Today, it certainly feels like the world is in a very uncertain place. The events in Ukraine are extremely unsettling; the eyes of the world are firmly on what happens next. 

Coupled with this, The World continues to struggle with what is hopefully the back-end of the Covid crisis as populations gather immunity through vaccination and infection and as new drugs and treatments come online almost daily.  Economically, the greatest challenge is soaring inflation, hitting levels not seen for several decades.  Consequently, interest rates and yields on bonds have started to rise, and global equity markets have started the year down.  That can all feel both gloomy and unsettling.

Stock markets falling on the back of geopolitical events is nothing new; we have been there many times before. It is always easy to feel that the present is more uncertain than the past. A common phrase we hear is “this time it is different”. Yes, this is a different event, but we have been through similar. The table below shows the S&P 500 (US index) performance in periods after major historical geopolitical/military events.

In summary, the stock market was higher one year after in nine of the 12 events above. The other three coincided with a recession.

Could we have predicted this?

The threat of Russia invading Ukraine has been around for many years now. Yes, the news has ramped up over the past couple of months, so you could argue this was always on the cards. Jumping in and out of markets based on news events is a very dangerous game to play. Not only do you have to make a call on when to exit markets, but you also need to decide when to get back in. Once you start to make calls like this, where do you draw the line? As a business, this goes against our fundamental investment beliefs. Based on today's news, being shaken out of markets is about the worst mistake any long-term investor can make.

What is to be done?

The short answer is ‘not much’. As ever, all the news that we see and worry about – including an invasion of Ukraine by Russia - is already reflected in market prices. For sure, new news will have an influence on those prices, but by its very definition, this is a random process that is hard to benefit from unless you own a crystal ball.

In terms of direct portfolio exposure, it is worth noting that Russia represents around 0.35% of global equity markets, and that is before this is diluted down in any portfolio by bond holdings. To put this in perspective, the global market weight of Apple is over 4%! In fact, Apple’s cash reserves alone are of a broadly similar magnitude to Russia’s entire market capitalisation.

At this stage, nobody knows the wider consequences of a Russian invasion. Below are a few things to be thinking about:

• Have your financial and personal circumstances changed recently to such an extent that you need immediate liquidity from your equity positions? That is most unlikely. Feeling uncertain about markets is not a valid reason for seeking to get out of markets (when would you get back in?).

• Remember that our high-quality bonds provide several valuable attributes. They provide more stable values, supporting a portfolio against equity market falls; liquidity to meet any liabilities without having to sell equities when they are down, and the dry powder to rebalance the portfolio and buy more equities when they have fallen to take advantage of cheap equity prices (as we did in the Covid crash two years ago).

• We should all be vigilant (as always) on cyber security. If you need any help with this, please do contact us. Rest assured, we treat cyber security extremely serious here at Ifamax and have measures in place.

Suppose that you needed to rent a car for the weekend, but you could not find a rental company able to guarantee the kind of vehicle you were going to get. You could be given anything from a Citroen C1 to a Mercedes A class, and you would not know what it was going to be until you showed up to collect the keys.

While this scenario might be disconcerting, at least choosing which firm to use should be straightforward. All else being equal, you should go with whoever charged you the lowest fee.

This is common sense when none of them can be certain of what they will be able to deliver. There is no point in paying more if you can't be sure that you are going to receive extra value for that money.

Yet, this is how the fund management industry has worked for decades. Active managers have been charging high fees for their products even though there is no way anybody can be sure of the outcomes that they are going to be able to produce.

What are active managers selling?

The rationale for this is that active managers offer the potential to out-perform the market. That is their selling point – you pay more because active management is the only way that your money can grow ahead of the benchmark. This is why so many investors and advisors fret over performance tables and fund ratings.

However, every genuine fund manager in the world is very careful to point out that not only is past performance no indicator of future returns, but that no level of performance is ever guaranteed. Given the vagaries of the market, it is simply impossible for anybody to know how any fund is going to perform into the future.

This hasn't, however, stopped active managers from promoting out-performance as their unique selling point. It was what almost every active manager in the world strives to deliver.

The irony is that this is obviously unobtainable. It is impossible for every active fund to out-perform. Simple mathematics dictates that if the benchmark is the average return from all active managers, then there must always be under-performers.

What does the evidence show?

As an increasing amount of research continues to show, these under-performers are actually the bulk of the market. Far more active managers are on the wrong side of average than the right side of it.

The most recent S&P Indices Versus Active (SPIVA) scorecard shows that over the 10 years to the end of June 2019, only 25.66% of UK equity funds out-performed the S&P United Kingdom BMI. In other words, just under three-quarters did not.

SPIVA scorecards calculated in markets around the world all show similar patterns. So too does Morningstar's Active/Passive Barometer.

Although this is only calculated for the US market, the most recent Morningstar barometer shows that only 23% of all active funds in the US beat the average of passive funds over the past decade. For US Large Blend Equity Funds, the figure is only 8%.

Where is the value for money?

Given this success rate, it should be obvious to active managers that what they are selling is not deliverable. It is much like a car rental company charging you for a Mercedes A class, even though it is likely that you would actually be given one. A company that did that would surely find itself out of business fairly quickly.

Yet, active fund managers continue to sell the idea of out-performance, even though more and more investors and advisors have begun to understand the research – that beating the market is extremely difficult to do, and improbable over the long term.

That is why there is now more money invested in passive funds than in active funds in the US. That milestone was reached in August last year.

Investors and advisors appreciate that the value proposition of index tracking funds is one that actually can be delivered consistently – to produce the return of the market, minus fees. It is understandable, straightforward, and reliable.

It is like the comfort of going to a car rental company and being given the keys of the vehicle that you actually booked. You should, after all, get what you pay for.

Photo by AbsolutVision on Unsplash

By Robin Powell

Make no mistake, this is a landmark week in the history of British fund management.

Yes, there’ve been City “stars” who have fizzled out over the years. But surely none has crashed to earth in quite such dramatic fashion as Neil Russell Woodford CBE.

Woodford, it was revealed earlier this week, has been fired from his flagship fund, Woodford Equity Income, which was gated in June after years of dismal performance, and the fund shut down. The fund’s assets are to be liquidated, but according to the FCA  investors will have to wait until January to get their money back. Suffice it to say, it will be substantially less money then they originally invested. It has since been announced that Woodford’s company, Woodford Investment Management, is to close down completely.

An industry shaken to its core 

Adrian Lowcock, head of personal investing at Willis Owen, summed it up when he told the Financial Times: “We have seen the complete demise of the most famous fund manager the UK has seen for years… This collapse is on a par with the implosion of New Star at the height of the financial crisis, and it will shake the funds industry to its core.”

It is indeed a rude awakening — including for Mr Lowcock, who in previous roles at Architas and Hargreaves Lansdown was one of Woodford Equity Income’s most outspoken advocates.

I’ve spent some time in the last few days looking at what was written about Woodford and the Equity Income fund at the time of the fund’s launch in June 2014 and in the months that followed. What is so extraordinary is not just how much coverage there was, but the fact that it was almost universally positive. There were frequent references to “the Oracle of Oxford” and Britain’s answer to Warren Buffett”.  Even the BBC described him as “the man who can’t stop making money”.

The role of Hargreaves Lansdown

What’s also very noticeable is how much of the coverage emanated from Hargreaves Lansdown.

Interestingly, many of the articles published on the platform’s website around that time have since been removed, but many remain. In one, the company’s founder Peter Hargreaves calls Woodford “one of the most gifted fund managers I have ever met”. Other HL commentators lauded his ability to “get the big calls right” and to “shelter money from the worst of market falls”.

Mark Dampier, Hargreaves Lansdown’s head of research, was quoted again and again in both the trade and mainstream press. One distinguished newspaper even gave him his own weekly column.

Dissenting voices 

Yes, there were a few dissenting voices. I regularly wrote on The Evidence-Based Investor about the folly of joining the stampede into Woodford’s funds. Indeed a journalist Financial Times journalist later contacted me to say thank you for persuading him and his partner to take their money out before it all went pear-shaped.

But those of us who did express concern — Paul Lewis from BBC’s Money Box was another one — were drowned out by Woodford enthusiasts. Responding to my suggestion that the academic evidence concludes, overwhelmingly, that winning funds are all but impossible to spot in advance, a well-known adviser wrote an extraordinary article in The Scotsman headlined Academics know nothing about investing.

I don’t mean to sound smug or clever. I had no reason to believe that Woodford would perform quite as badly as he did. I was just pointing out that the odds were heavily stacked against him beating the market on a cost- and risk-adjusted basis over any meaningful period of time.

Substantially worse off today 

In the event, Woodford wasn’t just beaten by the market; he was absolutely trounced by it. Apart from the worry that his investors have had to endure, and will continue to do so, they are substantially worse off today than if they had simply ignored the hype and invested in a low-cost index tracker.

Let’s hope that this whole sorry episode makes people think rather more carefully before entrusting their money to a heavily marketed active fund manager. 

But memories are short. This is just the latest in a long line of investment fiascos, and it won’t be the last.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

Robin Powell is a freelance journalist and editor of The Evidence-Based Investor.

Every investing style has its time in the sun. In the past decade, the sun has shone brightly on high-relative price ‘growth’ stocks, while relatively cheap ‘value’ stocks have remained deep in the shadows, neglected and unloved.

This has sparked a vigorous debate among investment professionals about whether growth stocks, like formerly pasty-skinned holidaymakers falling asleep on Mediterranean beaches, have had too much of a good thing, or whether value is out of favour for good.

Certainly, there is a significant body of research showing there is a long-term premium available for investors who tilt their portfolios away from glitzy growth toward less fashionable value stocks — ones with low prices relative to fundamentals like earnings or book value.

The problem is that no one has worked out either when and where that premium will kick in. Of course, that hasn’t stopped some of the world’s best fund managers from trying to unlock a pattern, but most admit that timing is a fool’s game.

As to why growth stocks (Amazon, Apple, Microsoft etc.;) have enjoyed such a run, there are several theories. One is that the era of central bank-led cheap money lifts the relative attraction of the expected strong future cash flows of growth stocks. This is known as the hunt for yield.

Another theory is that in an era of stagnant economic growth and significant technological disruption of many industries such as retailing and media, the share prices of traditional capital-intensive businesses risk becoming permanently depressed. This is known as the “value trap”.

A third theory is that the growth of so-called "passive" investing, in which funds just seek to track an index instead of making active bets on individual stocks and sectors, has created a self-perpetuating cycle in which high priced growth stocks just become more and more inflated.

But these explanations, however persuasive on the surface, still overlook that long periods of underperformance for value are not unheard of and, in any case, don’t really tell us anything about what might happen next.

They also neglect to consider that the problem is not so much that something has gone wrong with the value premium, but that growth has had quite an exceptional decade.

Analysis by Dimensional Fund Advisors shows that while growth’s annualised compound return of 16.3% in the past decade was much stronger than its return over 90 years of 9.7%, the performance of value in the most recent 10 years at 12.9% was close to its long-term average.

A second point is that much of the attention on the value-growth conundrum has focused exclusively on the US market, when in fact the value premium has been positive in many other markets over the past decade, including New Zealand, Singapore, Canada and Australia.

As well, in past periods when value has turned, it has done so in spectacular fashion, such as after the tech wreck of the early 2000s.

We can draw a few conclusions from this. One is that the evidence still points to a long-term premium from value. That doesn’t mean it will be there every year or even decade. Of course, if it was predictable, it wouldn’t exist. It would be arbitraged away.

A second conclusion is that these premiums aren’t uniform across different markets. That argues for global diversification. At some point value will kick in somewhere, so if you spread your net sufficiently wide, you’ll capture it.

A third conclusion is that you do not have to be focused entirely on value anyway. You can hold in your portfolio a mix of large, small, growth and value stocks. You might tilt your portfolio to value, but you can still get the benefit of growth when it is having its time in the sun.

Finally, consider this. The spread between value and growth stocks, measured by book-to-market ratios is now as wide as it was in 1992, when Professors Eugene Fama and Kenneth French published the landmark paper which highlighted the value premium.

That means the potential for outsized returns is greater now than it has been for some time. But as Warren Buffett says, you need to be patient and you must know that you can live with the ride in the meantime.

Value eventually will find its place back in the sun. But no one knows when.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

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Picture: Sebastien Gabriel via Unsplash

A perennial temptation for investors is the urge to quit the market at the top and to get back in at the bottom. While the lure of market timing sells millions of books and is standard fodder for financial television, the reality rarely lives up to the promise.

History is littered with the failed dreams of market timers. Less than five years after the nadir of the financial crisis, some pundits were saying US stocks were over-valued. Another five years on and the market had gained more than 60%.

Not even the gurus have much of a record. Back in 1996, Federal Reserve chairman Alan Greenspan warned of "irrational exuberance" in the stock market. But we now know that the market went on climbing for three years before the dot-com bubble burst.

Even if your logic about valuations is impeccable, there’s no guarantee the market will come around to your view. As someone once said, markets can stay irrational longer than you can stay solvent.

But the most overlooked challenge with market timing is that it requires you to make TWO correct decisions: Firstly, you must get out at the right time. Secondly, and often more challengingly, you must know when to get back in.

Think back to the global financial crisis. Plenty of people were throwing in the towel by early 2009. But how many got back in in time to enjoy the big bounce that followed in the second and third quarter of that year?

The fact is markets don’t move in a straight line and big gains (and losses) can come in relatively short periods. Not even the professionals have much of a track record in successfully negotiating these unpredictable twists and turns.

So, if market timing is a mirage, what can you do? Here are five alternative options that make more sense — and none requires you to possess a crystal ball.

1. Take a long-term perspective

"The historical data support one conclusion with unusual force,” the index fund pioneer Jack Bogle once wrote. “To invest with success, you must be a long-term investor." Instead of trying to time the ups and down of the markets, why not simply change your time horizon? Over the very long term, patient investors have almost always been rewarded. Of course, not everyone can take the long view. Those, for example, who are about to retire or who need to access their money in the next two or three years, don’t have that luxury. But if you don’t need it for, say, 15 years of more, you can afford to look at the big picture.

2. Construct a portfolio for all market conditions

Everyone should have a balanced asset allocation — certainly a mix of stocks and government bonds, and perhaps property as well — that matches their capacity for risk. A defensively-minded person may only have 50% of their portfolio in stocks, with the rest in bonds. The right mix also depends on your age, goals and circumstances. Whatever your risk capacity, diversification is key. Spreading your risk across different asset classes and geographies will reduce the impact of a steep decline in one particular market. Ultimately, it’s your asset allocation that is going to be the most important driver of your investment outcome.

3. Periodically rebalance your portfolio

Generally, the less you tinker with your portfolio the better. That’s not to stay you shouldn’t touch it at all, but any changes you do make should be done in a strategic, structured and disciplined way that reflects your needs and circumstances. A good discipline to adopt is to rebalance your portfolio periodically, to restore your original asset allocation. This means, every year or so, selling sone of the winners and buying some of the losers. It seems counter-intuitive, but effectively it forces you to sell high and buy low, which is just what you should be doing. It's a much better strategy than falling victim to knee-jerk responses to the latest bout of market volatility, which inevitably involve emotional, short-term decision-making.

4. Pound cost average

Another option, if you really are worried about the stock market and want to reduce your risk, is “pound cost averaging”. Say, for example, you have a sizeable sum of money — an inheritance, say — that you want to invest. Instead of going all in and investing the full amount in one go, you can drip feed small amounts into the market over a period of time. Incidentally, financial economists don’t think this approach makes much of a difference from an investment perspective and you might end up with slightly lower returns. But it’s a useful way of helping you sleep at night and minimising regrets.

5. Increase the size of your cash reserve

Finally, another strategy could to consider is to hold a larger cash reserve — either within your portfolio or in another account. Everyone should hold enough cash to cover around six months of living expenses, in case of unexpected medical bills, or losing a job, for example. But nervous investors may prefer to hold rather more than that. The advantage of increasing your cash reserve is that, in the event of a market downturn, you can see it as a buying opportunity and use your extra cash to increase your market exposure.

SUMMARY

In summary, timing the market — while superficially an attractive idea — is fraught with danger. If you get lucky, great, but there’s no method to it. We’ve seen that not even the gurus are much good at it.

The good news is that second-guessing the market just isn’t necessary. With the right outlook and a methodical process, you can achieve better results — and enjoy a smoother ride along your investment journey.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

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Picture: Veri Ivanova via Unsplash

Here at IFAMAX we’re big fans rugby fans and we can’t wait for the start of the Rugby World Cup. The build-up to the tournament has got us thinking about rugby as an analogy for investing, as our latest article explains.

Much of what the media focuses on when reporting on finance are the fortunes of individual companies. For an individual long-term investor, however, the danger with this approach is missing the wood for the trees. 

Naturally, the media likes stories about companies because they change all the time and they often boil down to people issues. That’s fine, but what matters to you more as an investor is the performance of broad ‘asset classes’, not individual securities.

An asset class is a category of investments that share similar characteristics and perform different functions in a diversified portfolio.

Let’s use rugby as an analogy. The forwards tend to be bigger and stronger. Their job is to gain possession of the ball and protect it when they do. The backs tend to be smaller and faster. Their job is to use that possession won by the forwards and score points.

This is a bit like the roles of bonds and stocks in a diversified portfolio. Like rugby forwards, bonds don’t tend to move very fast. They’re defensive in nature. But without them in your portfolio, you might not see much of the ball.

Shares, or equities as professionals call them, tend to be more like backs. They move around a lot more. But they also keep your wealth scoreboard ticking over.

Equities differ from bonds in another way. When you buy them, you’re becoming a part owner of the company. Whereas when you buy a bond, you’re more like a creditor. You’re lending the entity money, but you’re not an owner.

The sources of your returns in equities are twofold. First, there’s the chance that your shares will rise in value as the company grows and prospers. Second, there is the possibility of you getting a share of the profits in the form of dividends.

With bonds, there are two sources as well. As with shares, there’s the chance of capital growth (the price goes up). But there are also the regular interest payments you get for owning the bond. This is why bonds are often referred to as “fixed income”.

Bonds are seen as a more defensive investment because as a creditor, you rank ahead of shareholders in the event the company goes bust. But that doesn’t mean there aren’t risks associated with bonds. There’s always the chance the company will default on its obligations. Plus, your fixed income may not be so valuable if interest rates rise.

Within bonds, there are also varying levels of risk. Unlike shares, bonds are also issued by governments as well as by companies. Government bonds, particularly the top-rated ones, are seen as less risky than corporate bonds, but at the cost of a lower return.

And we can divide those categories up even further. Not every government bond is considered safe as houses. Think back a few years ago to what happened to Greek bonds during the Eurozone crisis.

But broadly speaking, equities tend to be more volatile than bonds over the long-term. And for that reason, the expected returns for investing in shares tend to be higher. This is called the equity premium and relates to the compensation that investors expect in return for having to put up with a bumpier ride.

But just as a rugby team composed entirely of fleet-footed backs without forwards to defend possession would be a risky proposition, being 100% in shares is not always wise either, unless you are very young with a low balance and can ride the ups and downs.

Ultimately, your bonds-shares split will depend on a range of factors like your age, risk appetite, life circumstances and goals. Most importantly, it comes down to what you can live with. If the portfolio is so volatile that you can’t sleep, it may be time to review it.

Naturally, these decisions are best made in consultation with a financial professional who knows you, understands your situation and can offer a detached view – sort of like the role of a referee in a rugby match. This person’s job is to ensure the game flows, the rules are followed and that no-one gets hurt.

Oh, we almost overlooked the forgotten asset class. This is cash. It comes in the form of bank term savings accounts, with higher rates of interest, or money market funds that combine short-term loans to the government, known as Treasury bills.

To return to our rugby analogy, you could think of cash as your reserves bench. It’s there if you need it in a hurry, though you may never call on it. The returns over the long term are less than equities and bonds, but in some years, cash can do better than both. Ultimately, though, cash is an asset class for savers rather than investors.

Finally, there’s been a lot of interest recently in so-called alternative investments beyond listed stocks, bonds and cash. These include commodities, hedge funds, private equity and even collectibles like fine wine, classic cars and rare art.

These alternatives all have their own merits, but they have disadvantages too, like a lack of transparency (you can’t see the risks clearly) or relative illiquidity (you can’t easily turn them into cash when you need it) or high fees (particularly for hedge funds).

Most advisers, like a good rugby coach, will tell you to build the bulk of your portfolio around the solid platform of stocks, bonds and cash, along with some property. 

Now time for kick-off!

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

Picture: Thomas Serer via Unsplash

We all know we shouldn’t throw good money after bad, but we do it all the time.

Perhaps you’ve made yourself sit through a bad movie purely because you felt that having paid for the ticket you didn’t want to be left with a sense of money down the drain? Or, for the same reason, you’ve read a whole book despite deciding by the end of Chapter 1 that you weren’t going to enjoy it.

The sunk cost fallacy

Behavioural economists call this tendency among people to stick with losing propositions as the sunk cost fallacy. You see it all the time in consumer finance, investment and business.

Think of the person who buys a motor vehicle that turns out to be a lemon. The buyer constantly is sending the car to the garage to be fixed. Yet every time it comes back from the mechanic something else goes wrong. The consumer would have been writing it off early in the piece.

Investors are affected too

This happens with investments as well. People will get overly attached to losing stocks and refuse to sell them, purely because they feel they have already stuck with them for so long and want to believe that at some point they will turn around.

There are a few ways of overcoming this tendency. One is not to become emotionally attached to investments. A bad movie doesn’t stop being a bad movie just because you doggedly opt to sit through the entire feature. Your money is gone; now you’re wasting your time as well.

A second approach is to look to the future, not the past. Maybe the next movie will be better. A third idea is diversification. Accept that not every movie you see is going to hit the mark. But if you see a range of them, something might take your fancy.

See the big picture

A final way of framing this challenge is to think of the big picture. People tend to place a higher value on what they might lose rather than on what they stand to gain. Walking out on a bad movie opens up the possibility of a better experience doing something else.

Bad movie or bad investment, that money and time wasted is gone. You can’t do anything about it. But you still have options and choices. And that starts with writing off a losing proposition.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

In step 5 of our financial decluttering drive it’s time for the big reveal. Our volunteer, business coach Nicola Wilkes came to us with several folders packed with paperwork and a shaky grasp of what was in them. Here we'll see what she gets back, discuss her next steps and make sure her financial paperwork stays minimal and manageable.

If you are an existing client we may have worked on decluttering your finances before. All existing clients can take up this service at any point in time.

Receive the whole video series in your inbox click here.

Check out the other steps here on IFAMax:

Step 1 - How we’ll tackle your paperwork

Step 2 -Show us what you’ve got

Step 3 - Keep, scan, can

Step 4 - Lightening the load

Step 5 - A streamlined new start

Ever been on holiday where the weather wrong-footed you? The brochures promised tropical bliss, so you packed accordingly. Instead, you are greeted by bone-chilling wind and rain. Shivering and exposed, you resemble an undiversified investor.

As with the weather, financial markets can be unpredictable. Yet, in their own glossy brochures, investment providers often promise the equivalent of endless sun. Excited, investors pile in like bucket shop holidaymakers. This rarely ends well.

But there’s an answer to this cycle of unrealistic hope and illusion-shattering reality. It’s called diversification. Described by Nobel laureate Harry Markowitz as the only free lunch in investing, diversification is the equivalent of an all-weather wardrobe.

Smart holiday-makers, knowing that resort weather is never as consistently glorious as the marketing suggests, will pack for a range of climes. Alongside the shorts, sunscreen and T-shirts will be warm sweaters, umbrellas, and novels for rainy days. 

Likewise, diversified investors will not hang their hopes on one asset class, or one sector, or one country, or one stock. They’ll spread their exposure across and within stocks and bonds, across different markets, industries and currencies.

Diversification increases the reliability and predictability of returns. Looked at another way, it smooths the way and reduces the sudden bumps in the investing road. The ups may be less spectacular, but the downs will also be less stomach-churning.

Like well-prepared travellers, diversified investors are ready for a range of outcomes. If the stock market is roaring ahead, they can have sufficient exposure to enjoy the benefits of that growth. But when stocks are down, they can also be protected under the relative shelter of government bonds.

Diversification works because different parts of financial markets aren’t perfectly correlated. As one asset class goes down, another may go up. Stocks, a growth asset, and bonds, a defensive one, are the classic example.

But diversification also applies within asset classes. In your stock portfolio, you can spread your risk across sectors. Instead of putting everything in technology or materials or financials, you can have a bit of everything. And instead of sticking to one country, you can diversify internationally, across developed and emerging markets.

You can diversify within a bond portfolio as well, spreading your holdings between government and corporate bonds, between long-term bonds and short-term bonds and between bonds of higher credit and lower credit.

And if you really must cut the holiday short because of an emergency at home or some other unpredicted event, you can have a portion of your investments in cash.

Ultimately, diversification works because you are giving yourself more choices. You are less reliant on any one variable. In this way, you are reducing idiosyncratic risk relating to single industries or stocks or countries.

Think of what happened during the tech boom of early this century. Piling into technology stocks worked very well, until it didn’t. At that point, many investors were left like a sun-seeker in an Ibiza cold snap with a suitcase full of swimsuits and sandals.

There is still residual risk related to the market itself, of course. This so-called systematic risk is something you can’t diversify away. But the main point is you should do everything you can to increase the reliability of outcomes and eliminate risks you simply don’t need to take.

The outcome is greater peace of mind and an understanding that when markets get unsettled, as they inevitably do from time to time, you’ve packed your portfolio for a range of eventualities. 

Call it all-weather investing.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

Step 4 of our financial decluttering process is the part where you get to say goodbye to the unnecessary paperwork that’s been cluttering up your house and life. We’ve digitised the paperwork that can be kept as a soft copy and now it’s time to shred the superfluous.

Receive the whole video series in your inbox click here.

If you are an existing client we may have worked on decluttering your finances before. All existing clients can take up this service at any point in time.

Check out the other steps here on IFAMax:

Step 1 - How we’ll tackle your paperwork

Step 2 -Show us what you’ve got

Step 3 - Keep, scan, can

Step 4 - Lightening the load

Step 5 - A streamlined new start

What will happen in the global financial markets tomorrow, next week or over the coming month?  It’s tempting to speculate, isn’t it? Indeed, speculation about the short-term direction of shares, bonds, currencies and commodities represents a good chunk of the output of the financial media every day.

To be fair, people have a natural curiosity about the future, particularly when their is money at risk. This makes it understandable that the media would seek to satisfy that need in its coverage.

Markets are inherently uncertain

The problem is financial markets are inherently uncertain. Prices move randomly in the short term and there is little to be gained for investors by trying to second-guess them.

This point is easier to understand if you reflect on the fact that what moves prices is news. It might be an earnings report involving an individual company, a regulatory ruling affecting an industry, a data release relating to an entire economy or a geopolitical development that affects the whole world. 

Prices are always changing as new information comes into the market. And the biggest changes in prices tend to occur on the news that no-one expected. For example, opinion polls might suggest a certain political party is certain to win a major election. Markets will price for that eventuality. But if there is an upset, prices will adjust very quickly.

An impossible task

What this means is that successfully speculating on short-term movements in security prices with any consistency requires an ability to accurately forecast the news. We’re not sure about you, but we’ve yet to meet such a person.

But it’s even harder than that! Even if you could forecast the outcome of news events — say a G7 statement or an interest rate change or a merger — you still need to be able to forecast how the market will react.

Now that’s especially tough because what moves prices is the degree to which the news lines up with what’s priced in. You might get a weak employment figure, for instance, but the share market might still rally if the headline figure is not outside the bounds of expectations.

The fiendish difficulty of forecasting markets is also partly because set-piece events that dominate media attention do not tend to occur in isolation. A big economic announcement might have been expected all week, but what if it is overshadowed on the day by a development in the Middle East that upends the oil market and drives equity prices lower?

We look for tidy narratives

In fairness, we doubt the media will ever give up on constructing speculative “stories” about markets by linking fundamental news about the economy or earnings to price changes. It fills a niche and there’s a real appetite among the public for tidy narratives that link cause and effect.

But for the individual investor it is best to distinguish between the daily noise of news and security price movements from the long-term signal of capital market returns. The latter are more predictable.

We know that over time, there is a return on investment. If capital markets did not ultimately reward investors, there would be no appeal in investment!

But the returns are not there every day, every week or even every year. Timing them is tough. What’s more, we don’t need know which individual asset classes, markets or securities will deliver the strongest returns next.

Like a patchwork quilt

This is best illustrated by the Periodic Table of Investment Returns, from Callan Associates in California. This shows the annual returns for various asset classes over 20 years, defined by indexes and grouped by colour.

Each column illustrates the returns for each year. Those with the biggest returns are at the top and those with the lowest are at the bottom. It looks like a patchwork quilt, doesn’t it? In fact, it’s hard to see any pattern at all.

Sometimes, emerging markets will top the table. Other years, it will be cash or bonds or real estate. The long-term premiums from these assets are available, but they are not evenly distributed.

Diversification is key

That means to succeed as a long-term investor, you need to take a bigger picture view, focusing firstly on how you allocate your capital across different asset classes like stocks, bonds, property and cash and secondly on ensuring you are diversified within these asset classes.

By having a little bit of all those asset classes, you are guaranteed to reap the returns when they do kick in and you don’t have to worry about market timing.

Finally, success over the long-term requires discipline and sticking to the plan that is made for you, attending to what you can control (asset allocation, diversification, cost, taxes and rebalancing) and ignoring as much as you can the daily noise that preoccupies the media.

By the way, this doesn’t mean you shouldn’t take an interest in the news. We all want to know what’s going on in the world after all. But it’s a caution against using daily news headlines to drive your investment strategy. 

Prices, like news, are simply unpredictable.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

In Step 3 of our guide to financial decluttering it’s time for us to report back. You’ve delivered your financial paper trail and we’ve worked our magic to divide it into three types – things you need original copies of, things you can keep digitally and things you simply don’t need at all.

Receive the whole video series in your inbox click here.

If you are an existing client we may have worked on decluttering your finances before. All existing clients can take up this service at any point in time.

Check out the other steps here on IFAMax:

Step 1 - How we’ll tackle your paperwork

Step 2 -Show us what you’ve got

Step 3 - Keep, scan, can

Step 4 - Lightening the load

Step 5 - A streamlined new start

In Step 2 of our series on financial decluttering, we’ll look at the most fun part of the process. It’s the part where you hand over everything you’ve got and we go away and make sense of it. It might be in folders, envelopes or a carrier bag. This is where clarity begins, so bring us what you have.

If you are an existing client we may have worked on decluttering your finances before. All existing clients can take up this service at any point in time.

Receive the whole video series in your inbox click here.

Check out the other steps here on IFAMax:

Step 1 - How we’ll tackle your paperwork

Step 2 -Show us what you’ve got

Step 3 - Keep, scan, can

Step 4 - Lightening the load

Step 5 - A streamlined new start

Whenever we have a mental block when trying to grasp an important concept, it sometimes helps to be presented with an image or a visual metaphor.

A good example of a concept that investors often struggle with is the idea that financial markets are highly competitive and that prices are the best estimate we have of future returns.

That may be because much of the financial media is built on the assumption that you can profit consistently from mistakes in share prices, despite the mountain of research showing that even the professionals struggle to do that.

One response to that is to talk about the wisdom of crowds. Remember that TV show, Who Wants to be a Millionaire? Contestants stumped for an answer are given three lifelines — 50/50 (two choices), phone a friend, or ask the audience.

According to author James Surowiecki  phoning a friend will give you the right answer about two thirds of the time — better than the 50/50 option. But asking the audience yields the right answer more than 90% of the time.

Accepting market prices is like asking the audience. They’re never going to be perfectly right, but it’s the best barometer we’ve got. And by not trying to work it out all on your own, you’re freed up to focus on all the things you can control.

A marketplace aggregates lots and lots of information very efficiently. The TV studio audience in this case is like all those buyers and sellers in the share market. No single person has got all the information, but together they get close to the truth. In investing, that truth is reflected in the price.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

Make sense of your money, reclaim cupboard space and put your mind at ease.

In this, the first episode, we explain our decluttering process and meet our volunteer for financial clarity, business coach Nicola Wilkes. Nicola’s paperwork is getting out of hand, so we’re going to assess it, trim it and make sense of it for her.

If you are an existing client we may have worked on decluttering your finances before. All existing clients can take up this service at any point in time.

Receive the whole video series in your inbox click here.

Check out the other steps here on IFAMax:

Step 1 - How we’ll tackle your paperwork

Step 2 -Show us what you’ve got

Step 3 - Keep, scan, can

Step 4 - Lightening the load

Step 5 - A streamlined new start

It’s very important, when choosing a financial adviser, that you find someone you can trust.

However, working out whether they’re trustworthy or not isn’t always easy. The size of the firm, for example, tells you very little.

Herman Brodie is a financial author and consultant who has specialist expertise in building trust-based relationships. 

In this video, presented by Robin Powell, Herman explains what you can do to help you find the right person to manage your finances.

You will find dozens of helpful videos like this one in our Video Gallery. Why not have a browse?

Video transcript: 

Just as you need to trust your doctor, you also need to trust your financial adviser.

Financial author and consultant Herman Brodie is an expert in adviser-client relationships.

Trusting your adviser, he says, will give you much more peace of mind.

Herman Brodie says: “So, if I trust my adviser or I trust my asset manager, the riskiness of the whole enterprise we’re doing together is actually diminished. So my level of anxiety is reduced. 

“Now, a lot of bad things can result when we are overanxious about the engagements we are involved in. And financial markets are fraught with all of the kinds of things that we as human beings find the most disagreeable. And this often leads us to do precisely the wrong thing at the wrong time. 

“Now if we perceive the whole riskiness of the engagement to be reduced because we trust the person who we’ve confided with our assets, then, of course, this brings an enormous amount of reduced stress for clients.”

Sadly, some advisers in the past have proved themselves to be far less worthy of trust than others.

If trust in your existing adviser has broken down, it’s very different to rebuild.

Herman says: “When you get advisers, for example, pushing products that are very expensive when there are cheaper alternatives, or because they are tied to a particular product issuer. Or even in medical professions, where doctors have been seen to be prescribing particular medicines because they are taking kickbacks from the pharmaceutical company. 

“It’s evidence therefore that they are actually not acting in my interests at all, they are acting in their own selfish interests. And this damages the perception of benevolence. And those perceptions are very very difficult to recover.”

Herman Brodie says there are two components to trusting an adviser. The first is a conscious decision: Is the adviser competent? The second is more sub-conscious: Does the adviser have my very best interests at heart? Ultimately, though, you have to trust your gut instinct.

Herman says: “At least with the conscious part of that evaluation, in terms of, you know, the skills and training, and let’s say the fiduciary responsibilities that that adviser takes on board. On paper, that adviser must stack up, so the competence measure must at least be satisfied. But, whether you are going to perceive that person as benevolent or not, it’s largely non-conscious, I cannot tell you how you are going to feel about somebody.

“Who I’m going to be able to be open with is probably going to be somebody different to you. And as a consequence, you just have to go with your gut. There is no secret formula for identifying benevolence. Everybody sees benevolence in a slightly different place."

So, you should choose an adviser who is clearly competent, but also one who will put your interests ahead of their own. Only you can decide if someone ticks both boxes.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

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There’s no getting away from the fact that investing — especially investing in equities — involves risk. But risk can mean different things to different people. There are also many different types of risk, so let’s have a look at some of the main ones.

Market risk and volatility

For many people, the most commonly perceived risk is market risk. If the share market falls sharply, you lose money, on paper at least. But this only matters if you plan to sell tomorrow. If your horizon is long, these daily ups and downs will matter less.

If you’re investing internationally, the ups and down of currency markets can affect the value of your portfolio in your home country. And if you’re invested in bonds, risks are posed by rising inflation, changing interest rates or a bond issuer defaulting on their payments.

Allied to market risk is volatility. The degree your investments rise and fall from year to year can affect your outcomes in a couple of ways. Firstly, there’s the stress that volatility can cause. Some people just aren’t as well equipped to deal with the ups and downs. Secondly, volatility can also have a real cost on your portfolio, as we shall see.

Diversification: the only free lunch in investing

You can deal with volatility through diversification. That means spreading your investments so you are not overly dependent on individual asset classes, countries, sectors or stocks. So, when one component zigs, another may zag. Think of it like shock absorbers in your car. Without them, you’re going to feel every  bump in the road. With them, the ride will be much smoother.

Diversification is often described as the only “free lunch” in investing. The flavour sensation of higher returns also can come with the indigestion of higher risk. But you can moderate the range of possible outcomes by ensuring you are not too exposed to any one ingredient. Think of it like a buffet full of different dining choices.

Of course, you could just stick to your home country. It’s what you know, after all. But this “home bias” also carries risks as well. Just as the performances of asset classes and individual sectors vary, so can those of countries. Think of Japan in the 1980s. Its market appeared unstoppable. Then it spent more than two decades in the doldrums.

Occasionally, the media gets excited about individual industries. Think about what happened in the early 2000s when the world was going crazy for technology stocks. It was a great bet while it lasted, but then it all came crashing down. Again, you can deal with this by spreading your allocation across different sectors, by diversifying internationally — and by keeping an exposure to all the drivers of expected return.

Falling in love with individual stocks is another risk you don’t need to take. If your gamble pays off, great! But it’s speculation. It’s not investment. You’re taking a bet that those companies will continue to dominate. Back in the 1960s, the media swooned over the ‘Nifty Fifty’, blue chips that would never let you down — names like Xerox, Eastman Kodak, IBM and Polaroid, all of whom were disrupted over the years. Nothing stays the same. That’s why you diversify.

Other types of risk

As for foreign exchange risk, you can “hedge” (a type of insurance) overseas returns to your home currency. But there is no evidence that this makes a difference to long-term returns. If you fully hedge your exposure and your home currency rises, all well and good. But if your home currency falls, you risk missing out on the kicker you get by converting the now more valuable foreign exchange. One answer is to hedge 50% of your overseas exposure and leave the other half unhedged.

While bonds are less volatile than shares, they still have their risks. The three main ones are rising inflation, increasing interest rates and default.

Inflation reduces the purchasing power of bonds. The income you were counting on suddenly buys less than it once did.

When a central bank increases interest rates, the prices of existing bonds can drop because their coupon rates look less favourable. Default occurs when a bond issuer can’t repay what they owe. Again, you can manage these risks by diversifying across different countries and currencies, and across government and corporate bonds.

Liquidity risk refers to difficulty in getting access to your money. So-called “alternative” investments often carry this risk. You can manage liquidity risk by always having sufficient cash on hand to keep you going in an emergency.

Finally, there is longevity risk, which means outliving your money. We’re all living longer, which isn’t necessarily a bad thing. But how do you ensure your savings last you through retirement? And therein lies an irony. Unless you’re willing to take sufficient risk as an investor, you may end up with a retirement pot that simply isn’t big enough. That’s right — one of the biggest risks you face as investor is not taking enough risk.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

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A little encouragement goes a long way

In the UK, Neil Woodford is investing Royalty. He famously outperformed his peers over many years as manager of the Invesco Perpetual Income Fund. When, five years ago this month, he set up his own fund, the Woodford Equity Income Fund, it was billed as the fund launch of the decade.

Alas, for tens of thousands of investors taken in by the PR and marketing hype, it hasn’t worked out as planned. The fund’s performance has been consistently dreadful and, one after another over the last few months, Woodford’s biggest clients have been withdrawing their money. 

Last Friday, the Kent County Council pension fund committee announced that it too decided to cut its losses, and yesterday, Woodford and his fellow executives took the highly unusual step of suspending trading in the fund, blocking further investor withdrawals until further notice.

Suddenly everyone has an opinion on Woodford and why the fund was doomed to fail. A simple Google search will show you that some of the commentators and publications putting the boot in now once waxed lyrical about his stock-picking expertise.

We have spoken many times about our scepticism of the Woodford cult (and active fund managers in general) — the fact you can invest in an index fund at a fraction of the cost and the odds of reproducing his previous performance were always heavily stacked against him. But we take no pleasure in his downfall.

If anything good is to come out of this sorry affair, we hope it’s that we all learn a little humility.

Hugely intelligent though we are sure Woodford is, the idea that one person can outwit the collective wisdom of millions of market participants requires an enormous leap of faith. Very few people beat the market any more, at least not on a cost- and risk-adjusted basis or over meaningful time periods. Since the global financial crisis, not even Warren Buffett has managed to do it.

We desperately want to believe there’s someone out there, in the massively complex and random world of finance, who knows what’s going and who really can predict the future. But that doesn’t mean that person exists. Even if they do exist, the overwhelming evidence is that they’re almost impossible to identify in advance.

Its time for reflection, time for us all to be a little more humble, and a little more honest with ourselves. We include advisers like ourselves in that, as well as analysts, consultants, journalists, investors and, yes, fund managers too.

Strange though it seems to feel sorry for a multi-millionaire, you could actually do so for Neil Woodford. When you’re fêted for years as a genius, it must be crushing to have it gradually dawn on you that you probably aren’t one after all.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way