There was a time, before the Global Financial Crisis, when the job of the central banker was relatively straightforward.
Market timing is an investing strategy where investors move their money in and out of the market to try and avoid losses before they happen and buy-in at the bottom after the market has crashed. It’s the well known tactic of ‘buy low and sell high’. It all sounds fine in theory, but timing the market rarely works in practice. Let’s explore why. What goes wrong? Market timing strategies are usually put in place when the market is high. People think that ‘what goes up, must come down’ so they panic. But there is also such a thing as momentum. If shares have been rising, they can continue to rise for some time. The risk of trying to time the market is that you may sell too early and buy back in too late. This could result in your money being out of the market at the very time that it surges, meaning you would miss out on the best performing months. Investment managers Schroders have researched the performance of three indices that reflected the performance of the UK stock market, the FTSE 100, the FTSE 250 and the FTSE All Share. They found that if you had invested £1,000 in the FTSE 250 at the beginning of 1989 and left the investment untouched for the next 30 years, it might have been worth £26,831 by the end of that period (N.B past performance is no guarantee of future returns). If, however, you had tried to time the market and missed out on the 30 best days, the same investment would have been worth £7,543 – a difference of £19, 288 (with no adjustment for charges or inflation). Take a look at the different results: 11.6% per year if you stayed invested the whole time 9.6% per year if you missed the 10 best days 8.2% per year if you missed the 20 best days 7.0% per year if you missed the 30 best days The difference in percentages may seem quite small but when you consider the compounding effect over the years, it becomes quite substantial. Successful market timing is only possible if you know exactly when to pull your money out of the stock market and when to put it back in. And none of us has a crystal ball. So why is it tempting? Rationally, we know that it’s exceptionally difficult to time the markets. We know that volatility is just part and parcel of investing. We know we should be in it for the long haul but it’s difficult not to make a knee-jerk reaction, if we think the markets are going to plummet. As humans we suffer from cognitive biases, one of which is loss aversion. We hate losing more than we love winning. So if we look at the market and fear there is going to be a major crash, it’s very difficult to sit back and watch our hard-earned money disappear. Sticking to a long-term investment strategy takes discipline and courage. We’re also prone to overconfidence. Even if we know deep down that market timing rarely works, we’re tempted to try and prove otherwise. We’ll be the exception to the rule, we tell ourselves. Time in the market There is always going to be some risk in investing in the stock market. That’s why the returns are higher than with something like government bonds. But trying to avoid the inherent risk of investing through timing the markets can open up even more risk. Some years will inevitably be worse than others but the example above shows that time in the market is more significant than timing the market. A long-term investment strategy is likely to win out over dipping in and out. If you’d like to discuss your investment strategy with us in more depth, do get in touch. Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
The daffodils and crocuses are beginning to appear, the trees are blossoming and the days are getting lighter. Spring is definitely on its way. Traditionally, this was the time to do the big annual household clean. Now that fewer homes are heated by coal fires, with all their soot and grime, this is no longer so necessary. Nonetheless, a thorough de-cluttering and re-organisation of our homes can still reap great rewards. And our finances too will benefit from a good shake-up every now and again. Review your budget It’s great to have a budget to track your spending but it’s all too easy to set one up and never really look at it again. So now’s a great time to dust off those spreadsheets and review each line. Have certain expenses, such as your utility bills or Council Tax, increased? Do you plan to make greater pension contributions? Have other commitments decreased? Maybe you’ve paid off a car loan or cancelled a gym membership? Make sure your budget is a living, breathing document that is accurate and works for you. Jettison old accounts Accounts can soon mount up so take a good hard look at those in your name. Try and consolidate as many as possible. Maybe you tried a new bank but didn’t particularly like their service so changed back but never actually closed it. This is the time to clean up any unused bank, building society or credit card accounts. Tidy up your paperwork Reducing the number of accounts you hold will have the bonus of reducing the amount of paper you receive. Admittedly, many banks are now only offering online statements but you’ve no doubt accumulated masses of paperwork over the years. Go through all your files and see what you can get rid of. Strive for the ‘paperless study’ and scan any key documents. As a general rule, you should keep tax-related paperwork for seven years or if you’re a business owner, for even longer. But if you find you’ve got personal tax documents that go back over a decade, it’s time to shred! De-cluttering can feel like a breath of fresh air. A word of warning, though: it can also be a bit of a rabbit hole. Don’t spend too long exclaiming, “Look how little such and such used to cost!” Start rolling your debt snowball It may seem odd to be mentioning snow when we’re thinking about spring but if part of your new approach is to get rid of any debts, the traditional ‘snowball’ method can be helpful. Pay off your debts starting with the smallest balance first and build up to the largest balance last. Each time you pay off a debt, you roll that debt’s minimum payments into your monthly snowball payment. By the time you reach the debt with the highest balance, you’ll have amassed quite a weighty amount of money to throw at it each month. Do some estate planning As well as discarding some of the past, spring cleaning is also about preparing for the future. In the home, it alerts you to things that may cause a problem in months to come; a leak in the garage, a cracked tile in the utility room. Financial spring cleaning is just the same. It allows you to take stock and plan for the future, for yourself and your loved ones. So if you haven’t looked at your estate plan for a few years, take the time now to consider if everything is in place.
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The Financial Conduct Authority in a recent feedback statement, highlighted the fact that there is currently £470bn held in non-workplace pension schemes, such as individual personal pensions and stakeholder schemes. Of these, some 89% of personal pensions and 44% of stakeholder pensions are in schemes that are closed to new business; unloved you might say. In most cases, the schemes are paid up, with no continuing contributions being made. Providers that have ceased activity in this market have outsourced the administration of their ‘business book’ to consolidators such as Phoenix and ReAssure who are committed to looking after the policies and funds, but because they are not actively looking for new business, have no compelling reason to be competitive investment-wise. As a result, and over a long period now, these unloved pensions have trundled along, generally on a non-advised basis until such time that the policyholder decides to retire and calls upon the provider to illustrate how the benefits might best be drawn. At which point, usually to be told that the provider doesn’t give advice and the policyholder should look for a financial adviser. But it doesn’t have to be this way. Most financial advisers will undertake a review of these unloved pensions to identify: • What features and benefits apply to the pension policy • Identify what charges are being taken by the provider • Highlight any beneficial guarantees that may apply • Explore the benefits of consolidating small pension pots together • Advise on the best ways to draw the pension at retirement. As pension specialists, Winshaw’s is no different, we will carry out an initial appraisal at no cost and highlight any ‘safeguarded’ that may be contained within the policy, such as guaranteed annuity rates, higher lump sum entitlements etc. So, if you have policies that you’d like reviewing, contact us by phone or email.
When it comes to saving for retirement, most people working within the private sector are likely to have a defined contribution (DC) pension. This essentially provides you with a savings pot you pay into throughout your working life; these savings grow over time through compound interest and tax relief and are, in most cases, only drawn upon once you retire. However, those working in the public sector, such as the NHS, the police and state education, instead have a defined benefit (DB) pension which works under an altogether different system. Rather than a pension pot which is paid into by you, DB pensions depend upon three factors: your pensionable service, calculated through how long you have been a member of the pension scheme; your pensionable earnings, which is decided either through the salary you are earning at the point you retire, or the average salary you’ve earned during your membership; and the accrual rate of your scheme, which dictates the percentage of your salary you’ll receive per year of service. In the past, the DB pension schemes of the public sector were envied by those in the private sector. However, the introduction of pension freedoms has seen something of a reversal of fortune for those with DB pensions. Pension freedoms have allowed those with DC pensions to withdraw lump sums from their savings pot but as those in a DB pension scheme don’t have a savings pot, they’re unable to do this. It’s for this reason that some people consider transferring their DB pension to a DC pension scheme. For those in the public sector whose pensions come from taxpayers money and not a central fund (known as ‘unfunded’ schemes), this isn’t possible, for the simple reason that the money isn’t available to them until they retire. However, ‘funded’ DB pension schemes, such as local government pensions, are paid from a central fund and therefore can be transferred. It’s worth noting that transferring from a DB to a DC pension scheme will likely leave you with less money in your pension savings, as the amount you will be able to move is dependent upon the transfer value of your DB pension. Some employers do offer transfer incentives such as enhanced transfer values or cash payments, however, which may make transferring more attractive. The main benefit of transferring is the ability to take advantage of pension freedoms, so if you have plans for what you want to do with a lump sum then taking a hit on your monthly pension amount for potential benefits later on can be worthwhile. If you don’t have plans to take a lump sum, however, then remaining in your existing DB pension scheme may be the safer bet. Any decision regarding your pension should be taken with financial advice; for more information, please feel free to get in touch with us directly.