“The market is going up the question is when”
This was a quote from an ‘Investment Academy’ run by Nucleus Financial in London on 27th September. It emphasises why it is so important to be in the market and not to try speculate with market timing or to remain uninvested. Guessing with market timing is one of the six behaviours that seriously reduce your investment return – look back a couple of months and take a look.
On Thursday 27th September I left home at the relatively late hour of 7.30 a.m. and at 10 a.m. met with the cream of the financial investment profession at Henderson Global Investors Offices in Bishopsgate. The next 5 hours were spend with John Pattulo, Mark Polson, Melony Holman, Rick Eling, Tony Wickendon and several others – all masters of their fields. The discussion continued over a glass of wine afterwards and I arrived home at 8.30 p.m. after a very illuminating day.
This was the third time in London last month but on that occasion I am pleased that it didn’t involve an overnight stay. A lot of time is spent on keeping knowledge and skills up to date so that this can be passed on to clients. There are so many changes occurring in investment, regulation, and the financial markets that continual professional development is essential. Earlier in the month a client commented that I seemed to be always in seminars, conferences, or business meetings almost as if he didn’t realise that it was all for his and other clients benefit. I suggested to him that if his doctor hadn’t kept up to date with his or her medical skills on a regular basis, how much confidence would he have in his medical advice?
The week before a day was spent with Michelle Hoskin of Standards International discussing the new British Standard BS8577 which is currently being approved by ‘Which?’ and when we complete is expecting to allow us to display the well-known kite mark on all stationery – I’ll keep you posted on developments.
Earlier in the month two days were spent in my teaching capacity with other Independent Financial Advisers who I am training to become Registered Life Planners. When I started this work 2 years ago I had a target of training 50 IFAs to put the clients at the heart of their business using life planning and this month I met that target. It is wonderful to think that the clients of 50 advisers are now getting more in depth and meaningful advice – a really good feeling.
There was enough about RDR in my Newsletter last month so I won’t dwell this month except to say that it was announced that The Lighthouse network has seen a 15% decline in numbers of advisers this year, which is consistent with the message that I have been giving. A different slant is the news from an OCR Survey which suggested that 30% of IFAs who work for National Firms were going to forego their IFA status and move to a Restricted Advice model. The report also said that smaller IFAs are more likely to remain independent. This suggests that the number of Independent Financial Advisers will not only be reduced by the numbers of people that stop advising but also by a significant number who change to a restricted status. As I write this on 1st October I realise that it is only 3 months today and for me it can’t come soon enough!
Last month I started looking at Ric Edelman’s “Rescue Your Money” and I quote where I finished off:
“People who focus on the market are missing the point. You need to emphasise your goals.”
Ric Edelman’s “Rescue Your Money”
The Two Major Obstacles that you’ll face
As soon as you start with the goal of achieving financial security and financial independence you find that you are hampered by two major obstacles: Taxes and Inflation.
Taxes: Your accumulation of wealth is diminished by taxes on everything: income, purchases, investment returns, capital gains, property taxes, inheritance taxes, and so on.
Inflation: This is the silent robber of wealth because you can’t see it in your account and it happens without you realising. Inflation has averaged 3.2% a year from 1926 to 2008. Sometimes it has been much higher sometimes lower but over long periods it has been remarkably consistent at 3.2%.
Why those who Invest “Safely” Often Go Broke
The sad truth is that taxes and inflation most hurt the people who know the least about investing.
If you place your money in the average bank return, after taxes you consistently lose over 1% a year. That may not seem a lot but this means that someone who retires at say 60 years of age and puts their money in the bank they will find that their money goes down in real value every year. At 3.2% inflation the cost of living doubles every 23 years and in that time money in the average bank account will have fallen in value. Becoming poorer as you get older and you may need more home comforts rather than less is scary.
And that’s the irony: The people who are putting their life savings into the bank do so because they want safety above everything else. They don’t want to put money in the stock market because they fear losing money. They’re afraid to invest in property. They don’t understand international securities. So they choose bank accounts, which (they think) offer safe, predictable, and stable rates of return: – Predicable and stable, yes – Safe, no. As a result many people are going broke safely. And they don’t even know it.
The minimum return you must earn
If inflation is 3% and you are paying tax at 20% you must earn at least 3.8% to break even. If you are paying tax at 40% you have got to get at least 5%. And you won’t do this by investing in bank accounts, money market funds, or bank CDs (Certificates for Difference), T-Bills, government savings bonds, life assurance, or (for most people) in fixed annuities.
Investments that can generate the returns that you need
I’ll let Ric tell the answer (and I’ll leave his American terminology to stay):
“Over the last thirty years, each of the three major asset classes (stocks, bonds, and real estate) generated double digit returns (or nearly so).”
And he continues:
“Sure, in any given year or couple of years, each of these asset classes has generated losses. But you’re not investing for a year or two. You’re investing for a lifetime, so it makes sense to focus on the average returns earned by a lifetime of investing.”
The Average Annual Return 1979 – 2008 Bonds – 9.45%; Real Estate – 10.3%; U.S. Stocks – 11.0%
So having made the point that unless you want to become poorer you have to invest he poses the next question – “How do you earn those returns?”
Next month we will revisit some familiar territory when we get Ric’s slant on the fallacy of market timing; the avoidance of following fashion; and why you shouldn’t trust the media. Those of you who have following my newsletter since the beginning of the year will be getting a recurring theme.
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