additional tax revenues each year would be raised under the reforms.
“A process has begun, a precedent has been set,” says the BBC’s economic editor Faisal Islam. “It may or may not end up being transformative, but this moment is historic.” I agree and I think probably about time!
… to finish – who remembers Bernie Madoff?
Bernie Madoff, “mastermind of the largest Ponzi scheme in history”, died 14th April 2021, said Ben Hoyle in The Times. Madoff, 82, was serving a 150-year sentence for swindling thousands of well-heeled clients out of some $65bn in investments – having beguiled them with fictitious annual returns of 10% or more. A former chairman of the Nasdaq, he exuded authority. Among those ensnared were actors John Malkovich and Zsa Zsa Gabor, director Steven Spielberg and the Nobel Prize-winning Holocaust survivor Elie Wiesel, whose foundation lost $15m. “We thought he was God. We trusted everything in his hands,” Wiesel remarked. But Madoff fooled even the pros. Fund manager Nicola Horlick – the so-called City “superwoman” – invested £20m with Madoff, telling the FT just before his exposure in 2008: “he is very, very good at calling the US equity market”.
In reality, Madoff was simply funnelling money from new clients into the accounts of earlier investors and passing it off as “stunning returns”, said Laurence Arnold on Bloomberg. But unlike the infamous Charles Ponzi, whose 1920 scheme “soared and fell in the course of one year”, Madoff “kept his ruse going for at least 15 years, even under the gaze of regulators who visited his office to inspect his records”. The fraud eventually collapsed when plunging stock markets following the Lehman Brothers collapse prompted panicking clients to seek withdrawals. More than a decade on, efforts to recover Madoff’s “ill-gotten funds” continue on behalf of ruined victims, said The Wall Street Journal. “Legal efforts are expected to play out for years.”
I do think of Bernie’s Ponzi scheme when I see the constant news around Bitcoin, so don’t be tempted – “if something is too good to be true, it usually is”!!!
Enjoy the sun.
The investment adviser Charles Ellis famously pointed out in 1975 — investing is like tennis. For professionals, it is a winner’s game. But for amateurs, it is a loser’s game.
“Professionals win points, amateurs lose points. Professional tennis players stroke the ball with strong, well-aimed shots, through long and often exciting rallies, until one player is able to drive the ball just beyond the reach of his opponent,” wrote Ellis.
“Amateur tennis is almost entirely different… the ball is fairly often hit into the net or out of bounds, and double faults at service are not uncommon. The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor… gets a higher score because his opponent is losing even more points.”
I do not think I like the term “loser”, but I get his point, which is that is that if you do not have a structured, repeatable approach to portfolio management, which you implement year in year out, your portfolio can fall apart.
The analogy echoes many studies completed over the years that have found that the investors worst enemy is often themselves. At IronBright we review the Dalbar Report every year which continues to re-enforce that individual investors regularly underperform relevant benchmarks due to poor behaviours and lack of discipline, which is summarised in the well renowned ‘The Behaviour of Individual Investors’ paper Barber & Odean – “The behaviours deleteriously affect the financial wellbeing of individual investors”.
Deleteriously – what a word!
But then this begs the question: ‘Is your professional investment adviser sufficiently, and smugly, equipped to deliver better returns”? Uncomfortable question, which I bravely put to the test looking at our portfolios against their respective benchmarks over the last 5 years, which has been a challenging period to both amateur and professional alike.
Benchmarks can be completely misleading, but we have ours about right. They offer the same asset allocation as the respective portfolio with the projected asset class returns as those prescribed by the FCA, which are reviewed on a regular basis by PWC e.g., UK equities 7.00% p.a. and UK Corporate Bonds 3.00% p.a.
The chart above shows a selection of IronBright portfolios, which hold the majority of our clients’ assets -very relieved to report that we are ahead of the game. “15 – love the Professional”.
Pleased, relieved and certainly not smug….honest.
As you read this, we have just passed the third of the five dates in the Government’s tortuous pathway to normality.
I haven’t yet ventured out for my “Alfresco” pint. It’s just not the same in a hat, scarf and gloves! Nor have I been for a haircut as I don’t have any hair, as many of you will know.
Outdoor sports is back which is very welcome in the Rylett household. Things have moved quickly from being virtually housebound every evening to out every evening. I shouldn’t complain.
I have seen my parents for the first time in a long while which was wonderful and very emotional after an extremely tough time as my father suffered a stroke in January and has been recovering slowly. The care and support he has received from the health services despite the pressure it is under has been second to none.
I have a summer break in Cornwall to look forward to although the one in Greece remains doubtful.
I had my first jab today so it is great that the rollout programme continues to thunder on and reaches us youngsters!
This is all good news and the mood has definitely been lifted. I hope that you are enjoying the relaxations too and we would be interested to hear what you are doing for the first time in a while.
Who knows what kind of world we will be re-emerging into?
It won’t be until the furlough scheme(s) end and the economy fully resumes that we will know the true state of things.
I wish with every fibre in my body for the good health of small businesses, the backbone of this country in many ways.
Time will tell. I don’t pretend to be optimistic but then I don’t know what the future holds – and nor does anyone else, for the record.
Spring is a time of renewal, of promise. Let’s put the rubbish year and a bit behind us and move on.
Now that we have some of our freedoms back, I sincerely hope that you won’t be waiting for our weekly update to land in your inboxes on a Friday afternoon. Hopefully, you will be out doing something much more fun. We will be continuing with these but moving them to monthly. I do hope that our little updates have helped in some way to get you through one of the most challenging periods some of us have ever or will ever face.
Onwards and upwards.
Damien Rylett CEO
How to kill two taxes with one stone (ok, maybe not kill exactly)
I am under no illusions that an article on tax is going to capture the imagination but please bear with me!
Now that we are at the start of a new tax year, there is one particular area I wanted to bring to your attention. Don’t worry I have no intention of staring into a tax crystal ball and predicting what may change in the future.
There are however two well-established tax traps that are all too easily missed but, in many cases, can be equally easily avoided if you know where to look. It is also possible to help a child or other family member avoid them which creates a win-win against both Income Tax and Inheritance Tax.
The first is the snazzily titled ‘High Income Child Benefit Tax Charge’. Imagine, if you will, someone a bit like me but only in so far as they are married and have 2 young children. If either my wife or I earned over £50,000 then not only would we start paying higher rate tax but we would also have to start paying back child benefit.
Now, imagine my wife earns £60,000. If she did then not only would she have paid 40% income tax on the income between £50,000 and £60,000 but she would have to repay the child benefit in full which is another £1,820 giving a total effective tax rate of 58.2% and leaving her walking away with just £4,180 in her pocket from £10,000.
Imagine, instead that you could turn that £4,180 back into £10,000 and the only catch is that it was in a pension to help fund her retirement. That’s a pretty attractive 239% return!*
The detail of how this works is below but I think it is important to make people aware of this. From experience, if that were indeed my wife, cashflow can be tight with 2 children but there is no reason why a parent couldn’t make this contribution on behalf of an adult child. If this were treated as a gift either out of income or by using the £3,000 annual Inheritance Tax (IHT) exemption then it is win-win as it also helps pass money to the next generation efficiently as far as IHT is concerned.
The second trap I want to cover is the loss of Personal Allowance for income exceeding £100,000. The ‘trap’ in this case exists for people earning between £100,000 and £125,140. For every £2 of income above £100,000 then £1 of personal allowance is lost.
This creates a punitive tax rate of 60% for this section of income. This comes from 40% income tax and an 20% extra tax for the amount of lost personal allowance.
I’m sure you get the idea now with pension contributions, but this can be another point at which pension contributions become incredibly tax efficient.
I will leave it there for now. If you think this could affect you, a family member or someone you know why not get in touch with your Planner and see if we can help.
*In practice the individual would make an £8,000 initial outlay into the pension. The scheme would reclaim £2,000 within the scheme giving a total of £10,000 in the pension. Higher rate tax (a further £2,000) would be reclaimed via a tax return taking the net cost to £6,000 and the Child Benefit of £1,820 can be kept making the net cost £4,180.
Financial Planning Director & Chartered Financial Planner
I must confess to having had a bit of a dilemma last Friday evening. France hosted Scotland in the final game of the Six Nations and who to support as an Englishman? The first emotion of “get behind the Sweaty Socks” was then swiftly followed up with a stronger emotion “Allez les Blues” because a France win by a certain margin meant Wales would come second overall and there would be much crying and gnashing of teeth down in the valleys.
Growing up in the 70s on the back of countless Welsh hidings has instilled in me such an unwholesome knee jerk reaction of ‘anyone but Wales’, which I am the first to agree with is not to my credit. But there you go – you get emotional about matters and you invariably make the wrong decision. Having had a stern word with myself I painted my face blue, sang Flower of Scotland like a warrior from Brave Heart, and watched an epic game to crown an epic tournament. Well done Wales (yes really) and well done Scotland who won the game at the death in dramatic style and came of age.
Many get emotional over investments both on the upside and on the downside, and indeed if they drift for too long. Emotion and investments become a heady cocktail, which leads to poor decision making. We have begun planning for the May rebalance when all portfolios are realigned back to their original asset allocation, an exercise that happens twice a year. Having zero emotion about such an important decision means that there is no soul searching about market timing or navel gazing about how much to sell and how much to buy. We have etched the investment process into tablets of stone and implement it at specific dates in the year. We complete comprehensive ongoing research and due diligence on the portfolios but will not be sucked into short term tactical decisions.
True to our word though when we stated earlier this year that any changes in our portfolios would have to favour a sustainable mandate, we will be adding the Liontrust Sustainable UK Growth fund to the IronBright Core Satellite range and introducing the Stewart Investors Asia Pacific Sustainability fund to the IronBright Sustainable range at the rebalance. We like both Liontrust’s and Stewart Investors basic belief that those companies that will survive and thrive are those which improve people’s quality of life, be it through medical, technological, or educational advances.
Most clients who I have spoken with over the past year have accumulated surplus cash, partly I would like to think down to our investment prowess, but probably more so because there has been very little to spend it on. With the Easter break only a few days away, the prospect of Summer on the horizon and the joyful promise of further relaxing of ‘The Rules’ even I am, on reflection, becoming a bit emotional …. nearly time to go face down in an enormous chocolate egg and spend a bit of accumulated cash planning a family holiday…. what could possibly go wrong!
From me and all of my colleagues may I wish you a very happy Easter.
We enjoy working with people of all ages. One of our recent new clients Miranda Parkinson, is in her 20’s and is a creative writer specialising in media. Having worked with her to establish her investment objectives we asked her to share her perspective on Pensions and whether she feels this is something that resonates for her and her peers. She’s based in London and currently looking for her next position in content creation and writing. Here are Miranda’s thoughts which you may wish to share with young members of your own family.
You heard your parents talking about them once. You’ve got a friend of a friend with a fancy job who’s already started putting heaps of money into theirs – probably. You vaguely remember a teacher mentioning them at school…
…but you’re still not entirely sure what they are.
Never fear – you’ve come to the right place. We’re going to give you the lowdown on pensions, from how to get one and who exactly pays into it to why it’s so important to suss it out early.
Simply put, a pension is a special type of savings account where you put money to be used when you retire. Everything you put into a pension is invested over years so when you get around to using it, it’s had plenty of time to grow.
But how exactly do you start one? In the UK, you’re automatically enrolled into a pension once you’re 22 and earning at least £10,000 a year. Your employer is required to enter you into a pension scheme and contribute at least 3% of your salary. The type of scheme and how much your employer pays will differ – but your employer will fill you in on that.
As well as your own pension, there’s the state pension – money that the government gives you. At the moment, the basic state pension is £134.25 a week and this kicks in when you reach the current retirement age, 66. Without your own personal pension, this money would have to cover accommodation, bills, food and any other living costs you might have.
And here’s the bad news: this is going to change. As of April 2028, the state pension age will be 68 years old, so there’s really no telling what it will be in the future. The age of retirement will increase and the state pension might get lower – or at some stage in the future it might not even exist!
But it’s not all doom and gloom. The younger you start investing in a pension, the bigger the rewards are going to be. One of the main benefits of putting money in early is the effect of compound growth. Let’s say we decide to invest £100,000. If there was growth of 5% next year, it would be worth £105,000. Then, if there was 5% growth the year after that, it would be on this larger amount. This means our money would increase to £110,250…and so on. Even investing small amounts has a powerful effect over time.
Research has traditionally shown that young people are the least likely age group to save money and for many, the idea of putting money away can seem really daunting – especially in something like a pension, where you can’t get at it until you are much older or retire.
If you don’t feel ready to start investing in a pension, opening a LISA is a good alternative. This is a new type of ISA (individual savings account – the L stands for lifetime) created by the government that gives you a bonus of 25% on everything you put in. This can be up to £4,000 a year and all you have to do is open one before you’re 40. Like a pension, delaying opening one could actually lose you money in the long run!
Although we probably won’t be earning much when we start working, investing a small amount gives it more time to grow and it’ll seem much less painful! Instead of having to invest something like 20% down the line, you could invest 5% over a longer period – and thanks to our friend compound growth, you’ll end up saving more.
A healthier bank balance and a growing pension pot? Sign me up!
Benjamin Graham once famously said that “The investors chief problem and even his own worst enemy is likely to be himself.” Graham was a British born American economist and professional investor who sadly died in 1976. Warren Buffett described him as the second most influential person in his life after his own father.
Since 1994, Dalbar, in the US have been producing an annual study that looks to measure the effects of investor choices to buy, sell and switch into and out of different investments over short and long timeframes. The results are startling over all time periods.
If we just look at the last five years, the US stock market as measured by the S&P 500 returned 8.49% per annum. Over the same period, the average US equity investor achieved a return of just 3.96% per annum.
To put this in context, investors underperformed the market in which they were invested by a whopping 4.53% a year.
The only explanation for this huge difference in returns is INVESTOR BEHAVIOUR. That is, that they made decisions based on emotions rather than sound academic foundations. They simply sold out at the wrong time or they bought in at the wrong time.
The research supports our belief that the dominant determinant of long-term, real-life investor returns is the behaviour of the investor himself. Many investors believe, and have been lead to believe by their financial adviser that their returns depend on being in the right funds or types of investments, or, whether they are in or out of the market at the right time. The dominant determinant is behaviour, NOT selection and certainly not timing.
It is undeniably clear that investors can almost double their return by simply avoiding harmful timing decisions and by maintaining a disciplined and rigorous buy-and-hold strategy.
Carl Richards, a US based adviser and creator of the Sketch Guy column in the New York Times, refers to this phenomenon as the “Behaviour Gap” and wrote a book on this subject in 2012. When we were moving office in September, I stumbled across a box of Carl’s books. I’d like to give these away and will offer a copy (signed by Carl) to the first eight people to message me at email@example.com. I’m just sorry I don’t have more copies of this great book.