Friday, 30 August 2013

DIY Investing is as easy as 1, 2, 3……..

Journalists and DIY providers have for a long time played on the the emotion of saving money by doing your investments yourself, I have recently read an article which explains that setting up a DIY account will take less than five minutes. So not only does it save you money but it is easy to set up. For the DIY expert, this is not new news but for new investors this is very appealing.

I have used this analogy before but I will use it again, for me to do DIY in my house is very easy to do. I buy the tools which take me an hour to drive to the store and pick up the tools, and then I save money by building the kitchen or whatever DIY job I want to do. Now all of this works on the basis that firstly I have the skill to do it and secondly that I know what tools I need to do the job.

Now what I read is just like this scenario, it is on the basis that investors know what they need. The first thing to understand is goals, so what are you investing for and what do you want. As such this is your financial plan and once you have that you can then start to look at the best way to achieve that. Now to say that takes five minutes and is easy is frankly tosh!!!!!!

So say we have built the plan and decided what we need then where do we go, now this isn’t easy. The recent change in the way financial services was sold was about having a level playing field but to be honest that is not happening. So let me explain, say I want fund x and the clean share class is 0.75% p.a., there are going to be some providers who demand a cheaper version of that share class. So all of a sudden you need to decide whether provider a or b provides the best access to the funds you need at the cheapest price.

That sounds easy but let’s take this further. Some providers have a very simple fee structure say £20 a quarter with no other fees, others might charge a percentage fee and others may have other more obscure fees. So research into the charges which you are trying to save on becomes a real issue.

So your five minutes is actually a lot more, furthermore where do you want to invest. There is an argument that passive funds (this is where the fund tracks an index like the FTSE100) is the easiest, cheapest route – if this is what you want then why go to an all singing all dancing provider who may charge you a significant fee for this when you could go direct to someone like Virgin or L&G and get access to this at a considerable cheaper price? Or if you want to invest in shares, do you want to invest in a platform that is skewed towards funds because what that means is that equity investors will be penalised.

Now the DIY expert will understand all of this, they will build their plan, they will search out the solution that is best for them and they will understand the investments that they need to achieve their goals. Of course they will make mistakes but we all do but because they understand what they are doing they understand how to correct those mistakes.

We know with the craze in DIY in the home that actually most people found that they couldn’t do it, they then sought out help to sort out the mess they were in and in the long term it cost them more. The tools they purchased are now gathering dust. Investing is not a game, you can learn to to do it yourself and as you learn you become more confident I do agree on that. But for journalists and providers to push the fact that it is as easy as 1, 2,3 is extremely dangerous, and I feel in ten years’ time there will be a lot of disgruntled direct investors looking for someone to blame and actually they will have no one to blame but themselves. 


In conclusion whatever you read DIY investing is only as easy as 1,2,3 for DIY investment experts and they will make mistakes. For new investors to be encouraged to think this way is extremely dangerous and a time bomb waiting to go off. By all means consider going direct but you are playing with your future and if you are not confident to do this, or you don’t have the time to constantly review your plans, then pay the money and get advice – I would argue that this will be the best investment you make.  

Thursday, 29 August 2013

Staying in the game…..

Although there are many people who argue there is no value in financial advice I continue to argue that there is a great deal to be found but this value needs to be seen and communicated effectively. Of course, there will always be individuals who can and will do it themselves and that is okay.

In this blog I want to focus again on the power of emotions. There is no doubt we are in a very different environment to that in which we found ourselves say ten or twenty years ago; life expectancy is  greater, gold plated pensions are for the few, and in reality cash and bonds are not what they once were. In fact cash only delivers negative real returns.

If we agree with the argument on cash, and possibly bonds, then the only way to make money and deliver income is through investing in equities. However, investors are fickle – when the market is doing badly they don’t want to invest and when it is riding high they want to pile in (which is the worst time usually).

The markets are currently riding high, and we are starting to see headlines about the great rotation from bonds to equities so what does this mean for the future?

If we focus on one market; the S&P 500 index over the last sixty years significantly outperformed during periods of recovery compared to periods of recession. There were two periods where the market was extremely volatile and delivered no returns if you were invested during that time. These periods were 1969 to 1982, and between 2000 and 2013.

During the seventies and early eighties inflation and interest rates were very high and commodities did well while stocks languished. Although from 2000 and 2013 inflation and interest rates were not the problem commodities outperformed equities since the popping of the internet bubble.

In the eighties falling tax and interest rates played a part in the boom and likewise falling energy costs in the US could do the same over the next 20 years.

The difficultly is that there is a generation who only know the markets from 2000 and they don’t believe in equities and have given up any notion of investing in them. To some extent this fuelled the rise in buy to let properties as an alternative asset class. The problem is that now the cost of these properties is out of the reach of many and therefore corresponding yields are lower.

Going forward we face a low interest rate environment for some time to come. This means that cash will be going one way especially when there is less concern around inflation. And although developed market bonds have had a good run, there is general agreement that this will not continue. So if we accept this argument the only long term investment opportunity is equities.

This brings us back to staying in the game. It is important to focus on relative performance against the benchmark but value is actually keeping you in the game.

There are three key factors:

  1. Clearly investing in one market for any one period of time restricts the investment opportunities and therefore diversification across sectors and regions is crucial.
  2. Patience is another crucial factor – investing is not about short term bets, there are a few good gamblers but there are a higher proportion of bad gamblers. Investing is about having realistic timeframes and being patient.
  3. The final factor is research. When constructing a portfolio it is about knowing who is investing your money and how they do it. There will be times when they underperform but if you view your portfolio as a team it is the team that wins over the long term, and not individual players.

In conclusion my argument is that one of the greatest values to be gained from your financial planner is that they keep you in the game, and they do this by keeping a close eye on the team. Don’t underestimate the value of this when considering whether to do it yourself or pay for the advice. Advisers can act dispassionately towards certain investments / funds which may be a key component to success!

Please note: Any reference to a share or fund is not a recommendation to sell or buy that share or fund. You should carry out your research before making any decision. You should also note that past performance is no guide to future performance and investments can fall as well as rise.

 Source: Guru Focus

Wednesday, 28 August 2013

Without communication there is nothing……

We recently decided to replace our kitchen; we had a choice firstly to do it ourselves or outsource to an expert. In our case going down the DIY route was not an option, I once tried to make a shelf but the saw seemed to have an angle to it!!!!!! We took advice from a friend who introduced us to a kitchen fitter. We set out our plans, he provided us with a fee for the work. We then explained that we would be away for two weeks and was it realistic for him to have the kitchen fitted and finished in that time. The kitchen is not big and he was confident that he could have it all finished by the time we came back.

Six weeks later and the kitchen is in, but the tilling, decorating and finishing touches seem to be some way off. Every time we speak to the fitter he sets deadlines and seems to miss them. We have had people helping for free to get things done but still we can’t see an end to this. To be fair three things have gone against him, at the start he lost a week because a relative was in hospital, then the whole kitchen had to be re-wired and finally it is a positive negative he is a perfectionist. The last is important because as deadlines slip the perfectionist bit becomes frustrating and somewhat annoying!

So what does all of this tell us, does it tell us that actually we are better to do it ourselves or is it something else. It made me think about financial planning and advisers, and more importantly why communication is such an important part of the service proposition.

Let me explain, the fitter we choose is not the cheapest and is certainly not the most expensive. We choose him because he is a perfectionist, I won’t go into the detail of the small things he does that actually you and I wouldn’t care about but these small things will eventually deliver an amazing looking kitchen. His downfall was two things firstly he told us what we wanted to hear, that is that he could deliver what we wanted in two weeks and secondly as deadlines slipped he continued (and continues) to fail to communicate when he might finish the work.

We have set a fee so actually cost wise it is not costing us anything but stress. But flip this around, if he looked at the kitchen and ignored what we wanted i.e. a two week delivery date and said actually it will take two weeks to fit the kitchen and two weeks to decorate we would not be disappointed. If when he lost a week when we were on holiday he called us on day one to say he might lose a week we would not be disappointed (perhaps a little frustrated). And now as the days slip by if he communicated a strategy to finish the project we wouldn’t be disappointed if he kept to that strategy.

And this is very similar to financial planners, often we have unrealistic expectations. So say, I want to double my money in two years and I set that expectation to my financial planner. He listens to what I say, and says yes I can do that then one of two things will happen – firstly he will deliver on that expectation and I will be delighted or secondly (and the more likely) he won’t deliver on that and I will be disappointed. With the later he may do lots of planning and frilly bits but missing on my expectations will taint my view of him.

Financial planning like any project is about two way communication – if you have a goal with your money then you need to decide whether you can achieve that without advice, or whether you need an expert to help you. If you choose an expert then you should expect the financial planner to take time to understand about what your goals are, and then draw up a plan to achieve those goals, explain how they will look to achieve them and then talk about timescales. So for example it may be possible to double your money but that might take five to ten years, the key is understanding why you need the money in the future, what risk are you prepared to take and then understand that the journey will not be smooth and with that in mind having constant communication with the adviser. There will be times when the investment looks a mess, there will be times when it accelerates forward, there will be times when it seems to stall and there will be times when it falls back but if you take two points in time you should see your goals materialise.

So focusing on a fee of 1% is not just about the performance (although this is important) but about the goals and the way your financial planner communicates with you during the journey. Hearing what you want to hear is not always a good sign, but patience and good communication will ensure that you are not disappointed.

Monday, 19 August 2013

How to engage with your financial planning

I recently read a short article on why you should ditch your adviser and by doing so engage with your own financial planning. I was delighted to see mention of this but the journalist didn’t expand on this and in the second blog I want to expand on this further. For me financial planning is all about identifying goals and then considering how these are achieved. Only when you do this can you consider how you invest to achieve this.

Recently I met someone who was just starting out as a financial planner after working in a large insurance company. He highlighted the importance of cash flow modelling and how this would be the secret of his success. I have never engaged with these in the past and so I started to look at these. My feeling was that many of these systems are simple too expensive for what they do, however it did make me think that you need some sort of simple spreadsheet to put your plan in place.

In developing a system I think it does highlight the value of advice because of the different scenarios that you face. Let me expand further using a case study.

Mr A Doe is 45 and has worked out he needs £2,000 a month net when he retires at 60, he knows that at 67 he will receive a state pension but cannot build this into the equation at this stage.

Firstly the £2,000 is in today’s terms, assuming inflation of 2.8% this would mean he needs around £3,000 per month at age 60. He has £100,000 in a pension fund and £60,000 in investments. He is also paying £500 p.m. gross into these investments. Assuming net growth of 5% after charges, fees etc he will be short by £1,000 p.m.

Let me take this a step further, if the £60,000 was in cash and he was paying £250 a month into the cash savings the shortfall would be £1,500 p.m.

This case study for me highlights why you should not ditch your financial adviser, there are many different scenarios to this example. If he has cash, it highlights how much it could deplete the retirement savings; it also highlights whether a more tax efficient investment like an ISA could mean he pays less tax and therefore reduces the shortfall. With the tool you can change the amount of retirement income, the percentage of income you take from your investments etc to deliver a road map that works for you. It also goes further to show the impact of inflation, growth and income in retirement to see how long your investments could last in retirement.

The point is this, the tool is important because it is a way that the adviser and client can engage in the plan. Once the client is happy with the plan, then the adviser can look at the best way to invest the money to achieve that. Many advisers will have developed similar tools (or use cash flow modelling) so when journalists and others question the value of advice this provides a snippet of what I would argue is a very important part of the financial planning process.

Of course savvy DIY investors will already be doing this but as I have highlighted before, product providers do not provide this detail and with financial education being so poor fewer are following this route. There is nothing wrong with DIY investing if you do this work at the start, and continually monitor it then it should work but if you don’t then it will go wrong. The question is not about cost, the question is about value. Do you believe that what a financial planner delivers to you is added value beyond what you could do and if you believe that then it is worth paying for advice.