It’s been said that you’re more likely to change your spouse than your bank. But, as you run the ruler over your personal finances, ask yourself whether your bank has been doing the right thing by you.

There’s plenty of research that shows we suffer from “inertia” when it comes to switching financial services, even though this could save us – or earn us – significant sums.

Think about it: When interest rates fall, does your bank pass on the full extent of those rate cuts so your mortgage is cheaper? When interest rates rise, do you get the full benefit with a commensurately higher rate on your savings? Have you been stung by the auto-renewal of a term deposit onto a below-par rate?

I’d be prepared to wager that the rate on your credit card (or cards) hasn’t fallen anywhere near as far as official interest rates in recent years. Some cards are still charging around 18 per cent, even though official interest rates are at rock bottom.

That credit card is probably with the same bank as your mortgage, and your savings account, and your debit card … need I go on? That’s part of the problem: banks and other financial service providers know the more products you have with them, the less likely it is you’ll shop around. 

In Australia, the Productivity Commission has identified “bundling” as an impediment to competition. Another study found that loyal, existing borrowers were paying interest rates on average of 32 basis points higher than those for new borrowers –  a “loyalty tax” worth billions of dollars in additional profits to banks.

It probably wasn’t so much that these borrowers were feeling “loyalty” but more likely that they were worried switching would be costly or difficult, or would just plain mess up their direct debits. Or maybe it was just a case of “better the devil you know”.

So, make a list and check it twice:

What are your top three needs from a bank?

Are you a borrower or a saver? Is a bank’s home loan rate or savings rate more important to you? Think about what really matters to you.

Is physical location important?

If you never go into a bank these days, why do you feel compelled to stick with your bricks-and-mortar institution? Make sure to check out the offerings of online-only banks.

How important is customer service?

I earn a good interest rate on my savings with an online bank, but heaven forbit I need to talk to someone on a weekend…

Compare rates.

Remember that “loyalty tax”? Keep up to date with changing rates and remember that you can haggle with your existing bank – get them to match new offers.

Compare fees.

That includes monthly “service” fees, ATM fees, and charges for overdrawing or declined payments.

Compare your values

I can’t begin to count the number of banking scandals in recent years. At what point would you take your money away from a big bank and put it somewhere like a smaller bank or credit union?

Picture: Steve Smith (via Unsplash)

Have you read any market forecasts for 2020 yet? There is something about the turn of the calendar year that brings out the thumb-suckers in the media as sage reflection on the year just past gives way to blue-sky speculation about the coming 12 months.

To be sure, there is an economic element in this. Newsrooms tend to thin out over the holiday season as staff are told to clear accumulated leave. Media outlets stockpile think-piece fodder from bankers and brokers to fill the gaps between the ads for a few weeks. End-of-year specials are a popular go-to feature.

This is why you are confronted with clickbait headlines at this time like “Ten Big Economic Surprises for 2020” or “Five Stocks You Can Count on in the Coming Year” or “Your Armageddon Portfolio: Bunker Down with these Shares”.

Last year’s predictions

Actually, there were plenty of these types of headlines around Christmas 2018 following the global equity markets’ worst calendar year performance in seven years. The US-China trade war was heating up, the Brexit saga was roiling markets and there was mounting evidence of a significant global economic slowdown in the pipeline.

So on New Year’s Eve 2018, CNN pitched in with a guest economist’s column titled How Populism will Cause a Crisis in Markets in 2019.  The argument was that the impossibly simplistic solutions enacted by populist politicians to the post-GFC stagnation in developed economies would come home to roost in the coming year.

How things panned out

The analysis appeared sound, but a year on and we’re still waiting for the promised reality check. Equity markets have experienced double-digit gains in 2019. The US market has kept breaking records, to be up more than 20%. Against most expectations a year ago, bond markets have had another stellar year, with yields reaching unchartered territory.

To be fair, expectations that 2019 would mark a brutal reckoning for markets were widely held. In December 2018, a survey by Natixis Investment Managers said two thirds of institutional investors believed the US bull market would come to an end in the coming year.

The biggest threats cited were geopolitical disruptions, such as Brexit and trade wars, while rising interest rates were also seen as posing a significant risk.

A year on and those issues grind on. Markets vacillate according to every tweet from Donald Trump, though the UK election has taken some of the wind out of the Brexit issue. As for interest rates, they have spent most of the year falling, not rising.

The growth slowdown also triggered a wave of downgrades by major brokerages and banks in late 2018. Barclays won headlines when it lowered its year-end target for the S&P-500 to 2750 from 3000, citing bearish retail investor sentiment and slowing growth outside the US. Actually, they got it right first time and should have stuck to the original call because the index was above 3100 going into December, or about 25% higher over the year.

The cataclysm that wasn’t 

Every year, you see these calls go awry, perhaps none so spectacularly as the headline-grabbing line from the Royal Bank of Scotland in early 2016, telling clients in a research note to ‘sell everything’ in anticipation of a “cataclysmic” year in markets.

“Sell everything except high quality bonds,” the bank told clients. “This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” 

It would have been a shame for those investors who followed that advice, because global equity markets delivered a return of about 8% that year in US dollar terms. In fact, the total return of equity markets from early 2016 to late 2019, as measured by the MSCI All Country World Index was more than 40%.

Opinions are soon out of date

The truth is everyone can have an opinion about the market outlook, but that’s all they are — opinions. And the problem with writing economic commentary on the run is you are always responding to news. Within a day of writing it, it’s usually out of date.

To be sure, there is still a case for economic analysis. The problem arises when you try to connect long-term analysis to short-term speculation about market direction. Markets respond to news based on the collective expectations of millions of participations. This is another way of saying all those opinions are already reflected in prices.

In any case, an economic or market forecast is inevitably based on a bunch of underlying assumptions, anyone of which can be thrown awry by events. Nothing really is constant, which is why forecasting is such a tough and unforgiving business.

Don’t indulge 

The media’s need for big market calls that attract eyeballs is easy to understand. We’re naturally drawn to the idea that someone out there can see the future clearly. The reality, unfortunately, is that no-one can. Everyone is guessing. 

Seasonal speculation is fun and diverting. But you’re better off choosing something else to indulge in.

Picture: Denise Karis via Unsplash

Christmas is coming. It’s time to start thinking about Secret Santa gifts and what’s going under the tree. I find these decisions harder as children become adults and in a society where we want for little. Like others, I’m also becoming more aware of the impact my purchases may have for people and planet. 

So, for a few years now, my Christmas presents have included “gift cards” from Kiva, a non-profit crowdsourcing micro-business loans that can help people work their way out of poverty. Rather than give people something they really don’t want or need, the gift card allows them to support a micro-business of their choice. They get to re-lend the money when that borrower repays the loan – making it a gift that keeps on giving.

If you want to spend your gift budget ethically and sustainably this year, here are some ideas (with thanks to social impact researcher Associate Professor Danielle Logue).

1. Give a goat

Oxfam popularised alternative gifts with its “I bought a goat for you” campaign some years back. The not-so-small print does spell out that your donation may not actually be used for a goat but “in general support of” Oxfam’s efforts. But if you’re comfortable with the goat as a “symbol” of your donation, go for it. If you’re not comfortable with that, go to Good Gifts, which guarantees “ your money buys the gift described”. These include things like a trip to the seaside for a poor child, toys for children in refugee camps and fresh fruit for African orphans.

2. Donate with the crowd

It’s estimated that $US5.5 billion a year is being generated in donation crowdfunding. This is where people use online platforms like Crowdfunder, Causes and Chuffed to raise awareness and money for causes. You might like to make a donation on behalf of a family member or friend as a Christmas gift. Some projects will appeal more than others, but community-focused projects on these sites have included things like building a rooftop garden to be tended by refugees, creating an online knowledge hub for people with disability, and teaching children in disadvantaged communities about good nutrition.

3. Support a social enterprise

Social enterprises are business ventures that operate for “purpose” not just profit. So, when you buy their goods as Christmas gifts you’re also supporting a cause.  One example is Thankyou.co, which sells bottled water, body care and food products, in so doing raising millions of dollars for safe water, hygiene and food security programs. It donates 100% of its profits. Do your research, ensuring the enterprise spells out precisely how they make their donations.

4. Make a micro loan

Microfinance refers to lending small amounts of money (say $25) to individuals or groups that mainstream banking often neglects. Pioneer Grameen Bank was established to provide micro loans to rural women in Bangladesh so they could buy cows to produce and sell milk in their villages, repaying their loan with the profits. Kiva, mentioned above, is one of the bigger organisations working this way today. There’s some concern that micro-loans are also being used to fund consumption, but you can filter loans to find those you’re happy to support.

5. Spend with a B corp

Businesses certified as B Corps have had to prove they meet the highest standards of social and environmental performance and show that they’re committed to balancing profit and purpose. So by spending your money with a B Corp you’re assured that you’re not funding practices that harm people or the planet. It’s a bit like looking for Fairtrade certification on your coffee. There are now over 2,500 Certified B Corporations in more than 50 countries. 

If you’re stuck finding a present for someone who has everything, look for a gift that helps someone who has nothing.

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Pay less attention to weather forecasts

How women view money and investing differently

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I thought I would give you a roundup of changes in this month’s newsletter as quite a lot has been going on behind the scenes here.

Ashton has now been promoted to Managing Director. He has been shadowing me now for more than a year and it has been great to see him step up and take the reins. This is great news for our business, as it means continuity. I have been delighted to see how he has developed since joining me in 2008. I will continue to work closely with him in the management team.

Personally, my role here has slightly changed. I am still looking after some of our clients, and that will remain the same, but I am now Chairman and our Compliance Officer. Effectively it is more of an oversight role of the whole business.

Since gaining Chartered Wealth Manager status, Jamie has been fully signed off as an adviser and is looking after clients in his own right. This means we have more capacity for dealing with additional clients.

Kat and Gethin are continuing to make great progress in passing their financial services exams. As many of you may know, there are quite a few to do. I expect by the end of next year they should both be fully qualified.

We have also taken on a new employee, Will Buckley, who has recently joined us. He has experience working in the City of London and is qualified as an adviser. He is still finding his feet with us but will be dealing with new clients in the new year.

Tamzin continues her important work as Company Secretary as well as dealing with the accounts and payroll.

Finally, as we are now in December, I hope you all enjoy the festive season. Thank you for all of your support through 2019.

Max and the Ifamax team

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Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

A key tactic in staying disciplined as an investor is developing the skill to separate short-term ephemera from long-term trends. A sharp drop in the market today, however disconcerting, is not important if your horizon is years away.

Highlighting the benefit of resisting the knee-jerk response to news is Warren Buffett, who once famously said that the most important quality for an investor is not intellect but temperament. 

He’s undoubtedly right. There are plenty of smart people in the investing world. But often the key difference between the successful and unsuccessful are not smarts, but patience.

Look at it this way. Most TV news bulletins conclude with two features — the finance report and the weather report. Both involve a person standing in front of a chart, describing what happened in the markets or meteorological conditions that day and what might happen tomorrow.

For sure, the weather is an interesting talking point in social situations. But we know longer-term that what counts is the climate and that this changes more gradually.

Likewise, what happened on the market today or yesterday is interesting. But if your horizon is 10 years or more it is unlikely to be as significant a factor as to how you allocate your assets, how diversified you are, and, most of all, how disciplined you can remain.

As investors, we spend a lot of time looking at the financial equivalent of weather reports, agonising over passing showers, and ignoring the long-term shifts in the investing climate.

In other words, our focus on today’s events reveals a tension between how we experience the passing of time day-to-day – through news and weather and market movements - and how time gradually shapes us and our investments in the long-term.

The difference between the two is in our temperament.

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How women view money and investing differently

A little encouragement goes a long way

Weekly round-up: Week 48, 2019

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.

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A little encouragement goes a long way

Weekly round-up: Week 48, 2019

Picture: Alice Donavan via Unsplash

Ask any parent, teacher, sports coach or line manager, and they’ll say the same thing. 

It’s easier to criticise than it is to praise. But the latter is far more likely than the former to produce the outcomes you want to see.

Of course, there’s a place for both the carrot and the stick, but all too often we get the balance wrong. Our in-built bias towards negativity means the tendency to blame comes much more naturally than the urge to encourage.

The oil companies

Take climate change, for example — and, in particular, what different companies are doing to tackle the problem, or indeed to exacerbate it. 

The big oil companies have rightly borne the brunt of criticism from environmentalists. True, they are, at least, finally acknowledging the need for action. Yet the resources that they invest in alternative energy remains only a tiny fraction of their expenditure on traditional oil and gas.

Calling out those firms that fail to match their words with action is of course important. But we also need to acknowledge the good guys — companies that are genuinely playing as part in addressing the climate crisis.

Several such firms were highlighted at The Values-Based Adviser, which IFAMAX helped to organise.

In his presentation, Dr Jake Reynolds from the Cambridge Institute for Sustainability Leadership highlighted two firms in particular that are really getting their act together.

Setting the standard

The first was the confectionery company Mars. Each year, according to the United Nations, an area the size of Bulgaria is lost to drought and desert. That’s enough land to grow 20 million tonnes of grain a year. To help reduce pressure on natural ecosystems, Mars has set as its goal freezing its land footprint, even as its business grows.

The second company singled out for praise by Dr Reynolds was Ikea. The Swedish flatpack furniture maker has substantially upped its game on the environmental front in recent years. As well as becoming climate positive, Ikea is committed to regenerating resources, protecting ecosystems and improving diversity.

Other firms that Dr Reynolds believes deserve recognition are the following:

Unilever (committed to sourcing all agricultural materials from 100% sustainable original by the end of next year)

Pirelli (improving methods of rubber extraction in Indonesia to extend tree life and reduce deforestation)

Fuji Xerox (now operating a closed-loop recovery system through product take-back, reuse and recycling, which is 99.5% effective)

Iberdrola (providing energy access to 4 million disadvantaged people by 2020, producing 50% less carbon dioxide by 2030)

Novo Nordisk (working with cities round the world to map and analyse the root causes of unsustainable planning) 

Balancing price with environmental impact

So, what are we saying? First of all, we’re not saying you should go out and buy these companies’ products and services. From a sustainability point of view, the less consuming we do the better.

But you should consider factors other than price when making a purchasing decision, and they should include environmental ones.

Remember too that you can support the efforts being made by responsible companies to tackle the environmental challenges we face by investing in a sustainable fund. 

The GSI Global Sustainable Value Fund, for example, which we at IFAMAX use, considers a company’s approach towards environmental, social and corporate governance (ESG) issues; companies with higher ESG scores are given a larger weighting than those with lower scores.

Seeing through the gloom

And one more thing. That negativity bias we referred to earlier also helps to explain how the climate crisis is covered in the media. There are so many more negative stories than positive ones that it’s not surprising that many of us find this whole issue depressing and overwhelming. 

The true picture is actually more positive. There are companies out there who are talking climate change very seriously. They deserve our support and encouragement.

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Weekly round-up: Week 48, 2019

Pictures: Ankush Minda and Adrià Crehuet Cano via Unsplash

It’s not mentioned often enough in the financial media that many of the keys to success as a long-term investor derive from qualities that are distinctly out of tune with the times. These include patience, discipline and crucially, delayed gratification — a readiness to prioritise distant rewards over instant ones.

In fact, the times we’re living in are almost antithetical to long-term investment. We are overwhelmed by choice. We are told we can have everything we want right now. And, if we can’t afford it, we can put it all on the plastic and worry about paying for it later.

All gain-no pain has a ready market 

The fact is there’s a ready market for the notion of all gain-no pain. Witness the dieting magazines that promise their subscribers perfect bodies with little expense or effort other than the cover price and sticking reminder listicles on the refrigerator door.

It works similarly in the investment world. Much of the financial services industry, and the media that serves it, wants people to believe in the idea that investment returns come down to “hot tips” and easy shortcuts. The giveaway pitch is “high returns with low risk”.

A dissenting view about the instant gratification, you-can-have-it-all-right-now economy has been memorably expressed by Charlie Munger, the business partner of legendary investor Warren Buffett and a man known for turning conventional wisdom on its head.

We can’t stand to wait

“Waiting helps you as an investor and a lot of people just can’t stand to wait,” Munger once said. “If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” 

Perhaps it’s due to the nature of modern consumer capitalism, which runs on encouraging people to pursue an endless and unquenchable cycle of externally generated desires. In other words, the notion of delayed gratification is out of tune with the times we live in.

But the ability to forgo today’s desires for the prospect of longer-term fulfilment is one of the most elemental requirements for success as an investor. Buffeted by media noise and the lure of short-term returns, we have to be able to resist the temptation to tinker.

Again, as Munger put it: “People are trying to be smart. All I am trying to do is not to be idiotic, but it’s harder than most people think.” 

One in five don’t plan for the long term at all

Just how hard it is was highlighted in a recent report by the UK online wealth management firm MoneyFarm, which looked at why as a society we seem to find it so difficult to invest in our future wellbeing and are so easily distracted by short-term temptations.

The research found that 21% of Britons don’t plan for their long-term future at all. And a further quarter (25%) think less than six months ahead. Five years was the furthest that most people (29%) currently plan for.

The causes of this short-termism are many, the report says, including a surfeit of choices and a subconscious view that by opting for one we limit our own freedom. Another factor is that thinking about our long-term future creates anxiety, which we treat with instant consumption.

How do we deal with it? The report recommends a number of strategies, such as imagining the most positive outcome from a change in our financial behaviour and consciously thinking about the biggest obstacles to our getting there.

Social support is important

Another underrated technique is galvanising social support around our goals from friends, family and professional advisers. The need, as Munger says, to wait patiently, to not do stupid things and to stay focused on a long-term goal is hard to do alone.

But the first step is setting the goal and building a plan to achieve it.

You can download the full MoneyFarm report here.

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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.

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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.

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Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

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2019 will doubtless go down in history as the year that Britain became obsessed with Brexit. Just now, there seems to be no escaping it. But is the media’s fixation on relations with Europe obscuring the fact that Britons are becoming increasingly concerned with a potentially far bigger issue? Climate change.

A survey in July by ComRes, commissioned by Christian Aid, found that 71% of the UK public think that, in the long term, climate change will be more important than exiting the EU. Six out of 10 adults said the government was not doing enough to tackle it.

In fact, several polls in the last year or so have produced similar results. An Ipsos MORI survey for the Evening Standard, published in August, for example, showed that 85 per cent of adults are now concerned about global warming. That’s the highest figure since the pollster started asking the question in 2005.

The impact of news coverage

What has caused this shift in opinion? Well, climate change has certainly featured prominently in the news. We’ve seen heavily publicised demonstrations by Extinction Rebellion in London; 16-year-old Greta Thunberg hit the headlines when she sailed to New York on a zero-carbon yacht to New York to address world leaders at a climate change summit; and the hottest July ever around the globe reinforced concerns that the effects of global warming are starting to escalate. 

In truth, however, opinions were changing before any of those news stories broke. Responding to a survey commissioned by the Department for Business, Energy and Industrial Strategy (BEIS) and published in March this year, 80% of the public said they were either fairly concerned (45%) or very concerned (35%) about climate change. The overall proportion of the population concerned about the issue was the highest since the study started in 2012.

It’s not just women and young people

Another interesting takeaway from these surveys is that old stereotypes appear to be breaking down. For example, a long-held view is that those most concerned about environmental issues tend to be either young or female. It’s still true that marginally more women express concern about global warming than men, but according to both the Ipsos MORI and BEIS polls, the gender gap is narrowing. Both studies also showed that levels of concern with climate change do not differ greatly by age.

Of course, we shouldn’t be surprised that the views of younger and older people are less polarised now than they were, as the older generation dies off. But academics have been pointing out for several years now that older people are actually more interested in environmental issues than is often assumed. 

In 2013, for example, a study called Age and environmental sustainability: a meta-analysis collated the results of multiple studies between 1970 and 2010, in order to “determine the magnitudes of relationships between age and environmental variables”. The researchers found that “most relationships were negligibly small”. They also concluded that “small but generalisable relationships indicated that older individuals appear to be more likely to engage with nature, avoid environmental harm, and conserve raw materials and natural resources”.

Walking the walk

That last finding is particularly significant. After all, it’s one thing to be concerned about the environment and quite another to do something about it. Studies have shown that, very often, people who claim to have green credentials fail to match their words with action. 

Another area in which older people are more likely to act in an environmentally sustainable way is in investing. Around the world, it’s generally the over-55s who are contributing the most to the sustainable investing market. Triodos Bank predicts they will continue to do so in the UK in every year until 2027.

Summary

In short, all the evidence appears to be pointing to an increase in interest in the environment and to a growing willingness to act on it. Nor is it just certain sections of the population whose attitudes are changing. 2019 may just be the year that, in Britain at least, the tide of public opinion finally turned on climate change.

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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.

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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!

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DNA testing used to be something distant and scientific that cropped up in TV crime series like CSI: Crime Scene Investigation or in family dramas where a child’s parentage was in doubt. Today it’s perfectly easy, and relatively cheap, to send away for a kit to check out our own genetic makeup.

You might think about doing this because you want to know more about your family background, having binge watched a programme like Who Do You Think You Are? Or perhaps you're curious to know whether you have the gene for certain diseases or conditions.

Exploring your family history is usually a benign activity, unless it uncovers an unsettling family secret. But digging into the health aspects of your genome just because you’re curious – rather than for clinical reasons, under the advice of a doctor – could be ill advised.

That’s not just because there have been doubts in the past over the reliability of commercially marketed testing, or because the psychological and medical impact of a worrying finding is better handled when the testing is with the knowledge of your doctor. It’s also because such tests can have consequences for you as a consumer of life insurance products such as death, trauma and income protection. 

The question to consider before undertaking a medically focused (but optional) genetics test is whether you’d have to disclose the results in any future life insurance application.

This is especially important if you’re younger and haven’t yet taken out such cover. When you do decide to apply for this sort of insurance, the insurer will ask a range of questions aimed at assessing the degree of likelihood they’ll have to pay out in the future.

One question will be about pre-existing conditions. Another may be the catch-all ‘anything else we should know about’ question that insurers ask as they decide who and what they’ll cover. Your ‘duty of disclosure’ could mean you have to share the results of your genetics test at the time of application, or whenever you change your contract.

If the testing has shown you have the potential to develop a particular disease or condition, the insurer may decide to charge you a higher premium because you’re a higher risk. 

The rules differ depending on where you live, with some countries banning or restricting life insurers’ use of genetic results but others still permitting it. So, ask these questions of your insurer or local consumer agency before you go ahead with a genetic test:

• I may apply for a life insurance product one day. Will I be legally required to disclose all genetic test results to the insurer?

• I already have life insurance. In what circumstances would I be required to disclose new genetic test results – for example, if I wanted to increase my cover?

• I already have life insurance. Is it ‘guaranteed renewable’ – that is, once I’m covered the insurer can’t change the contract just because of new information?

Never be deterred from taking a test your doctor advises is necessary. But if it’s just curiosity getting the better of you, make sure you’re fully informed about the potential financial impact of sending off for a DIY genetics kit. 

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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.

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There’s a well-known phrase that’s often used when the topic of budgeting comes up: “Watch the pennies and the pounds will take care of themselves.”

It’s true that small expenses — a posh latte here and a takeaway there — do add up. But the outgoings that people really need to focus on are the major ones. In most cases, it’s what they spend on their homes and cars which has the biggest impact on how much money they have left at the end of each month.

In other words, it’s far more important look at the pounds (and the hundreds of pounds) you’re spending before the pennies.

But, as the financial writer Andrew Craig explains to Robin Powell in this video, the first step to taking control of your expenditure is to start a spreadsheet showing all the money you spend each month.

It doesn’t matter how big your income is; if there’s more money going out than you have coming in, you could be heading for trouble.

This is one of many videos you will find on the IFAMAX YouTube channel. They cover a wide range of subjects, from investing to sustainability and personal finance. We’re regularly adding new videos, so why not subscribe to ensure you keep up to date?

Video transcript:

It’s well documented that, all over the world, levels of financial literacy need improving.

The good news is that, by investing a modest amount of time in researching this subject, you can improve your finances substantially.

Andrew Craig runs a financial education website called Plain English Finance. He was inspired to start it while working in the City of London.

Andrew says: “One of the things that really came home to me in doing that was, even people in the city had a really kind of bad nuts-and-bolts understanding of their personal finances. What is an ISA? What is a pension? What are stock markets? What’s inflation? What are interest rates?

“I started Plain English Finance as a sort of angry young man, as a reaction to that. And our guiding principle ever since I did that has really been to improve the financial affairs of as many people as we can.”

What then, according to Andrew, are the most important personal finance rules to follow?

He suggests there are two main ones.

“Rule number one is: don’t spend more than a third of your income on your house — which is something that sounds a bit crazy to people these days because we’re so obsessed with homeownership in Britain — because rule number two is: you should basically always invest ten percent of your income in investment products that aren’t your house. And a lot of people, in spending vastly more of a third of their income on a roof over their head find that they then can’t afford to save and invest ten percent of their money in investments.”

Saving or investing ten percent of what you earn can be a challenge.

The best way to tackle it, says Andrew, is to start a spreadsheet showing all your monthly outgoings.

You should then focus on trying to reduce the biggest numbers.

Andrew says: “Rather than trying to save money on how many cappuccinos you buy everyday... or, you know, going to Lidl instead of Waitrose... which is all very laudable; actually, the single easiest way... there are two things that are very easy to change if you’re willing to live in a less fashionable neighbourhood and perhaps a slightly smaller house or flat, is — number one — the biggest number is invariably the roof over your head.

“And then the second one down the spreadsheet from that tends to be cars. Too many people... dare I be slightly sexist, particularly men, rush to buy a really flash, expensive car prematurely.”

For more tips on keeping your finances in shape, you can always visit Andrew Craig’s website.

You’ll find it at plainenglishfinance.co.uk.

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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.

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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.

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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.

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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.

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Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way