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.

To book your places, please visit:

https://www.eventbrite.co.uk/e/applying-financial-science-to-create-additional-wealth-tickets-52214394660

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’.

If we don’t invest the value of our capital and our purchasing power will dramatically reduce over our lifetime. Inflation will take its toll and our hard-earned the money will buy us less and less. Because of this not investing is not an option.

Deciding to put your capital into an investment portfolio can offer you an element of control over your financial future returns – if implemented well. Remaining disciplined through rising and falling markets can be a challenge, but it is this discipline is crucial for long-term success, ensuring that your capital value increases, at least in line with inflation.

The ideal solution would be 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. If it were easy, millions would be doing it and getting very rich in the process. In reality, the only ones getting rich in this scenario is the financial services industry – at your expense.

A useful insight came out of a seminar on market timing which I attended. The presenter suggested that over 20 years a £1000 investment made on in the FTSE All Share Index (from 1 January 1990 to 31 December 2009) would have grown by 8.06% per annum to £4,712.31.

Over the same period a £1000 investment in UK 1 month Treasury Bonds would have grown 6.15% per annum (to £3,301.29).

Had you had the ability to forecast one month in advance whether to place your investment into either the FTSE All Share Index or into UK 1 month Treasury Bonds, yourinvestment would have grown by 30.51% per annum: from £1000 to £205,399.57.

As savvy investors you’ll know that the odds against calling 240 scenarios (every month for 20 years) correctly are massive. In fact they are: 1 in 1,766,847,064,778,380 followed by another 57 zeros.

As timing financial markets is clearly only available to those blessed with a crystal ball, I believe that becoming successful investors requires discipline. This means looking beyond the promises of well-intentioned discretionary fund managers and wealth management companies and making our own decisions.

Why investors lose money

Human instinct means that when we sense trouble we tend to react quickly without taking time for careful thought. When we see the market nosedive, the investor scared of losing his/her money, sells. The problem the investor then faces is when to buy back into the market. This of course means that 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.

And remember, when markets are falling, stock prices are falling, you can only sell if there is a buyer to sell too. If a buyer is found, you should then have to ask yourself a simple question. If a buyer thinks the stock is cheap enough to buy today, why I am I selling it?

This is where the issue of the investor’s behavior based on their faulty reasoning comes in to play.

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 and you cannot hold out any longer and you sell at the bottom. After a few more 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 into the market. The media is now all excited talking about the ‘Bull’ run everyone’s making money, so at last you get you optimism back which 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.

Another downturn in the market… and the cycle of faulty reasoning goes on.

An alternative approach

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.

Investment returns are random; they cannot be predicted with any great future certainty. Therefore, no one can say, with conviction, which financial sectors an investor should buy to get the next best return on their investments.

Therefore 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.

Ensure you have a cost-effective, low fee portfolio. Try to keep the costs of managing your portfolio 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.

And don’t forget: be patient or learn to be patient. Don’t leap into action the minute the market starts to drop. Manage your emotions by investing in a risk portfolio that is a good fit for your personal capacity for loss, (rather than one based purely on your search for the highest returns). Always remember that you are doing this for the longer-term and the best financial future for you and your loved ones. A thoughtful and patient approach is the way to go.

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.

If you’re looking to grow your money, whether for retirement or some other dream, then there are five rules you need to follow. And they are probably not what you are thinking.

1) Do trust the markets The global market is an effective information processing machine. Millions of participants worldwide buy and sell securities in the world markets every day. The real time information they bring to the market helps set the market price. With more than 98 million trades a day, the probability is minuscule that a committee, sitting in a board room and discussing where to invest your money, will spot a favourable discrepancy in a stock price. It is possible, but it is also highly improbable.

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.

2) Don’t think the Financial Services Industry has your best interest at heart Conventional wealth management institutions have internal systems set up to deliver a particular service in a particular way. They are, therefore, far happier when the status quo prevails; it’s more profitable for them and their shareholders. Bearing that in mind, why would you expect them to provide you with an opportunity to move your money to a competitor at their expense, even if it was in your best financial interest? These corporates are in business to maximise shareholder value and get rewarded for doing so. They are not in the game to make sure that each investor’s financial outcomes are catered for. It is therefore essential that you take back control of your money and ensures that the ‘hidden’ ongoing portfolio costs are kept to the bare minimum.

Aim to keep the costs of managing your portfolio at under 1%. The industry’s 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.

3) Do diversify Investment returns cannot be predicted with any great future certainty. Therefore, 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. Therefore, don’t let your financial adviser visit you each year, moving and changing your funds, to justify their existence and their fees. They are wasting your money.

Trying to make predictions in a random world is tantamount to gambling with your pension or investment portfolio and can have a serious effect on your long-term wealth. If you do not want to gamble with your nest egg, buy the global market using a diversified basket of index tracker funds and leave the speculation to the gamblers.

4) Do be brave… and patient Anyone can make money when the markets are moving favourably. And if you have a cost-effective portfolio, you will earn even more during this stage of the financial cycle, thanks to compounding interest. When things are good, investors are full of optimism. However, when there is a long slow decline in markets, investors want to jump ship and wait for the markets to recover before they jump back in. The problem is market timing cannot be predicted. If you take money out in falling markets you will lose real money, all thanks to fear. Most people don’t reinvest until they get their optimism back, which is often too late; by then the stocks have risen, you’ve missed out on the gains, and you still have your losses to make up. Manage your emotions by investing in a risk portfolio that is correlated to your capacity for loss. Not one that is based purely on your search for the highest returns. Remember, investing is for the longer term. History says that you will be rewarded for your bravery, and your patience.

5) Don’t be put off. Do invest Although the banks’ advertising agencies tell us how wonderful and safe these institutions are, I am still reminded of the chaos and misery they caused when they needed bailing out by the tax payer. This was due to what was described by the Financial Crisis Inquiry Commission as a ‘systematic breakdown in accountability and ethics’.

Also, where is the transparency? If we deposit our money with a bank, they will use it as they see fit. They will lend out to credit cards at 29%, and commercial loans at 5%+. They will lend for mortgages and charge big fees if we pay it off early. They will invest our money in the global stock markets and are happy to pocket the profit they generate for their shareholders. But what if they mess up again and we want our money out? We may be denied immediate access and could only receive up to £85,000 compensation.

Also, remember that your capital deposited in a bank is being eaten by inflation at 2-3% every year. Over the last 10 years whilst the stock markets have gone up, the buying power of your bank savings has decreased dramatically and will continue to do so for the immediate future. My advice is to look at investing, rather than ‘saving’ with a bank; diversify your portfolio, let the markets work for you, and ensure you keep your management fees to around 1%. By following these rules you’ll increase your fund faster and the day you can retire (or splash the money on whatever you dream you have), will arrive much sooner.

ABOUT THE AUTHOR Hannah Goldsmith is founder of Goldsmiths 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.

Goldsmith’s 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.

Putting the client first is a mantra for many advisers who take pride in providing quality service and value for money. For IFA firm Goldsmith Financial Solutions founder Hannah Goldsmith, this has meant refusing to play ball with investment groups that would charge her clients more in fees than the returns they would receive.

“How much does it cost a client to invest over their lifetime? It’s probably about 2.5 per cent per annum, but what does this mean in real money terms?” she says.

“If a client has a £250,000 portfolio that grows by 5 per cent a year over
20 years, the projected return is in the region of £456,061. Of that, £250,000 is their own money, so £206,061 is profit. Most clients would be happy with that – until you tell them a 2.5 per cent cost per annum would account for £212,464 in charges over their lifetime, so it has cost them more in fees than they get back in returns.”

Even though Mifid II has introduced greater transparency in terms of charges, Goldsmith believes it will not have much of an impact unless it is put into a format consumers can understand.

“Even if clients are being told what the fee is, I don’t see them understanding it. I’m not sure it’s being highlighted enough; there’s a bit on this page, a bit on that page.”

Goldsmith has built her business around low-fee investing, with clients benefiting from the effect of compounding. She has also written a book – “Retire Faster: Practical Retirement Planning & Investment Advice for Company Directors” – which came about as a way of explaining her investment approach to others.

As well as this, she also offers a second opinion service for those who have existing investment portfolios but do not know what they are investing in or what it is costing them.

“When we try to review portfolios it’s very difficult to get information out of the companies. They don’t want to tell you the total expense ratio on their old funds,” she says.

It is fair to say Goldsmith does not have a particularly high opinion of the investment industry in general, believing it to act in its own interests rather than those of the consumer. Her opinion was first formed back in the 1980s, when life and pension firms sold policies customers would pay into and “get virtually nothing back”, but she feels the problem remains even now.

“We give away complete trust to someone who says: ‘I don’t know
the amount I can make for you, but I’m charging you this much and I’m not telling you what the other hidden charges are.’ Why do we put up with complexity in financial services, when in every other part of our lives, technology delivers what we want instantly, accurately and cost efficiently?”

Goldsmith’s starting point is how to get clients invested in the market in the most cost-effective and transparent manner. She makes a point of not going to insurance companies, which she refers to as the “dinosaurs” of the industry.

“They are big and cumbersome. When you email or call them, you have to wait five days, then that department contacts another department which takes another five to 10 days, then you find it’s been sent to the wrong department.

“Why do we use the heavy oil tanker approach when we can use wrappers that are cost-effective and now GDPR  compliant? If you pay 0.3 per cent on a wrapper, you can go to the investment market at 0.3 to 0.5 per cent for a fully managed portfolio. That is more cost effective than a DFM and many online investment houses,” she says.

Financial services was not Goldsmith’s first choice of career – she wanted to be a rockstar. As a 19-year old songwriter, she sent a demo of her music to the famous Abbey Road recording studios. They liked it and got in touch – but Goldsmith did not take up the opportunity.

“At that age, I was worried that I was not good enough,” she says.

Eventually drawn into the financial services world, Goldsmith worked in sales at Prudential before becoming a self-employed IFA. She founded Goldsmith Financial Solutions in 2010 and spent five years working on the systems and processes for her low-cost investment service.

With plenty to say on investment fees, you might expect Goldsmith to have a similar view on the need to drive down advice fees. However, she does not have a problem with advice firms agreeing industry standard fees with clients for their knowledge and services.

“An IFA charging cheaper fees does not make them any better than another; it’s how they get their client to market in a way they can keep more of their money. That is what makes a difference.”

She admits some peers do not get her approach and become defensive or angry if she tries to explain that it is another way they could add value in their own business.

“If, as an IFA, I know something will have a negative impact on my clients, why shouldn’t I do something about it? The whole industry can’t work without clients’ money, yet the client takes all the risk and does not receive the full returns available to them.”

Feeling strongly about such matters, Goldsmith is busy with a campaign for fairness in pensions and Isa investments, and running her consumer awareness seminars on how to become financially efficient.

Her way of thinking adds an interesting spin on some issues. Take the argument that people need to put more money into their pensions to fund their retirement. Goldsmith’s response is that paying lower charges and benefiting from compounding would provide a much higher return than many clients could ever afford by upping their contributions, part of which would end up in the industry’s pocket anyway.

“Why should we take more out over someone’s lifetime than we give back? That’s not fair,” she says.

“But it’s hard to break that down as the big fund houses fight this tooth and nail. We need to get to the point where the industry comes on board, but I think that will take a long time.”

Five questions 

What is the best bit of advice you’ve received in your career? 

If you’ve got something important to say, don’t keep it a secret – stand up and tell everyone.

What keeps you awake at night? 

My partner’s snoring.

What has had the most significant impact on financial advice in the last year? 

The obvious one is Mifid II but for me it’s the response I get when we go through the charging with clients. I call it the tipping point, when they suddenly say: “I get it”.

If I was in charge of the FCA for a day I would… 

Speak to the government about teaching finance in schools.

Any advice for new advisers? 

Financial decisions your clients make today will lead them to their future lifestyle. Please lead them wisely.

CV 

2010-present: Founder, Goldsmith Financial Solutions

1992-2010: Self-employed IFA

1986-1992: Sales consultant then sales manager, Prudential

Want to escape the rat race that little bit sooner? Hannah Goldsmith, founder of Goldsmiths Financial Solutions, shares some tips on how you can make that last day at the office come a little quicker IF you’d like your money to work harder, perhaps with a view to retiring sooner, here are five rules you need to follow and they are probably not what you’re thinking:

1: Let the markets do the work
With more than 98 million trades a day, across the global markets, the probability is miniscule that a committee, sitting in a board room and discussing where to invest your money, will spot a favourable discrepancy in a stock price.

It is possible, but it is also highly improbable. 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. 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, paying somebody else to outguess the markets.

2: Diversify, diversify, diversify
Investment returns are random; they cannot be predicted with any certainty, so don’t let your financial adviser visit you each year moving and changing your funds to justify their existence and their fees. They are wasting your money. Avoid limiting your investments to a handful of stocks or one stock market. Thisis a concentrated strategy with high risk implications. Instead, buy the global market using a
diversified basket of index tracker funds and leave the speculation to the gamblers.

3: Take control of your money
Conventional wealth management institutions are in business to maximise shareholder value – not your investment returns. Why would they provide you with an opportunity to move your money to a  competitor at their expense, even if it was in your best financial interest?

It is therefore essential to take back control of your money and ensure that the “hidden” ongoing portfolio costs are kept to the bare minimum. Aim to keep the costs of managing your portfolio at under one per cent. The industry average is in the region of 2.3 per cent, so if you save yourself even one percent 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 per cent, and you received a seven per cent 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 per cent and received a seven per cent 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.

4: Investments are a long-term strategy
Market timing cannot be predicted. Taking your money out in falling markets means you lose real cash. Most people don’t reinvest until they get their optimism back, which is often too late; by then the stocks have risen, you’ve missed out on the gains, and you still have your losses to make up. Manage your emotions by investing in a risk portfolio that is correlated to your capacity for loss. Not one that is based purely on your search for the highest returns. Remember, investing is for the longer term. History shows that you will be rewarded for your bravery – and your patience.

5: Don’t lose money with the banks
Capital deposited in a bank is being eaten by inflation at 2-3 per cent every year. Over the last 10 years, whilst the stock markets have gone up, the buying power of your bank deposited savings has decreased dramatically and will continue to do so for the immediate future.

My advice is to look at investing, rather than saving with a bank; diversify your portfolio; let the markets work for you; and ensure you keep your management fees to around one per cent. By following these rules you’ll increase your fund faster and the day you can retire (or splash the money on your dream) will arrive much sooner.

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