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Financial Prescriptions – do they cure the ailment?

Let’s run a small experiment. Imagine you go through your daily routine and every time you saw an advert for a financial product/service, you replaced the image with that of a doctor handing out a prescription.

Depending on the circles you operate in, these financial “prescriptions” can come at you pretty thick and fast.  Whether browsing websites or reading billboards, they are difficult to ignore.

The problem with accepting financial prescriptions is that one collects a random mixture over one’s life that often overlaps, contradicts each other or worse, are not designed to treat the “ailment”.

In my experience the reason people end up with a collection of random financial prescriptions, rather than a targeted prescription based off a complete health diagnosis is:

American in Britain – Wealth Management

Many people don’t like to think about what will happen in the event of their death. For US persons living in the UK, the subject of inheritance tax is one that can be very important due to the large differential in the nil rate inheritance tax bands available in the UK as compared to the US. A lack of understanding about how inheritance tax works can end up costing loved ones hundreds of thousands, if not millions of dollars. However, proper planning can help minimise the amount of inheritance tax payable and help ensure that loved ones are left with an estate that will provide for their needs after death. Proper strategies will largely depend on whether an individual is deemed to be UK domicile or non-UK domicile at the time of death.

Staying the course

Millennia of evolution has ingrained in us many psychological traits that has served us well as a species, but that works against us when investing. Some of these traits are;

  1. Herding. Copying the behaviour of others even in the face of unfavourable outcomes.
  2. Loss Aversion. Expecting to find high returns with low risk.
  3. Chasing past returns and anchored views. Investors typically focus on the best investments and investment managers over the last five years or less, which can lead some to invest in expensive assets with lower expected returns than cheaper out of favour investments.
  4. Narrow Framing. Making decisions without considering all implications.

So how badly have average investors fared compared to the markets?

Many of our clients are familiar with DALBAR’s annual Quantitative Analysis of Investor Behaviour (QAIB) study, where DALBAR analysed cash flows in and out of mutual funds to calculate investor’s average net investment returns. The latest report covers the period from Jan 1st ‘1985 to Dec 31st 2014 and paints a similar picture to earlier studies. Here are the key findings:

  1. Over the period the S&P500 returned 11.6% pa, the Barclays Aggregate Bond Index Returned 7.36%pa, and inflation was 2.70%pa.
  2. Equity investors achieved 3.79% per annum on average, barely ahead of inflation.
  3. Fixed Income investors achieved 0.72%, almost 2% behind inflation.
  4. Costs and poor management contributed to the underperformance, but poor decision making was likely the primary detractor from average investor returns.

The results are a valuable reminder that trying to predict the future can have an overwhelmingly negative effect on investors’ investment experience, and that identifying the right asset allocation and sticking to it may provide the highest odds for a favourable outcome.

Warren Buffet probably summarized this the best when he said; “Investing is simple, but not easy.”

Safe as houses

When I was young the standard dinner party line was… son… whatever you do…. get onto the property ladder.  The old adage was if you stretch yourself over time (but still only within what you can afford) inflation should eat away at the debt, coupled with house price appreciation will mean your loan to value is reduced and you will probably be able to remortgage at better, possibly lower rates.  This framework may have worked for a time when we saw positive inflation and interest rates that were coming down from double digit levels.  It seemed like a one way bet and we all experienced it and believed that as such it was true.  For quite a while house prices only moved in one direction.  Consider the position we are in now.  Interest rates at rock bottom levels and asset prices arguably at elevated levels.  What could happen now if you follow that old advice and stretch yourself when buying a property?  In the UK at the moment most mortgages are fixed for a short period of time, so it is hard to budget long term.

Imagine a situation where house prices drop by 5% over the next two years and interest rates increase.  Those home ‘owners’ that stretched themselves previously are likely to see their loan to value reduce as well as their mortgage payment increase.  This would be acutely felt in the monthly cash flows and in a rising interest rate environment where house price appreciation doesn’t materialise the notion of stretching oneself seems frankly unwise with hindsight.  They could also be in a position where they cannot remortgage because the loan to value is too high.  Maybe one should have considered more about what one needs than what one wants when buying the forever home.

American in Britain

It is a New Year, and a new opportunity to start fresh and make some resolutions. It is also a great time to take stock of your financial position, reassess your financial goals and objectives and determine whether there are any changes that you need to make. In the Winter Edition (2014/2015) of American in Britain, MASECO features with an article outlining the steps you can take to ensure your current wealth planning strategies remain optimal given inevitable changes in your life.

A recipe for happiness

“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”

I was reminded of this whilst covering some retirement wealth planning recently, this is Mr Micawber’s recipe for happiness from the novel “David Copperfield” by Charles Dickens. How does one achieve this end result of happiness in retirement after the remunerated professional years are over? Most are familiar with the parable of the Tortoise and the Hare (it is also the name of our monthly investment newsletter) and it is the same concept of slow and steady wins the race when it comes to building a capital sum for the future. This means the earlier one starts with an investment or savings plan the better.

How You Really Make Decisions

A few weeks ago BBC Two repeated a Horizon documentary from earlier in the year called “How You Really Make Decisions” which draws on the work of Professor Daniel Kahneman, an American psychologist. Whilst at first glance this may not seem to be an obvious subject for a wealth management Blog, Kahneman is a leading expert in behavioural economics who won the 2002 Nobel Prize in Economics for his work. He came to the attention of a

A Good Education

Over the years I have chalked up a few academic accolades and whilst of course I value them I also value the depth of achievement of colleagues. At MASECO we have individuals who have passed advanced qualifications such as CFAs, CFPs, ACAs, those who have completed and are completing MBAs and Mark who is concluding his Ph.D. in Finance.

It’s better to be Rich & Healthy than to be Sick & Poor

Growing up my father used to always say: ‘It’s better to be Rich & Healthy than to be Sick & Poor’. I have often thought about that statement and about how lucky I was to be born into a wealthy country during a great time in history when people on average became healthier and lived longer. I was recently thinking about this statement over the holiday season when I remembered Hans Rosling’s excellent visualisation of this concept and how countries across the world have grown wealthier and healthier.