Newsletter & Alan’s Blog April 2012

D. O. A. – for those of you who watch medical dramas like Holby and Casualty this abbreviation will possibly mean ‘Dead on Arrival’. For me means ‘Delegate, Outsource, and Automate’: – Over the last 12 months or so I’ve been engaging expertise from various parts of the country using the power of the Cloud (the Internet) to enhance the efficiency of the business and free up my time so that I could focus on clients.  At the beginning of 2011 I analysed my business activity for 2010 and during the year 80% of my time had been spent working on the business, and this had left only 20% of my time to see and engage with clients. In simple terms the equivalent of one day a week was being spent with clients and the other four was spent running the business. I had taken feedback from clients and they valued the time that I spent with them but wanted more of me which was clearly not possible unless something changed. Not only that but seeing clients was the part of my week that I enjoyed most of all so the other 80% was taking me away from what I wanted to do most.

Hence: D. O. A. – by delegating, outsourcing, and automating I have already reached a much more appropriate balance of my time where 60% is now being spent with clients and before the end of the year I am on target to switch positions so that 80% is with clients and the other 20% on the business is taken up with a management and supervision role. Some clients have already commented on the difference in my availability and I am delighted that my efforts are being recognised,

I’m writing this on Easter Monday while looking out at the rain and thought that many of you would not be aware of how many people are now engaged by Interface and it’s a good opportunity to introduce one or two of them.

Cathi Harrison of Para-sols and her team are our paraplanners and you can see her at www.para-sols.co.uk. Cathi is a highly qualified Chartered Financial Planner and has won a range of awards including Paraplanner of the year award from Professional Adviser in February this year. Another of her team: Gary Tunstall won the prestigious 2011 Paraplanner of the Year award from the Institute of Financial Planning. Cathi is based in Darlington, County Durham and it would be impossible to obtain someone of her calibre without the internet.

Mel Holman from CATS and her team provide our compliance and training. Mel is a Certified Financial Planner with many years of impressive experience. CATS is based in Colchester, Essex demonstrating again the power of using the Internet to engage expertise.

There are several other equally impressive people engaged by Interface and full contact details of them all are given in the appendix of our Terms of Business. Either take a look there or ask and I’ll introduce a few more next month.

This month my continuing discussion of the “The 7 Secrets of Money” is about risk – a subject that is often misunderstood. ‘The 7 Secrets of Money’ is a book that I strongly recommend: you can get your own copy from Amazon and for more information you could look at the authors’ website at www.7secretsofmoney.co.uk.

Secret Number 4: Some financial risks are really not worth taking

I would like to start this session by saying that there is no such thing as ‘no risk’. We all take risks every day of our lives and we get through by assessing the risks and managing the potential for things to go wrong.

If you were to stop at home and never go out you might think that you had eliminated risk however you would still be exposed to many risks: electrical, fire, flood, falling down the stairs, food poisoning, someone breaking in to your house, an aeroplane crashing in to your roof, and the list goes on. And once you decide to leave your front door the number of risks that you have to manage rises exponentially. Investment risk is no different though it is often perceived differently because it is poorly understood. The ‘financial conspiracy’ that was discussed in the first secret of money has a vested interest in ensuring that you do not understand. If they can keep investment shrouded in mystery (even mystique) you will be prepared to part with more of your money and suffer lower net returns than you otherwise would.

In The Bible (Matthew 25: 14-30) the parable of the talents tells us that money should be invested to obtain a return. The slaves who were given 5 talents* and 2 talents invested their money and came back after they had doubled their money. However the slave who received 1 talent did not invest and came back only with the one talent that he had been given. He was left in no doubt that this was the wrong thing to do because he had this talent taken from him and he was thrown into the outer darkness where there was a “weeping and gnashing of teeth”.[*a talent is a unit of value / money]

One of the basic rules of investing is that there is no return without risk: hence you would expect a higher return from owning shares to owning bonds in the same company. However so that you don’t end up weeping and gnashing your teeth it is important to understand your own tolerance for risk and to ensure that your investment portfolio matches it. My grandmother used to tell me “if it sounds too good to be true it probably is”. She did not understand anything about investment and yet she was never more right when you apply her wisdom.

Why is it that many people see a huge return which is better than everyone else’s and then cast their common sense to the wind and end up losing significant amounts of money: history is littered with such tales: Polly Peck 1990, Bank of Credit & Commerce International (BCCI) 1991, The Dot-com bubble 2000, Enron 2001, Bernard Madoff (Ponzi scheme) 2008, Iceland’s banks 2008, and the list continues.

This is a good time to state categorically that investment is not speculation and neither is speculation an investment. We only recommend and implement a sound investment strategy which is at the polar extreme to speculation. If you want to ‘take a punt’ at a given share because you have been seduced by the financial pornography and think that the stock will do well then by all means take a punt. But do recognise it for what it is: – very little different to going to your local William Hill or Coral bookmakers on a Saturday afternoon and gambling. You may decide to go against our advice and go down that route but we will not be with you.

The authors introduce this secret thus: “the next chapter may at times seem rather technical, but we would encourage you to persevere. We want to keep things as straightforward as possible, but we feel that the information is so important and vital to your investing success that these chapters include some relatively complex material. Complete comprehension is not necessary, but an awareness of the issues will put you in a position to make informed choices.”

So this month I am not going to repeat much of the excellent explanation of investment risk because you can do no better than reading chapter 4 for yourself. I will merely summarise: –

There are two main categories of risk: Market Risk and Implementation Risk.

Market Risk is divided into Fundamental Risk and Specific Risk.

In turn Fundamental Risk is divided into Systematic Risk and Unsystematic Risk.

Specific Risk is split into four: Credit Risk, Currency Risk, Default Risk, and Political Risk

The second main category of Risk – Implementation risk is divided into Manager Risk, Liquidity Risk, and Structural Product Risk.

Hence our two categories have been subdivided into 9 subclasses of risk and this may seem daunting but all that we have done is identify the risks just as we did above when I talked about the risks of staying at home. When you know what each of the risks are you can manage the risk of fire or flood, make your house more secure so that an intruder finds it more difficult to break in, and so on. We do the same with investment – we identify the risks and eliminate, or manage each risk to provide a strategy to get you the return from the market that you want.

The one risk that isn’t included above is ‘Inflation Risk’ and your investment strategy needs to be planned so that your assets preserve their real value (I.e. after inflation). If inflation is 4% and your money is in the bank earning interest of 1% you are losing 3% a year – this is a known quantifiable loss. It is worth considering that something that you could buy for £100 in 1980 will now cost you £300 and if you do not as a minimum keep up with inflation you are destined to get poorer and poorer.

In summary nine different subcategories of risk have been identified. Some of those risks are worth taking, some risks can be diversified away, and other risks are best avoided at all costs.

All of our clients complete a 25 question risk profile questionnaire from Finametrica which gives them a risk profile report which we discuss with them to ensure that develop a sound understanding of risk.

Your investments should be transparent and the risks involved easy to understand: Investing can be a simple process and in general avoid complicated investments. In complex investments it is usually the hidden risks which will hit you the hardest and be least welcome. [Please remember the wisdom of my grandmother – “if it sounds too good to be true it probably is!”]

I will finish by quoting the last paragraph of this section which very neatly moves us towards next month’s secret about asset allocation:

“Make sure you are properly rewarded for taking the risk of investing in equities over time through owning enough of them across as many markets as possible. For more diversification, see the next chapter. As you will learn, bonds also provide a good return for the risk taken, provided you stick to the very highest quality bonds and keep their average lifetime relatively low.”

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