Investments made easy

1. 16
THE CREDIT CRUNCH has
become synonymous with bad
news: banks have reduced
profits; some banks have been
swallowed up by other banks
(or Government in the case of
Northern Rock) due to their
reckless practice making global
stock markets volatile; the
American and European central
bank (and, to a lesser extent,
the Bank of England) have
pumped huge amounts of
money into the world financial
system to provide money
(liquidity) for the banking
system; and rumours abound
(HSBC shares were temporarily
suspended in March).
All this bad news does not
mean that the global economy
is going into meltdown with us
ending up bartering for food
with cigarettes, as in Germany at
the end of the Second World
War. What it does mean,
though, is that if you have
invested or are investing in the
stock market or in residential
property you need to make some
smart decisions now to ensure
you take advantage of the
current investment climate. It
pays to seek professional advice.
Now is a great
opportunity to invest
There is no doubt that for at
least the next 12 months
global stock markets are likely
to remain volatile (displaying
erratic up and down
movements). This means that
your pensions, ISAs, PEPs, trust
funds and other investments
are going to have fluctuating
values, providing you with
either concern or with an ideal
investment opportunity.
When markets are likely to
fluctuate in a downward
direction you may consider
that it is a good time to buy.
Not knowing when these
fluctuations will be by simply
phasing your investment into
the market for a fixed period
over the next 12 to 18 months
should prove profitable in the
long-term.
You still need to make
decisions as to which markets
and sectors to invest in.
Warning: at present, using past
performance data only to
select investments will almost
certainly guarantee disastrous
future results. Why? – because
the top performers of the last
few years have managed to
achieve that performance in a
fundamentally different
investment climate.
Identification of likely
future out-performance
requires highly sophisticated
and time-intensive analysis of
performance data and fund
manager styles. Looking at past
performance in isolation
provides minimal value,
especially when you realise
that the turnover of fund
managers is substantial, and so
the past performance you are
looking at may well have been
gained by a previous fund
manager.
In November 2006 I read a
report in the FT which
outlined how, in 2006, more
than 50% of UK equity fund
managers and more than 60%
of fixed income fund managers
had moved, compared to 62%
and 70% respectively in 2005.
This information is not shown
in past performance tables and
fund management groups are
unlikely to tell you this in their
literature.
It is also important to
remember (for the more
concerned among you) that
there are only two occasions
when you need to consider the
price (value) of your
investment; when you buy and
when you come to sell. The
price in between is immaterial.
This is an important concept
to understand as many private
investors make the mistake of
buying on a high (riding the
wave of positive sentiment)
and then selling at the low
(riding the wave of negative
sentiment). This is where
professional guidance and
advice becomes invaluable.
Back to basics – Why
invest in the first place?
Before we consider some
investment fundamentals, let’s
take a broader view of why you
are investing. Did you know
that over the period 1901 to
2002, the life expectancy of
women has increased by 32
years and of men by 31 years¹;
and there has been an increase
of approximately eight years
over the last 30? Life
expectancy is still increasing as
technology develops and the
medical profession
understands more about the
human body and disease. My
point? Your savings are under
pressure to work harder for you
– and for longer.
Did you know that in
Britain we have the worst state
pensions in Europe² and that
1.2m pensioners in the UK rely
on state pensions alone³?
Inflation becomes a critical
consideration, then, when
deciding where to store and
protect your savings. At a 3.6%
inflation rate, the purchasing
power of your money halves
every 20 years. From 1900 to
2007 there was an average
annual inflation rate of 4%
compared to bank deposits of
5%4, providing a positive real
return of 1% p.a.
This is a precarious return
as research also shows that as
you get older (due to the types
of purchase that you make),
your personal rate of inflation
increases disproportionately;
therefore you are likely to
suffer a higher rate the older
you get, putting your savings
under more pressure5.
Stock market returns
If you consider the same time
frame of 1900 to 2007, the UK
CREDIT CRUNCH CONUNDRUM
Although global stock markets are likely to remain
volatile for some time to come it is nonetheless a good
time to invest – as Ivor Kellock, the prime mover behind
Kellock Wealth Management explains.
INVESTMENT NEWS
Time If Inflation 5% return 9.7% return
Years is 4% p.a. real p.a. p.a.
required value
5 £12,167 £12,763 £15,887
10 £14,802 £16,289 £25,239
15 £18,009 £20,789 £40,096
20 £21,911 £26,533 £63,699
25 £26,658 £33,864 £101,197
30 £32,434 £43,219 £160,768
35 £39,461 £55,160 £255,407
40 £48,010 £70,400 £405,756
Using the above data applied to £10,000 projected forward

2. 17
INVESTMENT NEWS
WHAT INVESTMENT DECISIONS
DO YOU NEED TO MAKE?
St Albans
01727 870613
www.kwm.cc
ivor@kwm.cc
Kellock Wealth Management is a trading style of
Trinity House Financial Planning Limited – Highland Suite,
Great Hollanden Business Centre, Mill Lane, Underriver,
Sevenoaks, Kent TN15 0SQ – which is authorised and
regulated by the Financial Services Authority.
Registered in England No: 4740530
Registered Address as above
stock market provided an
average annual return of 9.7%
p.a.4; this was 5.7% pa more
than inflation and 4.7% p.a.
more than bank deposits. You
can see in the table (to the right)
the significant difference this
would make to your savings
over the longer term:
You can also deduce from
this that to create a sum of
money in the future, you will
need to invest less if you are
achieving a higher rate of
return; and also that investing
in the real economy is likely to
provide superior returns over
bank deposits. Planning for
school fees is a perfect example
of this due to school fee
inflation historically running
ahead of RPI.
What is the longer term?
If you accept the premise that
over the longer term you are
likely to get better returns from
the stock market, how do you
define the long term? Fidelity
(one of the world’s largest
investment fund houses) has
conducted some research on
this. They examined
cumulative returns for the
FTSE – A All share index and
MSCI World Index, taken over
all eligible periods of one, five
and 10 years at one month
start intervals, from 1.12.82 to
3.12.07. The table below shows
that while all time periods
showed a good level of profit,
it was only over the 10 year
time periods that a profit was
made 100% of the time.
Source: Fidelity Investments.
Sterling (with dividends re-
invested, net of basic rate income
tax). Returns do not take into
account dealing costs
It is important to
remember that past
performance is not a guide to
the future, but this is a
compelling argument
suggesting that you would
expect to make a gain over 10
years.
Comparing stock market
and bank deposit returns,
Barclays Capital has compared
five and 10 year returns since
1945. Up to the end of 2006
there were 52 discrete periods.
Of all the five-year periods,
investments in the UK stock
market provided superior
returns for 39 out of 52
periods; and over 10 years for
50 out of 52 periods.
The reason for this is
simple. You are investing in
businesses in the real economy
that primarily aim to make a
profit, but most importantly
also aim to share some of that
profit with you in the form of
dividends. This provides you
with two separate profit
opportunities; the opportunity
of capital appreciation, and the
actual money received
(assuming a dividend is paid).
Deposits only provide one
profit result – interest.
This point can also be
illustrated by taking another
look at the period from 1945 to
20066. Approximately one-
third of the overall return from
this period of investing in the
stock market came from
dividends received and
reinvested. £100 invested in
1945 was worth £107,609 at
the end of 2006, compared to
£7,367 without dividends
received and reinvested. This
also compares favourably to
inflation (£2,647) and deposits
(£1,709).
So investing in the real
economy with income and
capital growth over the longer
term is likely to provide you
with more savings and protect
you from inflation. Some
investors try to be clever; by
coming out of the market
when it’s going down, and get
back in just as it starts going up
again. Surely this makes sense?
This is called market timing
and, yes, if you get it right it
can significantly add to your
portfolio returns. However,
the problem is that because
markets are unpredictable, it’s
just as easy to get the timing
wrong. Just as the sharp falls in
stock markets tend to be
concentrated in short periods
of time, the best gains are
similarly concentrated.
Because these gains often occur
just before or after a market
fall, you are likely to miss the
best gains if you follow the
herd. This suggests that now is
a good time to invest for the
long-term. Time in the market
– and not timing – is the
critical point here.
Fidelity has done some
research on this too, looking at
five major world stock markets:
see table above.
Timing the market is
difficult to get right, aptly
illustrated by some high profile
hedge funds going into
administration recently,
completely misreading the
market. Consider further
research that shows that as a
species we have the ability to
ignore relevant facts, to
overestimate our own ability,
to have bias in our judgment
and decision-making and to
have difficulty assessing our
own interests and true wishes.
This has been sometimes
described as cognitive
illusions7. If you have difficulty
believing this we have a
questionnaire that will
highlight this for you – please
email me for copy.
Like visual illusions, the
mistakes of intuitive reasoning
are not easily eliminated from
the mind, to the extent that
you may not even see them
happening. Decisions made on
this basis can end up becoming
costly and painful, thus
putting professional
investment advice further up
the hierarchy of must-haves as
part of your plan for future
prosperity.
Consider, too, that in the
UK alone there are over 2,500
publicly quoted companies8
and nearly 3,000 funds
available from 133 different
companies9. The fund universe
expands to over 10,000 from
4,000 managers10 if you look
further afield to European
funds.
Residential property
The credit crunch seems to be
affecting the residential
property market too. The great
British press, always quick to
paint a negative picture, have
done a marvellous job so far.
True, many of the UK sub
prime lenders have pulled out
of the lending market (due to
the impossibility of raising
funds), making it more
difficult for non-standard
mortgage applicants to find a
mortgage. True, the house
price indices over the past two
quarters have shown nil or
negative growth. Indebtedness
in the UK is at record levels
and repossessions are on the
up. Should this make you
worry about the UK housing
market as a home owner or
investor? Are we heading for
an early 90s type of property
slump? The simple advice here
is to proceed with caution and
not to purchase without very
careful consideration.
The key factor to consider
for the next 18 months or so
will be interest rates. Before the
credit crunch emerged last
summer, research showed that
base rates needed to rise to
8.5%11 to put enough
homeowners under enough
pressure to struggle to keep up
their monthly mortgage
payments. Indeed, interest
rates since August 2005 had
been creeping up due to
general economic inflationary
pressures.
Since last summer, though,
interest rates have been
reducing and the money
markets are currently
predicting interest rates to be
1% lower12 than they are now
by this time next year. Be wary
of making decisions on this
information alone, as these
predictions are based on
information today and are
vulnerable to the slightest
change in economic data and
sentiment.
In fact, interest rates
should still be going up as
inflation is running outside the
target set for the Bank of
England. Interestingly,
mortgage borrowing rates
haven’t necessarily followed
suit, so there is already
growing pressure on
household debt affordability.
The two most likely
outcomes for the housing
market over the next couple of
years of either negligible
growth or of a downturn are
fairly evenly balanced. The
worst case scenario of a
significant downturn fuelled
by repossessions could happen
but may be a couple of years
away. Fixed rates for existing
sub prime borrowers may not
come to an end for a year or
two, but they may then find
that their variable rate is
beyond their means - and with
fewer sub prime lenders in the
market to switch to, they could
end up in financial difficulty.
If you are looking to buy
your main residence, then
affordability is crucial; factor in
a 2% rate rise and see how
affordable it is then. If it’s a
buy-to-let property, careful
consideration of rental yield,
interest rates, costs, occupancy
rate, the local micro economy
and your appetite for being a
landlord all need to be
thoroughly thought through.
How we can assist you
In conclusion, then, there is no
one right place to invest. The
right investment strategy for
you is unlikely to be right for
someone else. Your individual
circumstances (both financial
and family) will differ, as well
as your personal tolerance for
risk and reward. We have
access to a Nobel Prize winning
formula and award winning
investment managers, whilst
regularly monitoring and
reviewing your portfolio to
ensure it continues to match
your objectives.
Sources:
1 Office of National Statistics
2 Daily Mail 12/11/07
3 DWP 06/07
4 Global Investment Returns
Yearbook 2008
5 Prudential, Newcastle Building
Society, Alliance Trust Research
(independently)
6 Barclays Capital
7 Journal Of Portfolio Management,
Vol. 24 No. 4, Summer 1998
8 FTSE
9 Investment Management
Association 02/08
10 Citywire
11 Alliance & Leicester
12 Barclays Commercial
Time UK Global
Years
1 81.7% 76.8%
5 85.5% 82.6%
10 100% 100%
Average Annualised Returns over 15 years – effect of missing best days
Ivor Kellock, the prime mover
behind Kellock Wealth
Management
Market Index Stayed Best 10 Best 20 Best 30 Best 40
Fully Days Days Days Days
Invested Missed Missed Missed Missed
UK FTSE All Share £ 9.84% 6.89% 4.71% 2.78% 1.06%
USA S&P 500 $ 10.63% 7.20% 4.57% 2.28% 0.32%
Germany DAX 30 € 11.46% 6.65% 3.06% 0.21% -2.28%
France CAC 40 € 11.02% 6.65% 3.56% 0.90% -1.43%
Hong Kong Hang Seng HK$ 15.04% 8.44% 4.41% 1.01% -1.90%
All figures show annualised, total returns, taken from 15-year periods, starting each consecutive month, from
30.11.92 to 30.11.07, in local currency terms. Source: Datastream as at 3.12.07. Basis: bid-bid with net
income reinvested. These returns do not take into account initial fees.
Percentage of Time Periods
Showing Increase in
Investment