With so much still uncertain, what does Financial Planning in the post-Covid world look like?
Just over 100 days ago, the biggest uncertainty investors faced was a matter called ‘Brexit’; remember that?
Brexit was 24/7; constantly in the media for more years than I care to remember. We had those in the ‘Armageddon… we will run out of food and pharmaceuticals’ camp and those in the ‘freedom of trade, best thing that can ever happen’ camp, and those in the middle who just wanted someone in Government to pick up the mantle and deal with it.
Now what do we have? A hidden silent attack on humanity, and Brexit has disappeared from our screens, at least for the time being.
So what has happened to markets since the beginning of the new decade and which investment approach has fared the best?
Below are actual examples of investors’ portfolios who had previously asked Goldsmith Invest for a review, but subsequently decided not to take advice as apathy settled in. Performance graphs are taken from January 1st 2020 and are based on the individuals current portfolios (blue line), against a transparent financially efficient portfolio managed by Goldsmith Invest (green line) on a like for like risk basis, gross of fees and charges.
Response: I don’t like paying advisor fees, I can do it myself choosing the best buy funds promoted by the financial media…Fund value was £253,257… Current value £238,170… GFS value £255,480. Investor has lost £17,310.
Response: My best friend is a financial adviser with SJP. I don’t want to let him down. He is a family friend. Fund value £347,034… Current value £331,430… GFS value £357,310. Investor has lost £25,880.
Response from successful business owner’s husband and wife: We understand the markets and do our own research using Hargreaves Lansdown. We are making money and do not need to pay adviser fees. Husband Fund value £715,985… Current value £636,930… GFS value £715,980. Investor has lost £79,050.
Wife Fund value £582,350… Current value £494,640… GFS value £582,350. Investor has lost £87,710.
Total family loss £166,760!!!
I wonder what needs to change so that investors can understand that costs and charges taken by the industry will have a detrimental effect on their long term wealth?
The lack of incentive from consumers to walk away from poor investment outcomes or companies that inflict unnecessary high charges creates an apathy in the industry to do anything about it. Why would they if their clients accept their substandard performance or high fees as acceptable.
Do you use any of the investment strategies listed above? Has the paying extra fees approach worked for you?
Certainly not for those investors above.
Do low fees mean low performance? Not if your portfolio is constructed in a financially efficient and globally diversified way as the graphs above clearly demonstrate. Yes, if you go for a cheap ‘buy online’ model portfolio approach, which just wants to attract funds under management at the lowest cost, to sell on to a big player at a later date.
That is why choosing a fund manager that can supply transparency with performance and low cost is so important. Even if the market returns are the same, having less fees being taken out of your investment pot, means that you have more money to compound and over time this amount makes a massive difference to your future lifestyle after all why do you invest, if it is not to maximise your returns.
Now is a very important time in our history where investors need to take notice of what is happening around them in the financial world, especially if they wish to acquire additional wealth and have the option to control their future lifestyle. Government is borrowing at an all-time high, taxes are about to dramatically increase for many years to come, which is necessary to pay back the government assisted loans and pay back individuals salaries covered on the furlough scheme.
On top of this, I ask the question what have you or your financial adviser done to hedge your portfolio against Brexit? (haha! That word again, it’s still there!!)
It’s frightening to think about what the future may hold, with economies, cultures and technology changing so fast. Who would have predicted 100 days ago that most meetings around the country would be held by Zoom technology and many employees will now continue to work from home. What will happen to City Centres as buildings become redundant due to less demand?
But we can give ourselves a helping hand if we act quickly enough and reclaim our money from these large financial institutions there are other, more financially efficient, ways to invest. Creating sufficient wealth over our lifetimes will enable us to have choices in later life. Being dependent on others in the future, I do not believe will be a happy place.
The question is, how do we create additional wealth without putting additional pressure on our current expenditure? With low interest rates and uncertain investment returns, creating additional wealth from the money we have accumulated to date, has become even more important.
However, suppose I could share with you a way to create additional wealth from your existing portfolio’s (just like I have in the performance graphs earlier)… just by using a transparent, financially efficient way of investing, using Nobel Prize winning academic data. The data is available to all investment managers, it’s just the big boys have their own way of making money to cover their costs. My approach is that this is your money and it is you who should benefit.
Having a financial advisor can be an important part of investing, but are financial advisor fees worth it?
Having a financial advisor can be an important part of investing, but are financial advisor fees worth it? In the financial world it could be said that both the financial services industry and the financial media are perfectly aligned.
The financial services industry can promote using the media, a product or share a prediction of what’s going to happen in future markets (to promote their companies) and the financial media get to fill their pages or news full of noise and get paid advertising revenue for doing so.
The media is full of financial services companies all trying to vie for your money with well-designed advertisements promoting how good a particular fund is performing, or that they have a current high profile investment manager in their ranks. Therefore it is hardly surprising that readers who are being bombarded by this financial noise day in and day out, can only identify the financial industry as selling a product; and they are not wrong.
The ‘layers of cost’ in the financial services industry
For decades the Wealth management and Insurance companies have first and foremost (in my opinion) promoted themselves and their products for their own financial gain, before that of their investors. Why wouldn’t they, they are in business to make a profit. The reason they promote the product over the service is that layers of cost can be built into the product and hidden in pages of disclosure documentation, which very few investors read.
Those employed by these companies are under obligation to get as much ‘funds under management’ as they can to justify their salaries and to secure their bonuses, regardless of investors’ outcomes.
Investors on the other hand have no interest in ‘Industry Product’. Investors care about their own financial security. Investors are less concerned about losing money short term in the stock markets, but are more worried about not living their desired lifestyle in later years, when it is too late to do anything about it. Investors are not interested in understanding volatility, but they are worried about being stuck with a reduced pension fund at the moment they want to retire.
So how does an investor without any financial training turn a complex, sophisticated and noisy world into a positive and successful investment experience?
They have two options. Option one is they listen to the media and make decisions based on the bestselling funds; deciding when to buy and sell and play the rollercoaster game of chance.
Personally, after over 30 years in this business, I do not call that investing. I call it gambling! Like all gambling, you will win on occasions but overall, unless you are lucky, you will lose. That is why gambling is a loser’s game.
I believe investors who leave their future financial security, future desired lifestyle and the size of their pension fund to chance, cannot complain when they get to later life and realise the financial services industry has not delivered on their expectations.
You cannot have an expected outcome if you do not plan and you leave such important matters to chance.
Option two is to make a financial plan. Use a specialist independent financial advisor you can work with on an annual basis to create your own financial blueprint and help you build a transparent and financially efficient investment strategy. Yes you are paying a fee for that, but all elite players at the top of their game employ coaches. Specialists that make that little difference between success and failure.
Let me give you an example:
Ten years ago I was introduced to an elderly lady, who said her husband had recently died and he had always looked after their money. She had called the Bank (they had been a client all their working lives) for an advisor to come and visit her (probably on the back of a black horse), but had been declined because the value of the portfolio had fallen below their minimum value for a personal home service. They were drawing an income from their savings to live, so this was not an unusual situation and the fund was expected to fall further.
She had been invited into a town branch to discuss her situation, however, being elderly and frail this was not an option. She was also invited to a telephone conversation with an online advisor, but not having a clue what she had, she felt vulnerable, so declined.
Therefore her decision was to do nothing and she became distressed not knowing what she had or how long she could draw an income for. Her husband had a pension and chose to take it on a single life, so on his death she had nothing except for this portfolio.
I played golf with one of her friends who recommended me so I went to talk with her. The amount of money is irrelevant. What is relevant is this lady was now a great grandmother and her family now lived in Australia.
When I was talking with the lady, I was not talking about the product. I was not talking about volatility. I was not saying this fund is better than that fund. I was asking what she wanted to do with the remaining years she had left on this planet and what might I do to make those years very happy ones.
She wanted to visit Australia and meet her great granddaughter and spend time with her. She felt she could not afford to do so, as this was all the money she had left. I asked her how she would feel if she did not meet her great granddaughter and her eyes welled up.
I took on her case and worked out her cash flow. I took her income and living expenses into consideration and then counselled her on what she could spend on monthly living (opposed to hats, gloves and handbags which seemed to be a passion of hers). This meant that she could make her money last her lifetime if she worked to my constraints.
However, this did not give her the money for Australia. I then worked out the fees that the bank portfolio was taking and the performance of the funds she was in.
I found the fees to be expensive for the lack of service she was receiving and the funds had performed poorly for the years I had reviewed.
We chose to transfer the portfolio and I invested the money into a transparent and financially efficient portfolio. I was able to reduce the financial service costs and charges by £1,100 per year (which included my fees) which gave the client her annual airfare. Because I diversified the clients funds, I was able to increase the fund performance (fund valuations can fall as well as rise) which has given the client a little bit extra for when that dreaded phone call comes in and I get asked “I have just seen a lovely bag which will go with my new dress… can I afford it”?
Occasionally I can now say yes.
So, are financial advisor fees worth it?
Does this lady think ‘Financial advisor fees are worth it’ … I will let you answer that one!
If you would like to have a conversation about building a financial plan or creating a blueprint to fund your future lifestyle, please contact us or request an SOS.
Our money is important to us so, naturally, we want to take care of it and ensure it’s in the very best hands – moving many of us to ask the question why should I use a financial advisor?
Over the years I have met many investors that have a very negative view of the financial services industry and those that work within it. They may have read articles about advisors ripping off investors in the national media, may have experienced poor financial advice themselves in the past or just do not want to pay for advice, because they believe they can do the job just as well; they see no value in financial advice or simply do not know who to trust with their money. This is perfectly understandable, when our money is so important to us – which moves many to ask the question: why should I use a financial advisor?
I feel the same way with dentists. I find it very difficult to pay a large sum of money to a professional on a regular basis, who says “yes, everything is fine” year on year… until something happens. As there is nothing worse than toothache, I am then more than happy to pay a professional to fix it and make sure it never hurts again, regardless of cost.
We use experts in all walks of life; from Doctors, Dentists, Pilots, Builders, but many may choose to DIY when it comes to money.
Why should I use a financial advisor?
Money will determine the ability to fund your future lifestyle and what would the consequences be if you get it wrong? There may be a time in your life when it’s too late to do anything about it and you find yourself underfunded for the lifestyle you had always planned for.
So why do you invest? Is it not to maximise your returns on your money, within the risk parameters you are comfortable taking?
Worldwide, you have clever financial professionals all trying to compete against each other to grow the wealth of their clients’ funds and there are thousands of funds available to choose from. If you are not working in the financial industry, what access to information would you have that gives you an advantage over all these professional global market makers?
Many investors have been lucky with stock picking over the past decade and feel strongly that they do not need to pay for financial advice. I have lost count of the number of times I have been told “we are very happy with the returns we are making”. My answer is simply “compared to what”? When stock markets are rising like they have over the last decade, everyone has made money.
I often hear investors claiming that they can get the same results as professionals, by investing their money with platforms like Hargreaves Lansdown and not having to pay for advice.
When I asked what their investment strategy was, typically they say it was based on media, financial publications or friends’ recommendations. This has never been a good financial strategy and picking individual stocks or funds based on past performance has always been down to luck, so let me show you why.
Financial investment case study: Second Opinion Service
I met a husband and wife business owner in July 2019 who had always invested their own money and were very comfortable doing so. They had a substantial sum (in excess of £1 million) invested with Hargreaves Lansdown. They told me they studied the stock markets and were very comfortable with their fund selections and the returns they were getting on their money, and a lot of this wealth had been self-generated. However, they asked me for a portfolio review and wanted to take advantage of our complimentary ‘Second Opinion Service’.
These were my findings:
My conclusion is that your combined portfolio is fully aligned with your current attitude to risk profile
My conclusion is that your combined portfolio has a heavy UK bias and does not take advantage of global diversification. With Brexit ahead I would consider reducing your UK holdings and consider diversifying your investment in line with world market capitalisation.
My conclusion is that the performance of your portfolio has not performed satisfactory to the risk profile it adopts, and has lagged due to lack of diversification.
My conclusion… is that your fees are very well controlled. However, my recommendation is to take back control of your money, cut out the middle men and improve your long term future wealth potential by using the expertise of a professional.
My conclusion… is that you are invested in a tax efficient manner
After we sent them our report, they decided to take their own advice and keep their current portfolio. They felt as our management fees were £743 more expensive per annum (albeit with advice) they concluded that they were in a financially better position using the DIY method that they had used over the past decade.
Sadly, they were stock picking which to me is gambling and in my opinion did not have an investment strategy that would work over the longer term. But as professionals we shook hands and went our separate ways with the promise to stay in contact. So what has the impact on their portfolios been, now the markets have fallen?
Mrs Investor had £522,637 when we met in July 2019. Her fund continued to lag in performance up until the Covid-19 market fall and is now valued at £408,110… a fall of £114,527 (22% drop).
Had she taken our advice, her fund value would have been £471,880… a fall of £50,757 (10% drop). She would have been £64,123 better off at this moment in time. She now has a smaller fund value to compound as the market begins to recover, which will take longer to get back to parity.
Both Mrs Investors and Goldsmith Invest portfolios were an Adventurous risk and both portfolios took advantage of low fees. However our approach, offered a diversified and global selection of stocks, which our research has suggested will provide the most financially efficient route to investing client monies over the longer term.
For those DIY investors that may be saying ‘this is such a short moment in time’… let me highlight the performance if Mrs Investor had invested a similar sum five years ago.
The global diversified approach has returned £722,650 and the DIY £565,010. That is a difference of £157,640 and yes financial advisor fees of £0.5% (£2,613 per annum) would have been taken, but the financial service industry fees to access our funds would have also been reduced.
While a downturn on the markets is never pleasant, we know from past experience that they do not last forever.
Markets need a degree of stability and as we are currently in a period of immense change; when markets are rattled they fall sharply, and the period is painful for investors, but these periods are usually short lived in investment terms.
The chart below shows the FTSE All Share stock market since the year 1900.
We can see that, of all of the big sell offs over the past century, none lasted more than three years and the worst period was the ‘Great Depression’ which was then compounded by World War 2.
When the value of your fund is falling, it can be very difficult to look past the ‘now’. But it’s important to remember that you do not invest for the ‘now’, you invest for the longer term, the future.
If you do not invest your money, it will deflate over the longer term because of inflation, which is a guaranteed loss. Financial investment means accepting the falls, staying focused to the longer term objective of increasing your wealth, and riding out the negative periods in spite of how painful they are.
You may feel, as an investor, concerned with all the noise in the Media about the markets, but you will only lose if you sell and create that actual physical loss.
Staying in the market means a paper monetary loss but not a real loss. It is just a lot lower than it looked on a portfolio report a month ago. This time next year it could well be a lot higher, and in ten years just another blip on an otherwise upward rising chart.
Global markets win more than they lose.
If we look at the Ibbotson large company stock index (below), since 1926 to 2019 the markets were down 27% of the time on a ‘year on year’ basis. Looking at 5 year annualised returns, the markets were down only 13%. This was not helped by the Great Depression followed by World War 2. There were no negative periods over a 15 year spread.
The above demonstrates why it is so very important to look through the ‘now’ and take the longer term view to financial investment – this is the best way to approach investment during a crisis.
Trying to predict and play the markets is a losing strategy. There is a common investment adage that says:
“It’s time in the market, not timing the market”.
What that means is that it is better to invest in the markets and leave your investment there, rather than trading when there is volatility and attempting to guess when is the best time to buy and sell.
As you can see from the chart below, missing out on the best performing days of trading can seriously damage your returns over the longer term.
The light green bars show the achieved return in each calendar year if the investor had missed out on the ‘single best performing month’ that year.
The dark green line indicates the return the investor would have achieved by staying in the market the entire time.
In growth markets staying invested works as a strategy year in and year out.
My advice, as hard as it is and as desperate as you may be feeling, is ride the wave. Markets will stabilise, there may be a period of global recession, but we are a capitalised society and clever minds will be looking at recreating wealth in their industries, and markets will recover; just do not try and guess when that may be.
In 2000 the founder of a brand new company called Netflix, proposed a partnership to the Blockbuster CEO and his team. The idea was that Netflix would run Blockbuster’s brand online but got laughed out of the room.
We all know what happened next. Blockbuster went bankrupt in 2010 and Netflix is now a multi-billion dollar company.
Just as many great financial institutions today, Blockbuster sat firmly at the pinnacle of their industry – seemingly untouchable. With thousands of retail locations, millions of customers, massive marketing budgets and efficient operations, it dominated the competition. So it’s not surprising that the Blockbuster CEO and his team laughed at Netflix’s proposition to go into partnership with the brand they had worked so hard to build.
Yet Blockbuster’s model had a weakness that wasn’t clear at the time. It earned an enormous amount of money by charging its customers high fees, which had become an important part of Blockbuster’s revenue model. These fees were once thought acceptable, but technology was changing and the company’s downfall was based on the company’s profits penalising its clients.
At the same time, Netflix had certain advantages. By not having retail locations and using modern technology, it lowered costs and could afford to offer its customers far greater value for money.
Netflix proved to be a very disruptive innovation, because Blockbuster would have to alter its business model and damage its profitability in order to compete with the new upstart. However, despite being a small, niche service at the time, it had the potential to damage Blockbuster’s well-oiled machine.
Many customers loved the new service and told their friends. Many were reluctant at first, they actually liked being associated with the big brand name (not really knowing how much is was costing them for their brand loyalty) but others jumped right in. As more of their friends raved about the new service, the laggards tried it too, saw the financial benefits and convinced their friend and family to take a look at it.
Network scientists call this the threshold model of collective behaviour. For any given idea, there are going to be people with varying levels of resistance. As those who are more willing begin to adopt the new concept, the more resistant ones become more likely to join in. Under the right conditions, a viral cascade can ensue.
So what has this to do with the financial services industry … much more then you are thinking right now.
When a company creates a financial product, the decision to go to market and how to market that product is based on how much profit the company will be expected to generate. So for example, if a fund manager decides to create a new global managed fund, they work out how much profit the company wants to earn from the fund and then they go to market and get consumers to put their capital into the fund. Let’s say they are buying 250 stocks globally and charge 1.650% total expense ratio (TER), the company needs to perform and provide an expected market return to retain the investor’s money. Without investor’s money they cannot pay for their offices, salaries, pension, staff etc.
So the bottom line is… as long as investors keep their money invested in the fund, the company gets its anticipated profit. It’s not about the client… it’s about how much profit the company is expected to make.
However, there is a counter argument: what if you start with the client first and not the company profit first.
So in a simplistic manner, let us say an adviser buys their client a ‘wrapper’ to hold the above fund which costs 0.29%, and charges 0.50% per annum to look after their money. The combined TER of the fund is 1.650%. So the investor’s total industry cost of going to market is 2.44% per annum.
However, what if the advisor informed the investor that if they went elsewhere using the new technology and investment philosophy from these new innovative companies, they could buy the wrapper at 0.29%, plus the advisors fee of 0.50% per annum, and they could buy a mixture of 20,000+ managed and passive stocks for only a 0.30% TER. If they did, the investor’s total costs of going to market could be reduced to 1.09%.
That’s a saving of 1.35% every year!
Let’s say both companies return 5% per annum for 25 years. By investing at the lower cost, because of compounding interest, the investor would generate in the region of 40% more growth than if they invested in the fund paying higher fees. Even if the higher fee fund manager beat the market by 20% per annum for each of these 25 years (very unlikely), the investor would still earn in the region of 10% more growth with the lower fee option.
Is that not why our clients invest…?! Do they not want to maximise their growth? Do they not expect their advisor to be transparent and get them to market in the most financially efficient manner?
One day the industry will have to make a shift as consumers wise up to what’s available in the financial services market place. Like Blockbusters who had a business model that seemed immoveable, there are many in our industry who think the same. It has always worked this way so everyone is happy.
But everyone is not happy … and when the power of threshold model of collective behaviour kicks in, those in the industry that run Blockbuster investment services may have to move fast or get left behind.
Perhaps these new technologies in our industry are already upon us and we should reconsider our proposition… from what is profitable to the industry, to find a way that is profitable for the consumer.
After all nothing happens without the consumer’s money.
Run by financial expert and owner of Goldsmith Financial Solutions Hannah Goldsmith, our latest masterclass ‘Applying Financial Science to Create Additional Wealth’ uncovers the most efficient approach to financial investment in order to achieve additional wealth.
Possibly the most financially rewarding lunch you’ll ever attend, this unmissable masterclass is Informed by decades of empirical research from Nobel Prize winning economists; research that Goldsmith Financial Solutions has used to create real world investment solutions, whilst consistently pushing the frontiers of financial innovation.
Come and join the financial investment experts at Goldsmith Financial Solutions for lunch, and discover the #1 reason why your wealth will not grow as well as you expect.
During this masterclass, we will consider: 1. Do you know exactly how much you are paying in Financial Services Industry fees and charges for each of your investments? 2. Are you aware of the monetary negative compound effect this is having on your investment portfolio and therefore your future wealth? 3. Has your Financial Adviser spoken to you and explained how you can reduce industry fees and charges and how those savings can be redirected back into your existing investments? If not… 4. Do you know how much your loyalty is costing you?
Hannah Goldsmith, also the author of the highly acclaimed ‘Retire Faster’, will provide you with solutions on how to boost your investments, ISA savings and pension pot.
Hannah Goldsmith is regarded as one of the most trusted voices in the financial services arena. Hannah has been invited to be an Ambassador of the Transparency Task Force; a Collaborative Campaigning Community who are all dedicated to driving up levels of transparency in the Financial Services Industry and in regular discussion with the Financial Conduct Authority, National Media and Parliament. Hannah will share her pioneering views on the financial services industry and her commitment to transforming the lives of UK investors with her philosophy on low fee investing.
EVEN FOR THOSE FAMILIAR WITH PENSIONS IT IS UNDOUBTEDLY THE CASE THAT MANY COULD RETIRE EARLIER IF THEY TOOK ONE VITAL STEP AND REVIEWED THE FEES BEING CHARGED ON THEIR RETIREMENT AND INVESTMENT PLANS. CONTRIBUTOR HANNAH GOLDSMITH DIPPFS – GOLDSMITH FINANCIAL SOLUTIONS.
The Financial Services Industry charges fees on all investments – that’s how they get paid for the advice they offer and the work they do setting up and managing funds and portfolios. In principle that is fine – but even financially savvy people have no idea what these fees are or the impact these fees have on the value of their retirement fund.
Buying a service without understanding the costs or the impacts these will have is unusual. Most of us, if short-changed in a shop, will not hesitate to make a fuss straight away. We use the internet to compare prices and make savings when we purchasing insurance or looking for the best energy deal. For some reason we don’t apply the same logic and shop around when looking at the products for our retirement.
Whatever your personal circumstances high industry fees can mean that your ‘stop working’ day is significantly delayed. With the changes implemented in the ‘Retail Distribution Review’ (RDR) five years ago and the new update to the Markets in Financial Instruments Directive (MiFID 11) which came into force on the 3rd January 2018, investors have never had so much information available to them. Investors now have the power to take back control of their money from the Financial Services Industry and do what’s right for them. After all, this is your money and you are saving for your retirement not your fund managers. Yet very few investors understand the fees and the impact of those fees.
It’s clearly problematic. Without the information on how much is it costing us in total Financial Services Industry charges and the impact that has on our long-term future wealth, it’s not surprising that people don’t know they should take action or what that action should be. Perhaps it is because we do not have sufficient information presented to us when we invest, to allow us to make that decision, or we do not want to look ignorant in front of our trusted advisor or perhaps we do not think it is happening to us.
Let’s have a look at an example: Inventor A, aged 45 has pension and ISA savings valued at £300,000 and wishes to retire with a fund in the region of £750,000 and preferably at the age of 65. The total financial services industry cost on their money is 2.5% per annum. Assuming an average growth rate of 6% per annum the fund value would not achieve the target value until the investor is aged 73.
Remember, £300,000 of this fund value was Investor A’s money to start with, a profit of £467,000 has been generated and it has taken 28 years to achieve target value. It may be a shock to find out that the total Financial Services Industry charges have totalled £345,512 over this time.
Investor A has had costs of £345,512 to make £467,000 and they have lost eight years of their desired retirement lifestyle.
Investor B, also aged 45 and with pension and ISA savings valued at £300,000, wishes to retire with a fund in the region of £750,000 and preferably at the age of 65, decided to review the industry costs. Investor B realised that they could get the same returns and same consumer protection for 1.1% per annum. They also achieved an average 6% return per annum on their money. They achieved a target fund value of £773,000 by age 65 – eight years before Investor A.
In other words, they have achieved their target retirement fund value at their projected retirement date with one simple decision; shopping around to get the best fees. As £300,000 was Investor B’s money anyway they have made a profit of £473,000 in 20 years not 28 and it has cost investor B only £102,000 (not £345,512) to make £473,000 and achieve their lifestyle objective. If at the time they decided to delay retirement to age 73 like Investor A, the fund value would continue to compound and be in the region of £1,128,500, an additional increase of £360,000.
Here is another example: Investor C is aged 30, has a smaller pension fund valued at £40,000, and looking to retire at age 65. The average annual return is 7% per annum over the investment period. The total Financial Services fees are 2.13% per annum and no further contributions will be made.
The fund value is projected to be £203,968 and as £40,000 was investor C’s money already, she has made a profit of £163,968. The Industry would report how well she has done and Investor C may be content with her advisor’s recommendations. However, it has cost Investor C £74,588 in Financial Service Industry fees to make £163,968.
Investor D, like Investor C has exactly the same scenario but shops around and reduces her fees to 1.1%. Lower fees do not mean lower returns and investor D also averages a 7% return per annum. Because the fees do not cause such a drag on the returns, the fund value compounds and at retirement age of 65 has grown in value to £291,105. As investor D already had £40,000, a profit of £251,105 has been generated but with a reduced industry cost of only £48,623.
Investor C gave away control of her money to the Financial Services Industry and achieved a fund value of £203,968 to live the rest of her life on, paying £74,588 in fees over the term.
Investor D took back control of her money and achieved a fund value of £291,105 for exactly the same financial return, same financial risk and same consumer protection.
Which of these investors is most like you? If you are the type of investor who is doing less well it is time to start being a little more prudent and investing some time to understand the impact that the fees you are paying are having. This will allow you to take control which in turn will give you a much greater chance of retiring with the funds for the retirement lifestyle you want on the date you plan to retire, or possibly even sooner.
Do you have capital to put into an investment portfolio? If so it can offer you an element of control over your financial future returns. However, staying disciplined through rising and falling markets can be challenging – but it’s necessary to ensure your capital value increases, at least in line with inflation.
If we don’t invest our capital value, then our purchasing power will dramatically reduce over our lifetime; as inflation creeps up, our money will buy less. This means not investing is not an option.
The ‘Holy Grail’ of investing is ‘to buy low and sell high’. Wealth management companies claim they stand a better chance of doing this for you than you would yourself – and charge accordingly. However, often you can do better than them – if you set up your portfolio correctly and you hold your nerve.
The biggest challenge always comes when the markets are volatile and big losses are incurred over long periods. Obviously, the ideal solution is to enter the market just as it bottoms and exit the market right at the top. But precisely timing your exit and entry is close to impossible.
I went a seminar once, which focussed on market timing. I found the following quite enlightening. The suggestion was that if you had invested £1000 for twenty years (from the 1st January 1990 through to 31st December 2009) only in the FTSE All Share Index you would have grown your investment to £4,712.31 (8.06% per annum).
Had you chosen to invest your £1000 in UK 1 month Treasury Bonds you would have grown your £1000 to £3,301.29 (6.15% per annum).
If you or your Wealth Manager had a crystal ball which let you forecast one month in advance whether to position your investment into either the FTSE All Share Index or into the UK 1 month Treasury Bonds, your £1000 investment would have grown at 30.51% to £205,399.57.
‘So what would the odds be for that successful scenario?’ I hear you cry enthusiastically.
The answer is if you could call the 240 scenarios (each month for 20 years) correctly the odds of success would be: 1 in 1,766,847,064,778,380 followed by another 57 ‘0’s.
So unless you have psychic powers I believe that if we wish to become successful investors, we should look beyond the promises of well-intentioned discretionary fund managers and wealth management companies and make our own decisions. Investors should consider buying across the global market at the most financially efficient cost and sit tight. Paying additional fees for somebody to make guesses in a random market seems a little pointless when the object of investing is to make more money so you can live the lifestyle that you want to live.
Why investors lose money
It’s a human instinct ‘fight’ or ‘flight’ to make sure that we run away from the fight we don’t believe we’ll win! When we sense trouble we tend to react quickly rather than pause and think things through.
When we read dramatic financial headlines the investor, scared of losing his/her money, sells. The problem the investor then faces is when to buy back into the market. If the stock has started going down, then you may already have made a loss, so you’ll be looking to recoup it. But, how do you know when it has hit the bottom?
Once it starts going up, can you predict it will continue or if it’s just a short-term rally? Leave it too long, and you’ll miss out on any potential gains to make up the earlier losses, and jump back too soon and you risk losing even more.
And remember, when markets and stock prices are falling, you can only sell if there is a buyer. If a buyer is found, you should ask yourself a simple question: If a buyer thinks the stock is cheap enough to buy today, why sell?
Without this question this is where investors can get caught up in faulty reasoning. Like this:
If you stay invested and the markets keep falling, you become anxious about the money you have lost when you could have pulled out earlier. If the portfolio value falls below what you invested you are now in a loss, you may become fearful that you will lose more of your money, but if you sell you will create a real loss. This loss if substantial it creates a real fear. Could you really afford to lose this money?
The worst scenario is that your nerve goes, you cannot hold out any longer and you sell at the bottom. After a few months the markets begin to turn positive and the time for optimism begins, but you have been burnt and you will not be burnt again so you hold out… just in case it’s a false rise.
The market keeps climbing but you are still nervous about going back in. The media is now all excited talking about the ‘Bull’ run, everyone’s making money, so at last you get your optimism back. This is often too late, because all the gains have been recovered and you still have your losses to make up. You jump into the market.
And then the markets fall… and the cycle of faulty reasoning continues.
It is tricky!
Despite our fear of losing money we know we need to invest to protect our capital from inflation. The problem we have is that it’s impossible to make good money decisions all the time. If we invested for today’s market conditions, tomorrow it could all change.
What’s the solution?
The global market is an effective information processing machine; there are more than 98 million trades a day. The real time information they bring to the market helps set the market price.
Instead of buying retail funds selected by a fund manager buy a diversified basket of global index tracker funds and let the markets work for you. Holding a wide basket of stocks from around the world, linked directly to market returns, can reduce the risk of trying to outguess the markets or worse, pay somebody to outguess the markets.
Limiting one’s investment universe to a handful of stocks, or even to one stock market, is a concentrated strategy with high risk implications. Do not try and guess which parts of the world will outperform others, or whether bonds will outperform equities, or if large stocks will outperform small stocks; buy the global market using a diversified basket of index tracker funds and leave the speculation to the gamblers.
Don’t jump the minute the market starts to drop – be patient. Manage your emotions by investing in a risk portfolio that is correlated to your capacity for loss.
Finally, ensure you have a cost-effective (i.e. low fee) portfolio. It’s the hidden fees and costs which are taken from your fund in the name of service costs, annual management charges and discretionary management that are often unnecessary. Try to keep the costs of managing your portfolio at under 1%. The industry average cost of using a conventional financial service company is in the region of 2.3%. If you save yourself even 1% a year you will have made a substantial amount of money using compounding interest over the life of your portfolio.
For example; if you invested £100,000 with a traditional financial services company paying a total fee of 2.3%, and you received a 7% return on your money for 25 years, you will have a projected future value of £329,332. As £100,000 was yours to start with you will have made a £229,332 profit. The overall cost to you, to make that profit, will have been £109,912.
If you invested £100,000 in a low fee portfolio, paying a total fee of 1.11% and received a 7% return on your money for 25 years you will have a projected future value of £441,601. As £100,000 was yours to start with you will have made a £341,601 profit. The overall cost to you would be £63,718.
This additional £112,269 can be used by you and your family, rather than just giving it away to an industry that feeds the ‘fat cats’. Remember it’s your money … don’t give it away.
In summary; be an investor, be disciplined, buy a diversified basket of global index tracker funds and keep your fees below 1%.
ABOUT THE AUTHOR
Hannah Goldsmith is founder of Goldsmith Financial Solutions and author of ‘Retire Faster’. Hannah specialises in Low Fee Investing and is challenging the way financial services are delivered to consumers in the UK, by enabling each client to understand the nature of investment costs and the impact these costs have on their future lifestyle.
Goldsmiths complimentary ‘Second Opinion Service’ reviews investors’ existing portfolios and makes recommendations on Risk, Diversification, Performance, Cost and Tax efficiency, making investors’ money grow in a more transparent and financially efficient way.
In the first of two guest articles on investments, Hannah Goldsmith of Goldsmith Financial Solutions discusses the challenge investors face of remaining disciplined through volatile markets…
Placing your capital into an investment portfolio can offer you an element of control over your financial future returns – if implemented correctly. However, staying disciplined through rising and falling markets can be a challenge. But it is this discipline that is crucial for long-term success and to ensure that your capital value increases, at least in line with inflation.
The ‘Holy Grail’ of investing is ‘to buy low and sell high’. Wealth management companies claim they stand a better chance of doing this for you than you would yourself – and they charge a healthy fee for doing so. However, often you can do better than them provided you set up your portfolio correctly and hold your nerve.
The biggest challenge always comes when the markets are volatile and big losses are incurred over long periods of time. Obviously, the ideal solution is to enter the market just as it bottoms and exit the market right at the top. But precisely timing your exit and entry is close to impossible.
Here’s a useful way of underscoring the timing issue that I got from a seminar I attended. The suggestion was that by investing £1000 from the 1st January 1990 to the 31st December 2009 (20 years) only in the FTSE All Share Index you would have grown your investment from £1000 to £4,712.31 (8.06% per annum).
By investing your £1000 only in UK 1 month Treasury Bonds you would have grown your £1000 to £3,301.29 (6.15% per annum).
If you or your Wealth Manager could accurately forecast 1 month in advance whether to position your investment into either the FTSE All Share Index or into the UK 1 month Treasury Bonds, your £1000 investment would have grown to £205,399.57 (30.51% per annum).
If you could call the 240 scenarios (each month for 20 years) correctly the odds would be: 1 in 1,766,847,064,778,380 followed by another 57 ‘0’s!
As timing financial markets quite clearly requires psychic intuition, I believe those of us wishing to become successful investors should be disciplined enough to look beyond the promises of well-intentioned discretionary fund managers and wealth management companies and make our own decisions.
Investors should consider buying across the global market at the most financially efficient cost and sit tight. Paying additional fees for somebody to make guesses in a random market seems pointless when the object of investing is to make more money for you, without fear of running out of money in later life. However it is important to understand the psychological dynamics at play, particularly when markets are falling.
Why investors lose money
The ‘fight’ or ‘flight’ human instinct is ingrained deep within us, which means we run away from fights we don’t think we will win!
We react quite quickly when we sense trouble without always taking time to think our actions through carefully. When we read scary headlines screaming ‘panic’ and ‘sell’… the investor, scared of losing his/her money, sells. The problem the investor then faces is when to buy back into the market. If the stock has started going down, then you may already have made a loss, so you’ll be looking to recoup that. But, how do you know when it has hit the bottom?
Once it starts going up, can you predict tell if this will continue to do so or if it is only a short-term rally? Leave it too long, and you’ll miss out on any potential gains to make up the earlier losses, and jump back too soon and you risk losing even more.
By rushing to sell you may lose any profit you have already made, and you run the risk of greater losses due to fees and the uncertainty of the market.
It is important to remember that when stock prices are falling, you can only sell if there is a buyer. If a buyer is found, you should then ask yourself a simple question. If a buyer thinks the stock is cheap enough to buy today, why I am I selling it?
Many investors don’t ask this question they are too keen to get out of the markets they get caught up in behavior based on their faulty reasoning.
If you stay invested and the markets keep falling, you become anxious about the money you have lost. If the portfolio value falls below what you invested, you may become fearful that you will lose more of your money, but if you sell you will create a real loss. This loss, if substantial, creates a real fear. Could you really afford to lose this money?
The worst scenario is that your nerve goes, you cannot hold out any longer and you sell at the bottom. After a few more months the markets begin to improve and the time for optimism begins. However, you’ve been burnt and you will not be burnt again so you hold out… just in case it’s a false rise.
The market keeps climbing but you are still nervous about going back into the market. The media is excitedly talking about the ‘Bull’ run. At last you get you optimism back and jump into the market. This is often too late, because all the gains have been recovered and you still have your losses to make up..
And then the markets fall… and the investor’s cycle of faulty reasoning continues.
Investors need to become aware of our psychological tendencies: the flight instinct, the fear of loss, and the dangers of faulty reasoning, and the need for discipline. This is an important first step in becoming more successful. With this understanding investors are in a stronger position to find the options that will increase their future ability to invest well.
By Hannah Goldsmith
Many business owners could reap the rewards of their hard work and retire earlier. The key is to review the fees being charged on your retirement and investment plans. Let me explain why and also show you what can be achieved with an example.
The financial services industry charges fees on all investment products – that’s how they get paid for the advice they offer and the work they do setting up and managing funds and portfolios. There is nothing wrong with that – but most people, even business people, have no idea what these fees are, and they have virtually no understanding of the impact these fees have on the value of their retirement fund.
Why don’t we shop around on fees for what is really important in our lives; our retirement lifestyle? Even if you love your business if you could get the same return on your money with the same consumer protection, but by shopping around you could retire sooner – why wouldn’t you?
Regardless of age or how much money you have, high industry fees can delay you reaching your desired date to sell your business, or hand it on to the next generation; the day you start your retirement. With the changes implemented following the ‘Retail Distribution Review’ (RDR) five years ago and the new update to the Markets in Financial Instruments Directive (MiFID 11) which came into force on January 3 this year, investors have never had so much information available to them. Investors now have the power to take back control of their money from the financial services industry and do what’s right for them. After all, this is your money and you are saving for your retirement not your fund manager’s. Yet very few investors understand the fees they are paying and the impact of those fees.
And that’s the problem; without knowing the total financial services industry charges and the impact that has on our long-term future wealth, why would we do anything about it, and how would we know what to do?
Perhaps it is because we do not have sufficient information presented to us when we invest, to allow us to make that decision, or we do not want to look ignorant in front of our trusted advisor or perhaps we do not think it is happening to us.
Let’s have a look at an example:
Joe is aged 45 and has pension and ISA savings valued at £300,000 and wishes to retire with a fund in the region of £750,000 and preferably at the age of 65. The total financial services industry cost on his money is 2.5% per annum. Assuming an average growth rate of 6% per annum the fund value would not achieve the target value until the investor is aged 73.
Remember, £300,000 of this fund value was Joe’s money to start with, a profit of £467,000 has been generated and it has taken 28 years to achieve target value. You may be surprised to find out that the total financial services industry charges have totalled £345,512 over this time.
This means it has cost Joe £345,512 to make £467,000 and he’s lost eight years of his desired retirement lifestyle.
Shelly, also aged 45 and with pension and ISA savings valued at £300,000, wishes to retire with a fund in the region of £750,000 and preferably at the age of 65, decided to review the industry costs. Shelly realised that she could get the same returns and same consumer protection for 1.1% per annum. She also achieved an average 6% return per annum on her money meaning that she achieved a target fund value of £773,000 by age 65 – eight years earlier than Joe.
By shopping around to get the best fees she has achieved her target retirement fund value at her projected retirement date.
As £300,000 was Shelly’s money anyway she has made a profit of £473,000 in 20 years not 28 and it has cost her only £102,000 (not £345,512) to make £473,000 and achieve her lifestyle objective. If at the time she decided to delay retirement to age 73 like Joe, the fund value would continue to compound and be in the region of £1,128,500, an additional increase of £360,000.
The question is which of these investors are you most like?
In essence this is about being prudent. When you understand the impact financial services fees have on your money you are in a position to keep more of your investment for yourself and your fund the retirement lifestyle you want to have.
You may love running your business but one day you will retire. It’s a good feeling to know that you have options to retire when it suits both you and your business.
Hannah Goldsmith, pictured above, is founder of Goldsmiths Financial Solutions and author of ‘Retire Faster’.
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