Fortitude Financial Planning

Investment Planning

History on the Run

This article, which was written by Jim Parker of Dimensional, succinctly captures our thoughts on the media speculation that so often surrounds investment markets.

“When news breaks and markets move, content-starved media often invite talking heads to muse on the repercussions. Knowing the difference between this speculative opinion and actual facts can help investors stay disciplined during purported “crises.”

At the end of June this year, UK citizens voted in a referendum for the nation to withdraw from the European Union. The result, which defied the expectations of many, led to market volatility as participants weighed possible consequences.

Journalists responded by using the results to craft dramatic headlines and stories. The Washington Post said the vote had “escalated the risk of global recession, plunged financial markets into freefall and tested the strength of safeguards since the last downturn seven years ago”

The Financial Times said ‘Brexit’ had the makings of a global crisis. “(This) represents a wider threat to the global economy and the broader international political system,” the paper said. “The consequences will be felt across the world.”

It is true there have been political repercussions from the Brexit vote. Theresa May replaced David Cameron as Britain’s prime minister and overhauled the cabinet. There are debates in Europe about how the withdrawal will be managed and the possible consequences for other EU members.

But within a few weeks of the UK vote, Britain’s top share index, the FTSE 100, hit 11-month highs. By mid-July the US S&P 500 and Dow Jones industrial average had risen to record highs. Shares in Europe and Asia also strengthened after dipping initially on the vote.

Yes, the Brexit vote did lead to initial volatility in markets, but this has not been exceptional or out of the ordinary. 161021-dimensional-blog-table

You can see by the chart above that while there was a slight rise in volatility around the Brexit result, it was insignificant relative to other major events of recent years, including the collapse of Lehman Brothers, the Euro Zone crisis of 2011 and the severe volatility in the Chinese domestic equity market in 2015.

None of this is intended to downplay the political and economic difficulties of Britain leaving the European Union, but it does illustrate the dangers of trying to second-guess markets and base a long-term investment strategy on speculation.

Now the focus of speculation has turned to how markets might respond to the US presidential election. CNBC recently reported that surveys from Wall Street investment firms showed “growing concern” over how the race might play out.

Given the examples above, would you be wagering your portfolio on this sort of speculation, particularly when it comes from the same people who pronounced on Brexit? And remember, not only must you correctly forecast the outcome of the vote you have to correctly guess how the market will react.

What we do know is that markets incorporate news instantaneously and that your best protection against volatility is to diversify both across and within asset classes, while remaining focused on your long-term investment goals.

The danger of investing based on what just happened is that the situation can change by the time you act, a “crisis” can morph into something far less dramatic and you end up responding to news that is already in the price.

Journalism is often described as writing history on the run. Don’t get caught investing the same way.”

We believe that successful investment comes from having two things:

  1. A sound intellectual framework for making decisions
  2. The ability to keep emotions from corroding the framework.

These beliefs underpin the “Fortitude way” of investing which continues to keep our clients on track to achieve their goals.

Can I keep my late husband’s ISA?

My client Marie had been left in a strong financial position by her husband when he died, however we found that she needed something we had not done before.

Derek had accrued an ISA that was valued at £242,000 on his death. Marie had no ISAs of her own. The rules for ISAs changed on the 3rd December 2014 from which date an ISA can be inherited by a spouse, although these rules have turned out to be a little more complex than first anticipated.

Marie is able to inherit an additional ISA allowance (not the money in Derek’s ISA to which she was already entitled in accordance with his Will) called an Additional Permitted Subscription – APS. This means she can invest any amount up to £242,000 into an ISA in her name; this could be a Cash ISA or a Stocks and Shares ISA (but not split between both).

First we needed to decide what sort of investment Marie might need. As part of our financial planning process we established that, whilst she needs the capital as protection against the possibility that she has to pay for long term care, she does not need to achieve high returns. It would be important, however, to achieve returns in excess of inflation so it is unlikely that a Cash ISA will be appropriate.  Therefore we agreed that she should invest the proceeds of Derek’s ISA into a new ISA in her name using a low risk investment strategy, targeted to achieve returns a little above inflation, because this would be most likely to achieve her objectives.

At this stage under the APS rules she has a choice:

  • She can sell the assets held in Derek’s old ISA and reinvest the cash proceeds in a new plan
  • She can keep the assets and transfer them ‘in specie’ to a plan in her name

Although a cash subscription can be done within 3 years from the date of death any ‘in specie’ transfer must be arranged within 180 days of the completion of the estate administration.Senior woman leaning on hand and looking forward.

The existing assets were held by a stockbroker and Marie had no interest or knowledge with which to manage the money herself so we recommended that she sell the assets and invest the proceeds via an investment platform. This structure allows all of the new investments to be held in one place and gave her the confidence and comfort that someone is ‘looking after her money’.

As expert financial planners, once we have helped establish a client’s objectives, we can structure their investments appropriately so that they have the best chance to achieve them. Reviewing the strategy regularly ensures that changes can be made as appropriate to keep their plan on track.


The Patience Principle

Jim Parker of Dimensional is a regular contributor to our Blog; these comments are particularly pertinent given the current stockmarket volatility.

“Global markets are providing investors a rough ride at the moment, as the focus turns to China’s economic outlook. But while falling markets can be worrisome, maintaining a longer-term perspective makes the volatility easier to handle.

A typical response to unsettling markets is an emotional one. We quit risky assets when prices are down and wait for more “certainty”.

These timing strategies can take a few forms. One is to use forecasting to get out when the market is judged as “over-bought” and then to buy back in when the signals tell you it is “over-sold”.

A second strategy might be to undertake a comprehensive macro-economic analysis of the Chinese economy, its monetary policy, global trade and investment linkages and how the various scenarios around these issues might play out in global markets.

In the first instance, there is very little evidence that these forecast-based timing decisions work with any consistency. And even if people manage to luck their way out of the market at the right time, they still have to decide when to get back in.

In the second instance, you can be the world’s best economist and make an accurate assessment of the growth trajectory of China, together with the policy response. But that still doesn’t mean the markets will react as you assume.

A third way is to reflect on how markets price risk. Over the long term, we know there is a return on capital. But those returns are rarely delivered in an even pattern. There are periods when markets fall precipitously and others where they rise inexorably.

The only way of getting that “average” return is to go with the flow. Think about it this way. A sign at the river’s edge reads: “Average depth: three feet”. Reading the sign, the hiker thinks: “OK, I can wade across”. But he soon discovers the “average” masks a range of everything from 6 inches to 15 feet.

Likewise, financial products are frequently advertised as offering “average” returns of, say, 8%, without the promoters acknowledging in a prominent way that individual year returns can be many multiples of that average in either direction.

Now there may be nothing wrong with that sort of volatility if the individual can stomach it. But others can feel uncomfortable. And that’s OK too. The important point is being prepared about possible outcomes from your investment choices.

Markets rarely move in one direction for long. If they did, there would be little risk in investing. And in the absence of risk, there would be no return. One element of risk, although not the whole story, is the volatility of an investment.

Look at a world share market benchmark such as the MSCI World Index, in US dollars. In the 45 years from 1970 to 2014, the index has registered annual gains of as high as 41.9% (in 1986) and losses of as much as 40.7% (2008).

But over that full period, the index delivered an annualised rate of return of 8.9%. To earn that return, you had to remain fully invested, taking the unsettling down periods with the heartening up markets, but also rebalancing each year to return your desired asset allocation back to where you want it to be.

150902 Dimensional Blog Table

Timing your exit and entry successfully is a tough ask. Look at 2008, the year of the global financial crisis and the worst single year in the table. Yet, the MSCI World index in the following year registered one of its best-ever gains.

Now, none of this is to imply that the market is due for a rebound anytime soon. It might. It might not. The fact is no-one can be sure. But we do know that whenever there is a great deal of uncertainty, there will be a great deal of volatility.

Second-guessing markets means second-guessing news. What has happened is already priced in. What happens next is what we don’t know, so we diversify and spread our risk to match our own appetite and expectations.

Spreading risk can mean diversifying within equities across different stocks, sectors, industries and countries. It also means diversifying across asset classes. For instance, while shares have been performing poorly, bonds have been doing well.

Markets are constantly adjusting to news. A fall in prices means investors are collectively demanding an additional return for the risk of owning equities. But for the individual investor, the price decline only matters if they need the money today.

If your horizon is five, 10, 15 or 20 years, the uncertainty will soon fade and the markets will go onto worrying about something else. Ultimately what drives your return is how you allocate your capital across different assets, how much you invest over time and the power of compounding.

But in the short-term, the greatest contribution you can make to your long-term wealth is exercising patience. And that’s where your adviser comes in.”


Greece is the Word

Although it has been announced today that an agreement on a further bailout for Greece has been reached, we think the following comments, again by Jim Parker of Dimensional, are helpful in putting the situation into context:

“The world’s markets and media financial pages have been consumed by a single issue in recent weeks—the stand-off between debt-laden Greece and its international lenders over the conditions of any further bailout.

For investors everywhere, both of the large institutional kind and individual participants, the story has been fast-paced and difficult to keep up with. More importantly, the speculation about possible outcomes has been intense.

Of course, no-one knows the eventual outcome or whether there will even be a definitive conclusion. After all, this is a story that has been percolating now for six years, since Greece’s credit rating was downgraded by three leading agencies amid fears the government would default on its debt.

Since then, the Greek situation has faded in and out of public attention as rescue packages came and went and as widespread social and political unrest gripped a nation known as the birthplace of democracy.

But there are a few points to keep in mind. Despite the blanket media coverage of Greece, this is a tiny economy, ranking 51st in the world by GDP in purchasing power parity terms (which takes into account the relative cost of local goods).

On this measure, Greece is a smaller economy than Qatar, Peru or Kazakhstan, none of which currently feature prominently in world news pages. Its economy is about half the size of Ohio in the USA or New South Wales in Australia and about a tenth of the size of the UK. Even within Europe, it is tiny, representing only about 2% of the GDP of the 19-nation Euro Zone.

As a proportion of global share markets, Greece is also a minnow. As of early July 2015, it represented about 0.32% of the MSCI Emerging Markets index and just 0.03% of the MSCI All Country World Index.

And while its total debt is large in nominal terms and relative to its GDP at about 180%, this still represents only about a quarter of 1% of world debt markets.

Of course, what worries investors is not so much Greece itself but the wider ramifications of the debt crisis for its European bank lenders, for the future of the single European currency and for the global financial system.

Yet, many of these concerns are already reflected in market prices, such as in Greek government bonds, the spreads of peripheral Euro Zone bonds, regional equity markets and the single European currency itself.

While no-one knows what will happen next, we can look at measures of market volatility as a rough guide to collective expectations. A commonly cited measure is the Chicago Board Options Exchange’s volatility index, sometimes known as the ‘fear’ index. This has recently spiked to around 18 from 12 in mid-June. But keep in mind the index was up around 80 during the peak of the financial crisis in 2008.

Of course, the human misery and dislocation suffered by the Greek people through this crisis should not be downplayed, neither should the financial risks. But from an investment perspective, there is still little individual investors can do beyond the usual prescription.

That prescription is to remain disciplined and broadly diversified across countries and asset classes and to be mindful that markets accommodate new information instantaneously. So the risk in changing one’s portfolio in response to fast-breaking news is that you end up acting on events that are already built into security prices.

In summary, the events in Greece are clearly worrisome, but Greece is a very small economy and a tiny proportion of the global markets. Events are moving quickly and prices are adjusting as news breaks and investor expectations adjust.

For the individual investor, the best approach remains diversifying across many countries and asset classes, remaining focused on your own goals and, most of all, listening to your chosen advisor, who understands your situation best.

Crudely speaking, should you be making bets on the price of oil?

This week we have a topical guest Blog from Tom Fellowes, a Regional Director of Dimensional Fund Advisers in which he comments on the recent fall in the price of crude oil and suggests how a rational investor should respond.

“The price of crude oil has fallen around 40 per cent since a recent peak in June this year. This has a profound effect on economies and markets around the world as the cost of manufacturing and transporting goods falls along with oil producers’ income and the currencies of oil-rich countries.

The theory goes that consumer spending will rise because people have more disposable income; that inflation will fall as the price of goods eases; and that companies with high energy bills will become more profitable.

If lower prices hold, the effect might become political and environmental as the balance of world power shifts from oil exporters to oil importers, and the impetus to develop cheaper clean energy wanes.

Oil seeps so deep into the global economy you might think that to be a successful investor you need to have an accurate view on its price and its impact on asset prices. But you would be wrong.

No-one with an opinion about oil knows whether their view is right or wrong, and only the changing price will confirm which they are. Market prices are a fair reflection of the balance of opinion because they are created by many buyers and sellers agreeing on individual transactions. As an investor you can take a view of whether that balance – that price – is right but, like all other people with an opinion, you have no way of knowing whether you are right or wrong until the price moves.

Knowing this, it seems irrational to take a view (or a risk) on something so random as the direction of the oil price. In fact, why would one take a view on anything related to the changing price of oil; the US economy, for example; or the price of Shell; or Deutsche Post; or anything else?

The rational approach is to let capital markets run their course and to have a sufficiently diversified portfolio that allows you to relax in the knowledge that, over time, you will benefit from the wealth-generating power of your investments as a whole; without risking your wealth on a prediction that might go one way or the other.”

This last paragraph reflects the Fortitude investment philosophy; please contact us if you would like to discuss your investments.

Principles of Successful Investing – take the long view

Early in September, the FTSE 100 reached its highest level since December 1999. People might read into this story that it’s taken 14 years for the market to recover from the technology crash and the credit crisis and that stock-market investment has been pointless over that period.

Looking at the blue line on the chart below (the simple price index that you hear quoted in the news) you might think they are right. But that is only part of the story. In fact, it has been possible to make money on your investments since the turn of the century by applying a few simple principles.

First, that the value of dividends and how they compound over time is significant. Reinvested dividends are the difference between the blue and orange lines on the chart. While the simple index has just broken even, an investor who reinvested their dividends would have made around 60 per cent since 1999.

141110 Dimensional Graph

 The growth of £1 invested in the FTSE 100 price index (blue) and FTSE 100 total return index (orange) since December 1999. Source: Dimensional.

Next, remember that there is more to a market than the index you hear quoted on the news. The FTSE 100 is just the largest 100 companies listed in London and, as such, is not representative of the UK market (that would be the FTSE All Share) or the UK economy (that would be GDP). The FTSE 100 excludes hundreds of smaller companies, many of which have performed better than the giants of the London market over the period.

A sensible long-term investment strategy has little to do with the daily quoted indices that dominate news reporting. That strategy would be globally diversified and take into account a detailed assessment of your future financial needs.

We work hard to devise those sensible long-term investment strategies for you and recognise that, in isolation, the FTSE 100’s current level is little more than a single point of fairly meaningless data.  Please contact us if you want to discuss how we could help or if you have any questions about your existing investments


Remember that any investment that is linked to stock markets will involve a number of risks including:

  • Past performance is not a guarantee of future performance.
  • The capital value of your investment is not guaranteed. The value of your investment and any income from those investments can go down as well as up and you may get back less than you originally invested.

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