Sustainable & responsible jewellery

March newsletter 2020

Ifamax's view on Sustainability

Could you give us a little introduction to yourself?

“I am a self-employed designer/maker of Fiona Lewis Jewellery. I live in Chipping Sodbury, a pretty Cotswold market town that has independent shops, cafes, pubs and bars. It is well worth a visit for an afternoon out. I love the countryside in all winds and weathers, the peace and space provide my inspiration… my mind is constantly forming shapes and movement into designs, and probably a source for a lifetime of jewellery and some more!

When I am not working, I am walking, travelling abroad, sewing, gardening, socialising, and spending time with my fabulous partner David, who encourages me in everything I do. My son and daughter are both creative so family conversation is often about our next projects. I keep chickens, and Prudence the cat who has decided the feral lifestyle is not for her, she prefers my sofa and a warm lap. ”

Tell me about how you came to be a jeweller?

“I attended a senior school where the pupils were all taught metalwork. I found my niche and was in my element during those lessons; forging, using the lathe, soldering and cutting, and unusually for me was top of the class. However, to my great disappointment, when the time came to select my options, I was informed Engineering and Metalwork was the ‘boys only’ option. I was disappointed to say the least but I stored in my mind some idea that one day I would revisit metalworking. In 2010 after quite a few decades of waiting for the right time, I booked an evening class in silversmithing. I learned to design and make jewellery and my passion for metalwork was reignited. Within 18 months, and due to popular demand from friends wanting to buy from me, I was selling my creations. I have continued to refine my skills, design, make and sell my jewellery in my online Etsy shop and through my Facebook page.”

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How do you define yourself?

“I am a magpie for shiny metal, and beautiful stones but also have a passion for a sustainable, responsible approach to my business. The gold and silver I use is either recycled by my suppliers, or I reuse my customers’ gold to create bespoke pieces for them. I source diamonds and precious stones from ethical suppliers and use recycled materials in packaging.”

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Tell me about the evolution and range of your styles of jewellery.

“I began by making jewellery that was inspired by nature and my love of the outdoors. Over time, I have concentrated on pure form, and more contemporary abstract shapes. Learning to set my own stones is a challenge, but also a delight, those are my hands that have touched each piece from start to finish. I make everything using traditional methods of silversmithing, using hand tools. I love the forged shaped look, and adding droplets of gold, the technical term for ‘droplets’ is an unromantic ‘granulation’. Adding the sparkle of my favourite diamonds and sapphires creates a unique, contemporary look in a piece.”

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What is the greatest recognition of your work so far?

“I talk to my customers and like to have a feel for who I am making for… so my recognition is from them, their reviews and feedback. I think this review is one of my favourites so far:”

“From the very moment I saw her work, I knew Fiona was the person I wanted to make a very special gift for my daughter. The communication between Fiona and myself was brilliant as she responded positively and instantly knew what I envisaged. Her patience and eagerness to supply me with a pendant that would match my idea was amazing; nothing was too much trouble. Once Fiona had confirmed all the details, she gave me a time frame and the pendant was made and dispatched within the time. It arrived securely packaged and beautifully presented in a gift box. The pendant is exquisite and has surpassed my hopes and wishes. It is a piece of art and will be treasured for years to come. If the reader needs someone with skill and vision, Fiona is this person”.

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What can we expect next from you?

“I will soon be learning to carve wax to create shapes to be cast. In my imagination I have a variety of beautiful, tiny birds that will become gold and silver jewellery, I am sourcing tiny black diamonds for little beady eyes, and peacock sapphires to flush set on wings.

My dream is to create a collection of kinetic jewellery and boxes with meaning; to celebrate life, a lost love, a friendship, special moment or emotion etc. I would incorporate a series of cogs or perhaps a chain to provide movement. Doors would open, hearts would spin and birds fly around the sun. Yes, there I go again…. Another lifetime and more of ideas!”

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Best of luck with your endeavours Fiona and thank you for being this months client in the spotlight.

If any other clients would like to feature in a future newsletter with a story, profile, charitable fundraising or discussion on a topic you would like to share please do get in touch.

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

Regret has been cited by Nobel laureate Daniel Kahneman as probably the greatest enemy of good decision-making in personal finance. It is often the driving force behind panicky attempts to time the market, buying at the top or selling at the bottom. It can prompt us to place a far greater weight on the possibility of suffering a loss than the prospect of a win.

Landmark research by Kahneman and his partner Amos Tversky in the 1970s found that when confronted with several alternatives, people tend to avoid losses and choose the sure wins because the pain of losing is greater than the joy of an equivalent gain.

We prefer the safe option

In one famous experiment, students were given the choice of winning $1000 with certainty or having a 50% chance of getting $2500. Most people will choose the safe option of money in hand. Conversely, when confronted with the choices of a certain loss of $1000 versus a 50/50 chance of no loss or a $2500 loss, people tend to choose the gamble.

In other words, we tend to switch from opting for risk aversion when it comes to possible gains to risk-seeking behaviour when it comes to avoiding losses.

Asymmetric choices

What’s more, regret, at least in the short term, tends to be stronger when it relates to acts of commission than of omission — in the former case, the things we did do and in the latter case the things we didn’t do.

As an example of omission and commission, imagine Jane has held a particular stock for some time. She thinks about selling it but does not follow through. The stock subsequently slumps in price. In contrast, John sells his stock, only to see it rally.

In the first case, the example of omission, or inaction, leaves Jane feeling less regretful than in the second case, John’s example of commission, or action.

Put another way, there is an asymmetry to our choices when confronted with uncertainty than is assumed by traditional rational choice theory in which human beings are cast as automatons carefully weighing the costs and benefits of their decisions.

We’re less logical than we think

The fact is we are not the logical decision-makers we assume ourselves to be. Instead, we are highly susceptible to behavioural biases that cause us to place a greater weight on the possibility of losses than on the prospect of gains – even when the statistical odds of the competing outcomes are identical.

We would rather secure a guaranteed lesser win than opt for the choice of getting more or possibly ending up empty-handed. And given a choice of two bad outcomes, we’re more likely to roll the dice to avoid the worse one.

This is why many people remain doggedly loyal to a particular bank, for instance, even when they are being ripped off by inferior service and excessive fees. It also explains why many people won’t cut their losses and dump a losing stock (because they’ll regret it if it bounces back afterwards).

Regret risk is frequently seen in bull and bear markets. In the case of the former, with stock averages hitting repeated record highs, there’s a natural tendency to want to hold back for ‘more certainty’. In the case of the latter, we want to wait to see the bottom before we wade in.

We’re not good at probabilities

In all cases, we imagine we are carefully calculating probabilities when, in reality, we are slave to our emotional instincts and resorting to mental short-cuts to justify our decisions ex-post.

Kahneman’s approach to regret risk in wealth management is to seek a balance between minimising regret and maximising wealth. That means planning for the possibility of regret and understanding clearly the range of possible outcomes beforehand.

Why an adviser helps

Of course, there is no one right answer here and that’s because everyone is different. It’s also why it is so important to have a financial adviser who can map out the range of eventualities and test clients’ potential reactions to each one.

Everyone has investment regrets. They’re part of being human. The important thing is to learn to get over them, so they don’t derail your decision-making process.

Picture: Sarah Kilian via Unsplash

In most relationships it tends to be the male partner who makes the financial decisions.

Yet in many respects women are better at dealing with issues of personal finance than men. There’s certainly plenty of evidence to suggest that women, on average, are more successful at investing.

Why, then, do so many women shy away from finance and investing?

In this video, Dr Moira Somers, a financial psychologist at the University of Manitoba, gives some interesting pointers.

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

Video transcript:

Robin Powell: Research into couples and their personal finances consistently shows that it still tends to be men who make the investment decisions.

But women tend to have a different attitude towards investing, and when they are involved, they often make better choices.   

Dr Moira Somers is a financial psychologist at the University of Manitoba.

Moira Somers: My understanding of the current research is that women are much more conservative investors. They often wait far too long to get into investing. When they do start investing though, they tend to have better returns than men, because they are more prudent. They don’t seek the extreme reward end of the spectrum. They are content with more modest returns and they tend to achieve them. 

RP: Surveys repeatedly show that money is one of the main causes of stress. Women are especially prone to worrying about it.

MS: Another gender difference is that women tend to stress more about money. They will acknowledge that they lose sleep more often than men do. And, sometimes, that’s because they do not have sufficient knowledge of their own family finances. They’re not the ones in control. You know how sometimes it’s harder to be a passenger in the car than a driver? You’re glad somebody else is driving but you still have absolutely no control about what’s happening. So, it’s a different kind of stress. 

RP: So, a lack of knowledge about investing is one reason why women aren’t more involved in investment decisions. But Dr Somers says there’s another key factor.

MS: When we survey them, when we work with them to say: “How come this isn’t so easily transferable for you? You have brilliant skills in household management, why is this not translating into the broader financial picture?” And some of it, frankly, has to do with mistakes that advisers make. There are some real big turn off’s, real big mistakes that just leave women feeling stupid and embarrassed and uncomfortable and so they vote with their feet.  

RP: Having the wise counsel of a good financial adviser is extremely valuable. There are signs that the advice profession is starting to serve women better than it has in the past, but there’s plenty of room for improvement.

So, don’t be put off by negative experiences. Find an adviser you trust and feel comfortable with. 

You can find out more about Dr Somers’ work via her website, moneymindandmeaning.com.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

A little encouragement goes a long way

Weekly round-up: Week 48, 2019

Picture: Alice Donavan via Unsplash

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

How women view money and investing differently

A little encouragement goes a long way

Picture: Sebastien Gabriel 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

How women view money and investing differently

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