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.
One of the many pleasures of my work is that I meet people from all walks of life who bring different perspectives to their financial planning. Different people will often view money differently too; some want to know that they have just enough for their lifetime while others who have perhaps inherited their wealth or act as an Attorney feel a real sense of responsibility and stewardship to pass their money on or to use it for a specific purpose. What is equally fascinating is the different ways they and we value money and the other elements that make up our lives, be it health, family, work, or those special items that we save up for.
At the end of last year, I listened to the Reith Lectures delivered by Mark Carney the former Governor of the Bank of England and now the UN Secretary-General Special Envoy for Climate Finance. Mark Carney has a real skill for communicating and my observations above came to mind as what he said really chimed with me. In these lectures which I wholeheartedly recommend if you have the time and interest, he looks at how as a society we have come to prioritise financial values over human values and the consequences of this.
It’s true that value and indeed success is often measured in financial terms for example a company’s profit, someone’s salary and the contribution goods or services make to a country’s economy (GDP). These are all essential to make our economy’s function but in isolation they can give money undue power. This single minded vision can also contribute to financial crises, our climate crisis. As my nephew aged 14 commented “so not only have you messed up the planet, but you have messed up the economy too”. I don’t think he is holding me solely responsible but for a number of decades money has been the primary concern at the expense of all else. It seems that our social values have often sat outside the financial markets.
HOWEVER……….. all is not lost as we are seeing a real shift in the role money has to play, which for a number of reasons will be more than a passing phase. This started before the pandemic (yes there was such a time!) and has since been accelerated by recent events. It was driven largely by the climate crises and the targets set by Governments worldwide including the UK’s ambitious target of achieving net zero carbon emissions by 2050 whereby we remove the same level of carbon from the atmosphere as we emit, with a significant reduction to be made by 2030.
Governments are not going to be able to achieve this alone, they will need large corporations, private finance, and the investment markets to all pull in the same direction. Companies will need to adapt and change their practices hugely to ensure they minimise their carbon emissions and operate in a climate friendly way – those that do not will not succeed.
We have also seen in the last year how Governments have prioritised health over the economy. We have come to value those who work in the healthcare sector and parents experiencing home schooling have come to value teachers. We have seen generous displays of civic duty with vast numbers of people volunteering, without them the vaccine rollout would not be the success it is, and many more people are wanting to be active in their community.
We are moving towards an alignment of monetary and social values where we are seeing that the companies who are doing well are those whose purpose is not just to create a profit but also do good for society.
I am lucky enough to have a number of clients in their 20’s and for them this is the norm, they are wondering why we have only just arrived at the party.
So, the future is bright, and we are all making a difference. I hope you have a great weekend, it doesn’t look as though its going to be a good one for gardening. If gardening is an interest the daughter of one of our clients, Tamsin Westhorpe, who is a renowned Gardener has written an excellent book that is providing me with lots of practical tips each month ……. perfect rainy day gardening!
Veronica Devereux DipPFS
The Chancellor’s self-promotion and prominent position in the Cabinet have led him to be dubbed Dishy Rishi by his admirers. And in the run-up to Wednesday’s Budget, Sunak was hardly camera shy. The 40-year-old posted an almost six-minute-long video on Twitter on Monday reflecting on his past year in No 11 – which has since been viewed more than 700,000 times. Can anyone imagine ‘spreadsheet Phil’ being on Twitter and having a video of himself prior to his last budget. I understand, this has raised eyebrows in Westminster and seen the Chancellor installed as the 5/2 favourite to be next prime minister by Ladbrokes. Sunak has an approval rating of 41 per cent, according to a YouGov poll, making him one of the most popular chancellors in recent years. Watch out Boris. Time to visit the Barber (once they open in April of course).
So, here are a couple of the headliners from the Budget and our thoughts:
These are also very much worthy of a mention, especially as we follow our roadmap out of lockdown:
As you know, I like to add in a few little news stories that have either made me smile or cringe!
In the news this week, we have:
…and finally, you may remember I did my little obituary to Eddie van Halen a few months ago. For all you cycle fans, you must see this paint scheme for a custom bike which was inspired by the iconic Eddie Van Halen ‘Frankenstrat’ guitar. Firstly, I love the paint job and who would not want to own a bike by the UK bike brand Windymilla. Inspiring!
As always, stay safe, healthy and keep a sense of humour.
Like most of my colleagues my days are very varied. In my dealings with clients, I keep getting reminded about the fragilities of life. It is impossible to keep some conditions at bay, but I am aware that keeping healthy is important (especially for a long retirement), so I start the day with a run.
Typically, the working day starts by heading into the office to deal with any messages that may have been sent overnight via our portal or email.
Then onto a meeting with my team – Harriet and Katy setting out the priorities for the day ahead. Harriet is my Paraplanner providing technical information/report construction etc. and Katy deals with the wide ranging administrative tasks (and there are many!).
Around 11am I may have the first client meeting of the day. Today with new clients who I had met before and wanted to retire but didn’t know if they had enough to do so. Harriet, Katy and I had worked to gather their information, looking at their ‘wish list’ of what they wanted to do in retirement and how much it would cost. The construction of the cashflow reports takes time but is so key in demonstrating what is possible. On this occasion, it was a privilege to let them know that they could retire. You can ‘feel’ the weight almost lift off their shoulders when you say this and the whirring in the brain and excitement of ‘what’s next?’.
After lunch my second meeting of the day is an Annual Planning Meeting with an existing client. They are in the fortunate position that they have enough income for their lifestyle and have said they don’t want to end up ‘the richest in the graveyard’. During the meeting, we talk about a gifting programme to ensure that the right people get the right money at the right time. Many clients have said that they would far rather gift money now to their family when they need it and get a pleasure out of seeing how the gift can help rather than waiting until they die. This is a good conversation to have and a plan is developed.
Talking to my colleagues we are all looking forward to getting back to having these meetings face to face.
I speak with many clients who have been and are going through different stages in life – especially retirement. This has influenced my own thinking of what life after work could look like for me, of course everyone is different. I have many years to continue planning for this as with a 10 year old in tow, I am aware that demands on my wallet will only increase!
Someone once told me that in terms of travelling I should work from the ‘outside in’ – this means travelling to the furthest countries that I wish to visit during my early years and work my way back closer to the UK, as travel becomes more challenging the older you get.
Another tip I picked up from a GP whose friend was a Geriatrician – his advice was walking every day (at least 3 mph) and get a dog. That’s the second GP who’s advised getting a dog in retirement, and not just for exercise – there may be something in that as our cat tends to just walk from the sofa to his food bowl. You don’t get healthier the older you get – a generalisation I know, but reasonably accurate. In other words, ensure that you do the most physically demanding and fun travel/projects as soon as possible.
All things to consider and I’m sure many more ideas will be relayed to me over the coming years.
Have a good weekend and if you have a dog, enjoy exercising in this spring weather and if you don’t, perhaps think about it!
Chartered Financial Planner