Welcome back, Dear Reader, to the latest quarterly missive from Nick Lincoln. This edition has FIVE articles.
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MIND THE GAP
“NICK: OUR PORTFOLIOS JUST SEEM TO GET THE MARKET RETURN: REMIND ME WHAT I’M PAYING YOU FOR!”
In my two decades and counting (!) of dispensing financial advice, I’ve seen a broad swathe of advisers come and go. As a profession, we have moved forward massively in that time. Nevertheless, a number of financial advisers are still well-intentioned busy fools.
Furiously peddling faster and faster to go precisely nowhere, these deeply unhappy men (for they nearly all are men the same way that nearly all teachers are women. Cry me a river: I don’t care) - work ridiculous hours trying to please a clientele who can never be pleased.
Why? Why would you try and make people happy who are impossible to make happy?
Because some advisers - to capture the client - make well-intentioned promises that are near-impossible to deliver on. And having lured the client onboard (or rather, the client’s dosh) said advisers have to endlessly prove that what was promised at outset is deliverable. Classic untruths include:
“We can help you outperform the market. Our value comes in picking star fund managers.”
“Our Economic Committee will help us navigate choppy waters. We constantly position your portfolio to take advantage of prevailing economic headwinds.”
Having made the above rods for their backs, the advisers have to do just enough all the time to prevent the always slightly unhappy clients from walking. This probably involves endless emails and investment updates involving graphs. Beware the adviser who uses graphs like confetti: such people, whilst not evil, should not be left alone with minors. Just sayin’
““People with a financial plan tend to act in accordance with that plan; the plan guides their investment principles and hence portfolio construction. If the plan doesn’t change, the portfolio doesn’t change.
People without a plan - in my opinion (and yes, it’s self-servicing, I confess) - react to events (see: Ukraine) or chase past performance... These saps are like rudderless boats on the ocean, tossed this way and that by the prevailing storm of the day.”
In my experience, clients of these advisers don’t have an overarching financial plan (absolutely disastrous) and consequently manage to underperform their own investments through constant bad behaviours, often egged on by their adviser, desperately trying to add value by being seen to be doing “stuff” with client portfolios.
In short, most people - whether they have an adviser or not - don’t get the market returns that are laying there, waiting to be picked up, by the patient, plan-focused, well-behaved investor.
That’s a bold statement, Nick. Where’s the proof?
Research from Wells Fargo and Dalbar Inc suggests that over the thirty years to the end of December 2020, whilst the S&P500 (“The Great Companies of The USA”) delivered an annualised return of 10.7%, the average US investor investing in US-focused funds achieved 6.2% per annum. (Note: in my short video message later on I talk about why I refer to the USA so much in these essays.)
See, ahem, the graph bar chart below.
This is the so-called “Behaviour Gap”, the space between what investors could get and what they do get because of their improper behaviours (and expensive fund management fees but that’s for another day).
Over the last 30 years, that gap is a whopping 4.5% per annum.
To answer the sub-heading above, you are paying me to stop you from falling into the Behaviour Gap. If you can capture the broad market returns that are waiting for you, you will not only be outperforming the vast majority of other investors, you will be giving your financial plan the best chance to reach an optimal outcome, where the money outlives you in retirement.
You are paying me to
hone and craft your Financial Master Plan and then
keep you on that plan when the whole world wants you to cave in and capitulate during the seemingly endless "Catastrophe-of-Catastrophes"© that will besiege us in a typical three-decade retirement.
I stand (or fall) between you and The Big Mistake. Be that going into crypto just as the less dumb money floods out. Or trying to time the next bear market or five.
If you make enough Big Mistakes, you are going to fall into the Behaviour Gap. And when you do, at some stage in retirement, the money runs out. And you have to ask the kids for a handout.
BRICKS AND TORTURE
MORE INTEREST RATE RISES ARE COMING. PROPERTY INVESTORS SHOULD TAKE HEED.
Does any nation on earth have more love for property than the British? Aside from the weather and grumbling about Boris, nothing unites our conversations more than a good natter about how much the neighbour’s house went for last week: “It’s unbelievable really. And it only has one en suite and we’ve got three, so ours has to be worth a lot more.”
Disclaimer: such conversations bore me rigid. I have no affinity for property: a home is somewhere to live. If it appreciates over time, great. Turns out that property price gains are largely a function of time and are often not as impressive as first thought.
Without a doubt, property as a standalone investment (eg rental or “Buy To Let”) has attractions. I have several clients who have built up buy-to-let property portfolios. The income (rent) from these is helping them fund some or all of their retirement income needs, together with State pensions and other bits and bobs.
Good for them, say I: these people have (in the main) eschewed traditional retirement income sources (personal pensions, ISAs etc) for the lure of bricks and mortar. That’s not a route I would go down BUT it’s way better than doing nothing in terms of retirement income planning.
And, for the last three decades, or so, buy-to-let (BTL) investing has provided strong returns via a combination of rising property prices and continual rental income (the occasional dodgy tenants notwithstanding).
Miss Jones, Rigsby and Philip discuss the pros and cons of property investing.
But that could be changing. An FT article of 29th April 2022 (behind a paywall but bizarrely copied and pasted here with nary a revision) suggests the good times could be coming to an end, as the UK government belatedly tries to deal with the inflation problem largely caused by the same government printing money during The Great Overreaction of 2020-21. Note: the media will try and blame the return of meaningful inflation on Putin: don’t believe it. It was back in the system before Vlad got all possessive over Ukraine.
Governments have one crude method to try and reduce the rate of inflation, by raising interest rates, making money more expensive and effectively strangling the money supply. The Bank of England has raised the base rate from 0.1% to 0.75% since December 2021. Further rates are more than likely (“Lincoln is making a prediction. Mark it down and call him out later if it doesn’t happen.”)
As and when these future base rate rises occur, the outlook for BTL investors becomes commensurately less rosy. The Tory government introduced taxation reforms in 2017 that already made BTL investing more problematic. These changes reduced the net return for BTL investors.
Most BTL investors are heavily mortgaged. As and when interest rates rise further, those mortgage costs will also rise, further reducing any residual profit from rental income, and perhaps wiping it out entirely for higher-rate taxpayers.
Coupled with the 2017 reforms this could in turn lead to disenchanted BTL investors looking to sell their rental properties en masse, helping to drive down the prices of said properties, and reducing sale profit (itself then subject to Capital Gains Tax).
There are a host of assumptions in the above. Maybe rates will remain at 1% for years. But, honestly, in your heart of hearts, does that seem likely, with inflation currently north of 7% per annum?
If the base rate reverts to its “normal” historical average of somewhere around 4-6% then the maths for BTL investors becomes decidedly sub-optimal.
BTL investing has been a superb source of wealth creation over the last 20+ years. But things tend to work in cycles. And this particular cycle could be about to come off the road - hard.
“The hardest thing in the world to understand is income taxes.”
SUMMER PRACTICE UPDATE
OF PLATINMUM JUBILEES, air travel, and weddings!
Nick Lincoln, IFA and owner of V2VFP Ltd
The recent celebrations seemed to be enjoyed by almost everyone. I’m no ardent monarchist: the Queen is terrific, and Princess Anne quietly does a lot of good stuff but as for the rest of them… however, it was lovely to see the street parties and village fairs.
The weather was pretty decent for most of it. But, of course, it’s not guaranteed blue skies on this sceptred isle, which is why we suffer the indignities and small humiliations of modern air travel.
If you are going to warmer climes I hope your travel is as painless as possible. I’m off to see my parents in Spain shortly - for the first time in over three years - and whilst I’m very excited, I’m trepidatious about the whole getting there (Ryanair) and back (EasyJet) shenanigans.
The Lovely Penelope (TLP) and I are set to tie the knot in July. We are having a very small ceremony at the local registry office with our boys as witnesses. As I said to TLP, getting married makes sense from an Inheritance Tax point of view. And they said romance is dead!
I won’t belabour the point but I am the luckiest chap on the planet and she must have a screw loose.
I hope all is well with you and yours. Speak soon.
An eagle-eyed reader has noted that in the video below I say we’re in 2002. And the picture quality degrades towards the end. Sorry, don’t know why that happened.
“Modern slaves are not in chains. They are in debt.”
A BEAR IN ALL BUT NAME
MARKETS HAVE DECLINED A FAIR BIT IN RECENT WEEKS. BUT NOT ENOUGH FOR A “YOU-KNOW-WHAT
As I type, the S&P500 (“The Great Companies Of The USA”) stands at around 4,100. At its peak at the end of 2021 it was at 4,797. So it’s experienced a temporary decline of 15% or so (for the declines are always temporary, just as the advance is always permanent).
A couple of weeks ago it was nearly down 20% from the end-2021 high. It looked like we were entering “bear” territory. Sadly for geeks like me who like to record such things in spreadsheets, we never got to that magic number.
Of course, we still can! If the S&P falls to 3,838 or less by the time you read this, then we will be in another bear market. And they are common, more common than perhaps you would imagine.
And - let’s be honest - if you’re investments decline in value by 19% or 20% does it make a stack of difference as to how you feel as to whether we’re in a bear market or not? I would hazard “No”. Your investments are still down a fair wedge, temporarily or not.
So, seeing as we can’t call 2022 thus far a bear market quite yet, let’s just review how common it is for the prices of the Great Companies to experience double-digit declines or “drawdowns”.
Since 1928 there have been 57 (!) temporary declines of 10% or more. They happen every 18 months or so on average.
The figures in red (danger, run, flee, sell, sell, sell) are bear market declines of 20% or more. We’ve had three savage bears this century alone, with temporary declines of 49% (2000-2002), 57% (2007-2009) and 34% (Feb-Mar 2020).
And yet, the S&P has delivered a return of virtually 10% per annum from the start of 1928 to today, with dividends reinvested. That is not despite the above horrors, it is because of them: the patient investor gets rewarded for having the stoicism to sit through the temporary declines. As the speculators leave the markets in mass acts of financial harakiri, the patient, goal-focused, plan-based investor sits there, doing nothing but figuratively starting out of the window for months, years, decades.
If you take one thing from this rambling squib let it be this: market declines are a feature, not a bug. Last summer I penned a love letter to bear markets. If you can’t fall in love with them, at least recognise their utility in cleaning out the excesses and resetting the investment landscape for the next permanent advance.
Large temporary declines are the financial equivalent of bush fires: unpleasant, occasionally dangerous, and totally necessary
“It’s true hard work never killed anybody, but I figure, why take the chance?”
INFLATION IS TO RETIREMENT WHAT CARBON MONOXIDE IS TO HEALTH
This is a recurring piece. Each quarter the figures will be appropriately updated. Why? because while the numbers will change around the edges, the message is eternal!
A typical retired couple may well see one partner live for three decades or more. Over such a long period, the annual cost of Lifestyle could more than triple. Says who? Says me: financial planning involves enormous ambiguity. If you want certainty, die now.
So an example Lifestyle cost of £50,000 per annum entering retirement could later escalate to £150,000 a year, just to keep standing still, to keep buying the exact same amount of “stuff”.
If you really must, some prosaic evidence: in 1992 a First Class stamp cost 24p. Now? 95p. See the detailed graph below:
Some nuggets to lessen the gloom (past performance is no guarantee of future returns etc):
Three decades ago - Summer 1992 - the S&P 500 (The Great Companies of The USA) was valued at 408;
Today, 30 years on - Summer 2022 - The Great Companies of The USA are valued at c.4,100;
In three decades these Great Companies have grown in value by a factor of 10;
In addition, the dividends paid by these Great Companies have risen five-fold in those 30 years.
The last three decades have seen three severe "get me out of here I can't stand it anymore" bear markets (2001-3, 2007-9 and Q1 2020) and numerous smaller temporary declines.
Source for US market figures here. Why US data and not the UK? Because the Yanks have this kind of thing publicly available and we don't - yet. Also, the US market is enormous. By comparison, the UK market - at under 5% of worldwide market capitalisation - is tiny.
Dear Reader, the big risk to a dignified, independent retirement Lifestyle is the destruction of purchasing power via inflation. Like carbon monoxide, you can't hear it, smell it, see it, taste it. Yet inflation will silently, stealthily kill your wealth.
The cure? Possessing a Financial Plan fueled by ownership of The Great Companies of The World: equities.
The problem with the cure? It's really really hard to stick with your Plan and stay invested through the horrendous-but-always-temporary-declines. The cure for the cure? Having a tough-loving, empathetic counsellor to stand between you and "the big mistake".
Having stated the problem, and maybe scared you witless, I hope the above figures give you a glimpse as to the only rational, moral solution for a healthy couple facing a three-decade plus retirement!
“Inflation: odourless, tasteless, and utterly poisonous to a dignified, independent retirement.”
