Holding cash deposits because it makes you feel good?
Wednesday 22 October 2008
Before I make any comment…if you are a cash investor…read this.
“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities. Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.”
Warren Buffet wrote to the New York Times explaining his opinions. The full article can be seen if you click here.
The current crisis has created anxiety in holding cash. So much so the governments of the world are standing behind the banks and savers deposits. A sigh of relief, but such peace of mind today, may not offer peace of mind over time. I believe in the comments made by Buffett. What he is saying is that if you back business with your capital, over time you are more likely to be rewarded than staying in cash.
Buffett goes on to say “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”
Whilst Buffett believes in the long benefit of equities, there may still be the problem for investors to be brave and "be greedy when others are fearful" as it goes against natural emotions.
So, I’ll end with an analogy. If Marks and Spencer’s reduced the price of socks by 50%, shoppers would perceive the value to be a bargain and human nature will be drawn to snapping up those socks. Of course, taking a chance on £3.50 is different to investing £350,000, yet the principles are basically the same. If the net return on cash was 3.5% per annum and net return on equities was 5.5% per annum, the 2% margin could add over £100,000 in 10 years and about £200,000 in 15 years in equities. For some investors that might mean the difference between retiring early or others having to work longer.
If you allocate your capital wisely, and stop and think about what Buffett says, perhaps through the midst of chaos that is prevalent now may appear a bright future.
posted by Murray Round Wealth Management @ 15:54,
Investing is about perspective..how would you react if official interest rates fell below 2%?
Saturday 18 October 2008
I wonder if in the Diary of Samuel Pepys, there was a discussion about interest rates following the Royal Charter being granted to the Bank of England on July 27 1694. If not in the diary's of numerous investors in 2008 it will have plenty of mentions.
One leading economist believes the Bank of England may have to drop rates below 2%, and they could fall to the lowest level for 300 years….1694 to be exact, say the Daily Telegraph
Great news for borrowers, disastrous news for savers!
Whilst we do not believe in crystal ball gazing, it is clear we are in uncharted territory. If interest rates did fall below 2%, it will have an impact on bond prices and equities..all assets classes will react positively or negatively as the economy is all interrelated. Savers may then consider buying bonds or even equities…a demand for either could drive prices upwards. All speculation I know, but trying to second guess what will happen is a futile or unprofitable endeavour or eloquently called a 'mugs game'.
My point is that trying to predict when the right time to react to macro economic factors is likely to be almost impossible for most people. If instead savers and investors had diversified their holdings subject to their risk profile, they can then ignore macro factors. They can look forward to a well balanced portfolio, which means you are much more likely to have a successful investment experience over time.
We hope investors take notice and put their own house in order first without trying to react to Gordon Browns’ house, or George Bush’s house….as these people only take responsibility for the economy for a short time, you take responsibility for life.
posted by Murray Round Wealth Management @ 10:13,
Due Diligence for your money in the current crisis.
Thursday 16 October 2008
What questions do you ask your advisers during these volatile times?
When investment returns are poor, most people are driven by their emotions rather than methodical behaviour which results in doing nothing. It is often easier to ignore the problem rather than deal with it in a pro-active way. In fact, behavioural science tells us it is a perfectly natural emotion to do nothing.
If you are told that other investors are in the same position, the herding instinct, which is essentially protectionism, helps you feel a little more at ease which alleviates your anxieties. Yet these emotional calming influences do not deal with the route cause. You need to find out exactly what is happening to your money. This is much harder for investors to analyse because they do not know what pertinent questions to ask and what answers to expect.
Your future financial security needs to rely on rational thought, which is why we have listed a range of questions to help you become a money expert. By gathering good information, you can then make better decisions which in turn gives you longer term peace of mind. You are then more likely to achieve your goals and your emotions can be directed to more important matters in your life rather than accepting the financial anxieties of today.
Here are some questions you need to ask your advisers, e.g. fund managers, stockbrokers, private bankers, IFAs, etc that are helping you invest:
- Has my total investments outperformed the market average in total? (You need comparisons against various total return indices, such as FTSE All Share or even FTSE 250 and others, to give you a broad overview of market returns).
- For each individual investment in my portfolio, has it outperformed its relevant sector? If so, by how much? What decisions were made to actually give the outperformance? How were those decisions arrived at? What processes are in place to help replicate future decisions that give outperformance? (After all, you want to know the chances of success in the future)
- How volatile has each investment been compared to its sector? (Clearly if the investment is a lot more volatile than the average in the sector, unfortunately you are taking on extra risk without being rewarded for taking that risk.)
- Are my investments being actively managed? If yes, how are decisions made on what to buy, hold or sell? Who makes these decisions? If investments are falling, what action is taken to mitigate it?
- Whose responsibility is it for my whole portfolio to be rebalanced? Is this discretionary or advisory?
- What are the parameters of the investment funds? (Do you know what your advisers or fund managers can invest into and what they cannot invest into? Are you sure you know where your money is actually invested? Are greater risks being taken with your money than you are aware of?)
- What are both the explicit and implicit costs of my portfolio? How do these costs impact on my return? How are the managers incentivised for managing my money?
- Do I have a written investment policy statement?
- Finally, ask if your advisers or fund managers believe they have been successful in managing your money, if so, how do they measure their success? How to they plan to repeat successes and eliminate failures?
What answers can you expect?
Whilst these questions can demand ‘rocket science’ answers which may confuse you, importantly they should be communicated to you in a simple and straightforward manner and in a way you understand. If the answers are too confusing or complicated and you cannot understand, you are more likely to face more anxieties in the future. The best portfolios are ones that investors understand, which means they are most likely to stick with them over the long term.Do also remember to ask for the answers in writing.
When you have satisfied yourself with rational and methodical answers, you can then move forward within this crisis by reviewing and rebalancing your portfolio. You can therefore feel satisfied you have carried out your own due diligence on your money and are likely to then feel less anxious about the future.
If on the other hand, you do not get the answers to which you are entitled; perhaps you should consider your alternatives.
Unfortunately some investors will find their emotions over ride any effort to carry out due diligence. It can be argued that the lack of due diligence has contributed to the banking crisis – we all know how that has turned out.
We hope these questions and the answers you receive will help you build a better portfolio and help you achieve your financial goals.
posted by Murray Round Wealth Management @ 14:56,
How does the current crisis affect your fund manager?
Sunday 12 October 2008
I was interested in an article by Kate Burgess the FT . She quoted Roger Yates, the recently resigned CEO of the fund manager Henderson, who said "The asset management industry is at an inflexion point," he said, adding that too many asset managers are too complacent about existing business lines assuming they would return to previous levels in the medium term. But investors are becoming more hawkish and less tolerant of high charges for mediocre performance.”
So the boss (well ex boss) of a leading fund management group is talking about high charges and mediocre performance. It is nevertheless refreshing for to hear such comments, and it does bring into question, how do these managers add value and in particular, what is their mind set, in this financial crisis? The FT goes on to say “Most fund managers are scrabbling to contain the damage by cutting costs. But as revenues decline, those with high levels of debt, such as New Star Asset Management, risk being pushed up against their banking covenants”
How many fund managers are facing similar turmoil? What questions do you ask these fund providers, especially those managing your money, how this crisis is really affecting their business models?
Then you need to consider how is the crisis is affecting the individual fund managers’ motivation and behaviour? How would you feel if the company you work for is cutting costs and possibly laying off employees? What if your income was due to be cut? Are the managers going to be focused on your money, first and foremost, or will they be distracted about their own future? Will they in fact take more risk with your money in the hope of better returns to benefit from bonuses? If their decisions do not work, it’s your money they are losing not necessarily their own! Conversely, they may be taking less risk to protect their job and therefore may not be omnipresent by searching out new opportunities. Their finger may no longer be on the pulse! These are issues potentially facing some of the fund management groups.
Fundamentally, investors are accepting what is called as ‘fund manager’ risk. As investors you need to minimise this risk whilst seeking maximum return. More of this later.
But lets go back to an earlier point above. Are fund management groups actually really experiencing pressure?
Actually, many are losing funds to manage. Here is what the FT went on to say “Analysts at Morgan Stanley argue that risk aversion has prompted a huge flow from retail funds to deposits across Europe, encouraged by the banks, which are seeking to bolster their capital bases. In the first six months of the year, net outflows across Europe from bond and equity mutual funds reached a record of more than €130bn (£100bn), according to Lipper Feri, the data provider….The same nervousness about the prospects for asset management is prompting banks such as Santander, the Spanish lender that recently bought Alliance & Leicester and the deposit book of Bradford & Bingley, to put their fund management businesses up for sale.”
So what does this mean to you if you have your money invested by many of the retail fund managers? The future may be not quite what we all expect!
That means you should be reviewing your holdings with your fund managers. You need to satisfy yourself they are working for you? What parameters have you set to measure their success or failure? I repeat the statement above “….. investors are becoming more hawkish and less tolerant of high charges for mediocre performance” Are you?
Every investor needs to start asking these and many more questions, yet even in the face of evidence that makes it crystal clear what investors need to do, many investors do not act in a rational manner. This is no surprise as the answers lie within the world of behavioural finance. To illustrate, there is what is termed ‘a fear of regret’ and ‘belief persistence’. Even when a clear course of action is appropriate, people prefer to do nothing or remain indecisive for the fear of making the wrong decision. Also belief persistence can cause people to ignore evidence or indicators that are contrary to what they believe to be in their own best interest.
At Murray Round we encourage all investors to take action. Asking questions of those advisers and fund managers that may have delivered in the past is not easy, but it is your money. If you fail to take responsibility for your money, you cannot blame anyone accept yourself. As the famous investor Benjamin Graham said: “The investor’s chief problem and even his worst enemy is likely to be himself.”
We agree with the FT comments that say there is a sea of change which is a shift to ‘spicier’ fund managers and cheap index tracking funds.
There is no need to accept the motivations, fears, hopes, aspirations, concerns, in fact, all the emotions of retail active fund managers, instead, you can avoid ‘fund manager risk’ by applying a systematic approach to investing, using passive funds, which means investors have a greater change of experiencing a successful investment experience over time.
It’s what we do. Call us. It these times of uncertainly, a systematic plan is vital. The future is here now if you want it.
posted by Murray Round Wealth Management @ 14:42,
Why investment reviews are a "no brainer" decision.
Friday 10 October 2008
As I write this blog, the FTSE 100 has crashed below the 4000 level.
Without doubt, investors will be finding their emotions are high. Yet at these times, the investment review has never been as important.
As we know what investors need to do, the decision to review is a no brainer. Yet I recognise that many individuals will feel the only option is to do nothing. Even if it appears crystal clear that action should be taken, often investors do nothing. Sometimes in these situations there needs to be a different perspective, to help your decision making. With this in mind, perhaps these numbers might help you in your thought process.
Let us assume that the future investment return on your portfolio is 10%. Most investors would be happy with 10%. If this is managed in a variety of retail managed funds or insurance bonds, when you actually add up all the explicit and implicit costs, it is possible you may have deducted from your funds over 2.5% per annum. That leaves you with 7.5%.
Lets take say a gross return of say 12%. If you take say 2.5% costs from 12% you may end up with 9.5%.
These are simple numbers that everyone understands. However, before I continue, I would like to make the point that these returns are just assumptions, clearly no one can predict future returns. Yet investment costs have been studied. When looking a retail actively managed funds there is ample evidence to suggest that 2.5% per annum is not unreasonable.
If you want to know more, why not take a look at some of the academic evidence.Here is a link to the various studies
Lets continue. If you think the next 5, 10, 15 years or whatever time period you may wish to consider, that investment returns will be say over 12%, you maybe happy to pay the investment charges you have experienced in the past. In other words, if fees and charges are say 2.5%, then as a percentage of 12% total return, then your costs represent about 20% of the total return. You therefore pay 1/5 of the total return in fees and charges.
Do you consider that fair? That is a question for you to answer.
Of course, simple maths will conclude that if you could reduce those charges, you end up with more of the investment cake. That is good news.
But what if you think returns may be lower, perhaps because you are not as optimistic, and think returns may be 7% per annum, then 2.5% of fees represent 33% of the total return. That is 1/3 of the total return in fees and charges. Not only do you receive less because your expected return is lower, but the percentage of the total returns is higher in charges and fees.
Clearly if you could reduce the cost of investment management, it is in your interest to do so.
My point is straightforward, if you reduce the costs you are paying, you end up with more of the total investment return.
Of course, you may say, your investment management fees are nowhere near 2.5%. Your adviser or fund manager may say they are only 1% or 1.5% per annum. If so, perhaps you could look at a study issued by the FSA. On page 5 is the statement: “One must invest about £1.50 in an actively managed unit trust or through a life office in order to obtain the market rate of return on £1”
Try putting these figures in your calculator over 10, 15 and 20 years and you can work out for yourself what the costs are over time. I think you will find the 2.5% is likely to be on the low side! Bearing in mind also that the average holding period according to the Investment Management Association is 7 years!
I also recognise that some fund providers and advisers will say "you get what you pay for". However, take a look at the academic evidence which suggests many fund management groups do not beat the market return.
Not convinced to take action? Ask whoever is managing your money, whether it is in your pension fund or ISA's or separate portfolio, to write to you detailing the impact of costs on your portfolio. Perhaps ask them to comment on the FSA study and ask how they interpret the results.
We believe in transparency and your investment managers and advisers should have nothing to hide.
posted by Murray Round Wealth Management @ 17:08,
Who is your worst enemy?
Tuesday 7 October 2008
The answer is you! Unfortunately investors can become their own worst enemy.
It is vital that investors invest with a Plan …yet every time we review a new clients portfolio, the plan is not systematic. We believe an investment advisor must clearly identify the risk aversion, risk preferences, and risk perspective of the investor, and in this way use a psychologically justified risk concept. To meet this goal a risk profiling questionnaire is indispensable. The discussion about risk is essential to our client discussions.
I recently attended a seminar regarding behaviour finance. The speaker was Prof. Dr. Thorsten Hens. He is Director of Swiss Banking Institute, Professor of Financial Economics.
He has listed “The Ten most Common Investment Mistakes”. They make interesting reading.
"You may delay, but time will not" – Benjamin Franklin
Many investors feel that investing is a very challenging task, and continually put it off. It is put off to the next time, and again to the next time, until they eventually become aware that a big portion of the return opportunities have gone because they didn’t take the time to make investment decisions.
"This week was sunny, so tomorrow I leave my umbrella at home"
If stocks have granted good returns for a few years, many investors will invest again in the stock market. They are so focused on attractive returns that they underestimate their risk tolerance. They have forgotten how much nerve it takes to stay invested in the stock market during a downturn. A rude awakening is sooner or latter inevitable.
"Betting on the winner who already won"
People are “adaptive learners” according to psychology. Practically, this means: if something gives us success we will be inclined to do it again. Only with failure do we change our behaviour. Unfortunately this strategy is not useful in the financial markets. Whoever follows the masses and holds the investments which have until now been successful, has a slim chance of winning returns, and is not invested when the biggest winnings are available. Although difficult considering our innate “herd instinct,” successful investors like the American investment guru Warren Buffet remain anti-cyclical and refrain from running with the herd.
"Market prices disclose all"
To analyze the fluctuation of market prices can be fascinating, but this effort is not profitable. The fluctuation of asset prices does not on its own hold any valuable information, contrary to the indications of numerous business studies. The study of price fluctuations reveals that investors too quickly believe a market move is a trend, and too quickly pull out of profitable investments, because they are afraid that “the end” is near.
"Always staying on the ball"
Psychological research shows that the more often one looks at the progress of a risky investment, the less and less inclined one is to remain invested. A risky investment does not only move upwards. Psychologically, losses hurt more than gains make one happy. For this reason, those who look too often at their investment cannot endure the fluctuations. They forget that the probability of realizing a loss on the financial market decreases as the investment time horizon increases. For this reason investors give up a large portion of the long term returns available to them.
"The odd charm of losers"
Private investors too quickly cash-in on short term winners and wait out losers for too long. If they make an investment decision, then the subsequent decision is not made with consideration for the future, but rather made with consideration only for the past. After a win the investor cashes out of the market and is proud to show off that his initial investment strategy was successful. The opposite is true in the case of a loss. To avoid accepting a loss investors wait in the hope that the investment can redeem itself.
"Glitz and Glamour"
Exciting stories advertise themselves better as boring. This is true in the financial market just like in media. Investors prefer to invest in ‘exciting’ ideas, for example in fascinating new technology, than to invest in well known ideas. However, in the long term, the economic results of the ‘boring stories’ prove them to be desirable solid investments. This phenomenon, the so-called value anomaly, has been known in science for more than a hundred years, and can be observed in almost every region of the world.
"Better 3 possible good stocks than 100 underperforming stocks"
The above quote appears to be plausible but is wrong from a scientific point of view. A broad diversification is worthwhile. It is enormously difficult to forecast which stocks or investment funds will be good or bad in the future. For this reason it is worthwhile to spread out the risk. Many studies have shown that private investors are significantly under-diversified. They distrust stocks from other countries, and limit themselves too strongly to their home market. In this way they forgo a large portion of the return opportunities.
"Gone with the Wind"
Many investors feel that they can pilot the investment process themselves. Too often the result is an unclear strategy. Like a leaf in the wind, investors move back and forth. They change their portfolio too often by buying and selling, so that they pay a great deal in transaction fees. This behaviour is of course good for the bank’s wallet, but consider ‘back and forth makes the wallet empty.'
"I actually knew that"
It is said in old wives tales that one learns through mistakes. This is not always true. To the contrary: when one experiences a financial mistake resulting in loss, it is a natural reaction to forget why the investment was a mistake. In retrospect many tell themselves that they actually knew what the right investment strategy was, but for some dumb reason they didn’t do it. This recurring phenomenon prevents us from learning from our mistakes.
posted by Murray Round Wealth Management @ 14:26,
The ‘Fat Cats’ keep the money - who is left holding the bag?
Friday 3 October 2008
Whilst some of the so called Fat Cats will still have their homes in the Hamptons, New York and Notting Hill, London, the casualties of the current crisis are the workers. For example, you maybe in a senior position with a bank and have seen the shares you own plummet. Unfortunately, some will have not only lost their job but have seen their shares wiped out?
Regardless of how you acquired your shares, however, by maintaining a concentrated stock position, you are taking an unnecessary risk with your financial future.
It is important for individuals with stock options or concentrated positions with a large number of shares in their company review these positions.
So how do you know if a concentrated stock position is an issue for you? Here are some warning signs:
•You have 20-30% or more of your net worth invested in one company.
•Your holding has outpaced the market by a wide margin.
•Your stock has begun to under perform in the market.
•Your stock has large, volatile swings in price.
It is fair to say that any, or all, of these warnings can be a signal to you to diversify. But what kind of plan do you need for that diversification, and how should the plan be implemented? First, you will need to honestly assess your appetite for risk and get in touch with how diversification can reduce that risk.
You will find it helpful to model several scenarios and look at how different mixes of stocks, bonds, and cash - even private equity and property—have performed historically. This is something Murray Round can help you with.
When you have selected a target asset allocation, then you can choose a method for diversifying out of the concentrated position. While there are many ways to reduce exposure to a concentrated stock position, often the simplest solution—an outright sale of the stock—makes a lot of sense. A sale achieves diversification immediately, and the cost of implementation is extremely low. Also, you receive your proceeds in cash, which leaves you free to select and take advantage of any investment program you see fit. The downside of this decision is that capital gains taxes—typically 18% of the profit will be assessed on the sale. However, if the stock in question is particularly volatile, paying this tax may well be the lesser of two evils; you will want to weigh your stock's downside potential against the tax liability to be incurred when you sell.
The key issue is diversification.
To help reduce the tax, it may be attractive to make a pension contribution and then diversify holdings within the pension fund. Whatever method you consider, remaining focused on the diversification process is essential to building a risk managed portfolio.
Categories: Asset Class Management, Diversification, Risk
posted by Murray Round Wealth Management @ 16:06,
Now is the time to review your portfolio
Thursday 2 October 2008
Alan Greenspan, former Chairman of the US Federal Reserve and political commentator, John Plender of the FT, have said “...they have never, in their working lifetimes, seen anything like this…”
They are referring to the collapse of Lehman Brothers.
John Authers of the FT has said "...it is the end of the decade of moral hazard.
Such words certainly make me sit up and take notice. How does it make you feel?
Have you considered the implications on your portfolio? What course of action should you consider?
There is no need to panic, as perhaps Corporal Jones of the classic TV show Dads Army would have said, but there is a need to take systematic and thoughtful action.
Reviewing your portfolio is important to ensure you are fairly rewarded for the risks you are taking.
Investors are rarely educated in the fact that 'structure explains performance', where your assets are deployed has more effect on return than who is actually managing them. Setting an asset allocation that has the right risk and return characteristics, and diversifying within and across asset classes, is both prudent and effective for most investors with their critical capital. Speculating on individual stocks or individual manager skill is adding an extra layer of risk that is not necessarily going to reward you in the long run.
James Bevan, chief investment officer, of the CCLA, specialist investment management for charities, faith organisations, and local authorities said in the FT recently, “The probability that you will get a decent return over a rolling 15 years from equities or real estate is reasonably assured. The expectation that you will definitely get an adequate return from a skillful manager over a 15-year view has to be zero because skill by definition has to be a zero sum game.”
In other words, many investors are paying for skill based managers when there is no added value above what the market gives in any case.
We know that when investors find out that such statements are true and are not dismissed as simply opinion, especially as independent research confirms these views, the solutions become self evident.
Our role is to help you recognise how important this research is to your future wealth, you can then make informed decisions about how you want your assets managed. If you decide to continue with your existing managers, you can do so for positive reasons rather than by default and historical reasons.
Want to know about how we review portfolios...take a look. Download our document “We have been able to improve every portfolio we have reviewed. What are you waiting for?”
Categories: Asset Class Management, Risk
posted by Murray Round Wealth Management @ 22:34,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
Welcome to our Blog
Our Blog focuses on the three Ts...truth, transparency and trust. The world of investment management is fraught with self interested parties keen to sell investment products but wrapped up as 'advice'. Only with totally transparency, can investors make informed and successful decisions. We have included various categories for simpler navigation, alternatively search our Blog using key words you think are relevant. We hope you find something of interest to you.
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