Newsletter & Alan’s Blog May 2012
I will be the first to admit that nothing beats a face to face, heart to heart, communication, and I agree that picking up the phone is better than a score of emails but we are in an age of electronic communication and the number of ways to contact seems to increase regularly. As much as I am a Social Media fan I am amazed with how many direct communications I now receive via Twitter. To bring us back down to earth I start with a quote from Joseph Priestley: –
“The more elaborate our means of communication, the less we communicate.”
So keeping it simple is important and following feedback from a client I thought that you might find it useful to consider your alternative methods of communicating with us:
Communication via Website
We have made considerable investment in technology to ensure that our clients have access to our services at all times. All clients are provided with their unique log on details so that they can view all of their details that we hold in our system on a ‘24/7’ basis. Their log on allows them to receive and send messages and documents securely. Portfolios are updated regularly (daily where possible) so that they can see current valuations of their investments at any time. Our 2012 innovation ‘PaperCloud’ enables clients to have direct access to all of the documents that we hold on our system. Clients have told me that they love the openness and transparency that this provides.
Communication by email
We have dedicated email addresses: firstname.lastname@example.org and email@example.com which are used for clients only and ensure that client messages get priority. These messages synchronise with iPhone so that they are received when away from the office. Our monthly E-Newsletter is one of our main means of client communication where we keep you up to date with developments at Interface Financial Planning and provide articles and information of interest. If you are not receiving our e-newsletter please let us know or go to our website and subscribe.
Communication by telephone
Someone is always available on our reception from 8.30 a.m. to 6.00 p.m. Monday to Friday and your calls will be put through immediately if I am available. If not available your message is relayed instantly by email and your call will be returned. When you leave a message it is helpful if you leave a ‘time-window’ when you will be available to receive our call because no one enjoys telephone ‘ping-pong’. If you leave a message outside of normal office hours your message will be transcribed and sent by email.
Skype is becoming increasingly popular with clients and my Skype ID is alan.moran.ifa – if unavailable you are redirected to reception where you can leave a message. My mobile number also redirects to reception after 4 rings if I am unavailable.
Communication by Text
In order to be sure that our clients have all possible means of contacting us we have a dedicated text line where clients can text us at any time. Texts to 0795 008 1331 are received as emails so you do not need access to a computer to send us an email. We ask our clients to ensure that we hold their current mobile phone details so that we can send them urgent or important messages or reminders by text. We do not use text for general communications only for specific and personal messages.
Communication by Fax
Faxing is a technology which is in decline however some of our clients still like to fax us documents and it with them in mind that we have a dedicated fax facility provided by EFax. When you fax to 0121 554 7444 your fax will be received as an email to our client dedicated email address.
Communication by post
When you write to us please use our Business Reply envelopes or the Freepost address as given below. This is a priority first class service and ensures that your mail is delivered to us without delay. In the past clients have sent items with the incorrect postage and the Royal Mail procedure of claiming the excess postage means that their mail can be delayed by up to a week. In addition Business Reply and Freepost deliveries show up as client correspondence and are given priority when received.
Please copy the address below exactly as written: –
Interface Financial Planning Limited
122 Hamstead Hall Road
Communication by Screen Sharing
Clients are able to use our screen sharing facility either on a pre-arranged basis or on-the-fly during a telephone call so that we can share information and review your financial planning just as if you were in our offices. During screen sharing sessions you can speak to us via the internet or via your normal telephone.
Social Media and Instant Messaging
I am actively involvement in Social Media and if you connect via LinkedIn, Facebook, or elsewhere this provides another way in which you can communicate. You can follow me on Twitter or use my Twitter address: @Alan_Moran to send a direct tweet. There are many sources of Instant Messaging – the one that I use is via Skype and you will usually find that I am logged into Skype where you will be able to send an instant message.
You can see that keeping in touch is important to us and you have a range of ways to contact us. Don’t be put off by the range of methods of communication – just use whatever you are comfortable with.
[And in response to one client who asked: – Sorry we no longer use carrier pigeon, they went to the Cloud!]
This month my continuing discussion of the “The 7 Secrets of Money” is about asset allocation. ‘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 5: Asset Allocation is the most crucial decision of all
I find it uplifting when I read a passage written by fellow experts saying exactly what I have been telling my clients and the following is a great example:
“Various academic studies have shown that over 90% of the variability of returns is explained by strategic asset allocation – put simply, the proportion of shares (equities) and fixed interest (bonds) held. Active strategies – market timing and share selection – undertaken in an attempt to beat the market are repeatedly shown to have only a slight significance.”
Hence ignore the financial pornography and put aside the crystal ball gazing which costs too much and gains little or worse. Following an investment strategy where you spread your assets between investment classes and keep the proportions in balance will provide the best chance of you meeting your investment goals.
The process of asset allocation is not new and a wonderful quotation from the Talmud is used to illustrate:
“Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve.”
At its simplest level investment is principally concerned with either owning an asset or equity stake, , or lending capital. There are two fundamental ways of getting a return on capital:
1 Owning commercial enterprises or assets such as equities or property, with the potential of receiving dividends, rent or some other ownership reward.
2 Lending your capital to a government or company by purchasing a gilt or bond (fixed-interest investment) and receiving interest.
You should look nowhere else and any investment in which one of these two sources of return is not apparent should be viewed with scepticism as it will normally fall into the speculation category, involving some sort of forecasting of the future of asset prices.
Bonds come in a number of different varieties with different levels of risk. The level of risk is based on the creditworthiness of the institution issuing the bonds and its ability to pay the coupon (interest) due on those bonds.
The evidence shows that bonds with longer maturity have greater volatility for little increase in return offering the conclusion that short-term bonds offer the best risk-return ratio.
Bonds are used for one of two reasons: To reduce overall volatility of a portfolio, and to generate a reliable income stream. Short term, high quality bonds, with historically low yields and lower volatility are ideal for long term investors who may seek to earn higher expected returns by shifting risk to the equity side of their portfolio. On the other hand income orientated investors whose priority may be to meet a specific income need may not be concerned about the short-term volatility in their bond portfolio and they may choose longer maturities and lower credit quality to increase income – a choice that they should exercise with caution.
You are likely to gain a considerable extra return from taking the extra risk involved in equities. It is commonly held that risk and return are related but understanding risk is vital if you are take advantage of risks that are rewarded and risks that are not. For example if you invest in too few companies or a specific industry you are not rewarded and reflecting back to the ‘dot.com’ bubble of the late 1990s will be enough for most to recognise this point. You get rewarded for investing in the stock market as a whole. Nobel Prize winner Bill Sharpe demonstrated that this strategy is responsible of 70% of the returns you get for investing in equities over time.
In 1992 academics Eugene Fama and Ken French looked at whether there were other ways of explaining returns that one gets from equity investing. They found that by analysing firstly the size of a company related to other companies in the market, and secondly the price of a company related to the book value of its assets, you could explain 96% of the variability of returns in equities. Basically they showed that:-
1 Investors have received a higher return for investing in small companies (small cap) compared to big companies
2 You get a higher return for investing in companies whose prices are low compared to the book value of their assets (value companies) than investing in growth companies
“Investing in smaller-value companies is a risk that one seems to get rewarded for over time, and the extra reward can be quite significant.”
Over time and across many different markets around the world a pattern emerges. Large-value companies give investors a higher return than large companies in general, and significantly higher than large-growth companies. This pattern repeats itself across different sizes of company, with small-value companies having higher returns than small-growth companies, and small-value companies having higher returns than small-growth companies, and small-value companies having an even higher return than their large value counterparts.
In summary: “Value beats growth and small beats large”.
Your investment split
A riskier portfolio holds 100% equities whereas the least volatile portfolio holds 100% bonds. Between these extremes lie standard equity based allocations such as 80-20, 60-40, 50-50, 40-60, and 20-80. Volatility and return of each portfolio over 1, 3, 5, 10, & 20 years should give a good indication of the lows and the highs and should be matched to your capacity for risk.
After establishing the equity proportion in the portfolio the equity allocation can be refined using the Fama – French research. By holding a larger proportion of small cap and value equities than mainstream indices the investor increases the potential to earn higher returns for the additional risk taken.
Diversification – not putting all your eggs in one basket
Diversification helps to increase return and to protect against the worst market falls. The more diversification in equities the more that you remove the specific risks associated to companies and to industry sector. Adding bonds reduces risk (assuming that you use only bonds of a very high quality sometimes called ‘investment grade’ bonds).
Beware of averages!
“Think of it as crossing a river: you need to know the depth of the river all the way across, not just the average depth. The average depth may be 4 feet, but if it drops to 8 feet halfway, you may find yourself in difficulty, particularly if you cannot swim”.
You might be attracted to the highest rate of return of a portfolio with the largest percentage of equities but make sure that you are also comfortable with the more than 30% drop that such a portfolio would have given you in 2008?
What about Property investment?
There are four key asset classes: businesses, property, cash, and debt. Businesses and property have produced far better long-term returns than the other two asset classes. Many clients are already well exposed to property as homeowners, buy to let investors, and commercial property owners. Hence in the interests of diversification property funds are not given much emphasis though low cost property index funds are available.
When you have balanced your portfolio to give you your right level of risk it is important to ensure that his balance is maintained. The basic idea is that once an asset class has moved up in value you should sell some of your investments in this asset class and buy investments in the asset class which has in comparison done less well, to a level that maintains your originally agreed risk levels. Rebalancing can maintain your desired level of volatility and have an important effect on your overall return.
Getting the most from your portfolio
Managing your portfolio is somewhat like piloting a plane. At the outset you decide upon your destination and how quickly and at what altitude you are going to fly to get there. Along the way, however, you will need to make small adjustments to your course because of winds, storms and the like which may cause you to deviate. By staying disciplined and following the agreed course as closely as possible you give yourself the greatest possible opportunity of arriving comfortably on time at your destination.
Sadly investors still face a significant challenge. Despite out best intentions we often let our emotions get in the way of sensible investment decisions. “Your behaviour will define your return” is the subject of Secret number 6 and will be discussed in our June Blog and Newsletter.