Welcome back, Dear Reader, to the latest quarterly missive from Nick Lincoln. This edition has FIVE articles.
If for some bizarre reason you enjoy “The Hat-Tip Newsletter” please do forward it to family and friends.
ON ELECTIONS AND PLANNING
Long-Term Planning Based On Short-Term Guesses Ain’t Going To Cut It
Much as we may try and bury the thought deep within our subconscious, ideally to never re-emerge, we all know that a General Election is looming in the next year or so. It’ll be the normal pile of agony but what’s to be done? This is the system and we are all in it. Until the idea of an elected Dictatorship takes grip (and, yes, I would be the perfect candidate) we are all going to suffer another battle between Public Schoolboy X and Public Schoolboy Y.
During a recent ZAPM (Zoom Annual Planning Meeting) with long-standing client friends N and P, the dreaded subject of the next election came up. Namely, what could happen if Labour gets into power? Personally, from a purely fiscal point of view, I don’t care: under the Tories, we are mired in debt, taxation is hammering us all into the ground, inflation is way too high, and there’s a palpable sense of decline. We have a socialist Uniparty system. Vote Tory, get Labour. Vote Labour, get, er, Labour. Whoever is in power next will be more of the same nonsense we’ve had since 1997.
Plus ça change, plus c'est la même chose
Regardless, and much to my perpetual annoyance, my clients have their own views (!) and in the ZAPM pressed on with their concerns. Namely, around Labour’s mooted plan to put VAT on school fees. For the mega-wealthy, this will be a rounding item, of no concern. They will flog some land in the lower field, and send Petronella and Tarquin to the best schools oodles of money and centuries of inbreeding can buy.
But for most working aspirational parents, VAT on school fees will likely nix their plans to put the urchins through anything-but-state-education. The straw that finally broke the back belonging to the camel etc. Ah, the joys of the politics of envy!
As an aside, said children will then be a burden on a State education system already buckling under a population that is expanding rapidly for reasons that have nothing to do with indigenous folk procreating like rabbits. Let’s leave it at that.
Back to client-friends N&P in their ZAPM: we talked back and forth about this for a while, getting nowhere. We could have added VAT onto the guesswork estimated school fees built into their financial plan. But building more guesswork onto existing guesses is not my idea of fun, or of time well spent.
Sometimes you just have to say “Let’s see what happens. We don’t change the plan until the facts change.”
Then N raised the spectre of a possible new administration getting rid of entrepreneurial relief. He owns his own limited company and pays loads of Corporation Tax and personal Income Taxes. He is seriously considering paying himself a special dividend taxed at 39.35% (on money that’s already had Corporation Tax at 26% levied on it) to get money out of his business now, before Labour maybe comes in and maybe gets rid of entrepreneurial relief.
Could Labour do this? Maybe. But not definitely. So, again, we say “Let’s see what happens. We don’t change the plan until the facts change.”
There are lots of things a Labour government might do. There are lots of things the Conservatives have done, most of them ineffably stupid and absent any sense or understanding of market forces or human nature.
LET’S WAIT UNTIL THE MANIFESTOS. THEN, MAYBE, PERHAPS, WE BRING NEW FACTS INTO THE PLANNING. UNTIL THEN - “LET’S SEE WHAT HAPPENS”
“There is only one way to avoid criticism: do nothing, say nothing, and be nothing.”
IN FINANCIAL PLANNING, AS IN LIFE, RELATIONSHIPS ARE EVERYTHING
When building financial plans for clients (you know if you’ve seen one: lots of pretty graphs and so forth) I have to assume what future inflation rate to use. Many key assumptions go into a plan, and the inflation one is first among equals. It’s the variable that can have the most impact, as it’s going to be in the client’s (your) plan from now until the moment you die.
Other things in a plan will vanish over time (wages, investment pots etc) as they reach a natural conclusion or are spent down. Any assumptions linked to these assets (eg future investment returns, wage increases etc) likewise disappear. But inflation, like gout, will ebb and flow and is there until you’re not.
Since 2008 I’ve used an assumed future inflation rate of 4% a year as my go-to figure in doing this planning work. Most of that time 4% has been above actually experienced inflation and certainly ahead of the Bank of England’s target of 2.5% (stop sniggering at the back). Currently, of course, inflation is way over 4% a year. If it gets “baked into the system” at present levels then perhaps I will revisit my inflation assumptions.
But let’s give that particular cake a bit more time in the baking: for now, I’m sticking with 4%. And I’m comfortable doing that.
Why, I hear no one ask.
In financial planning, it’s the relationship between the numbers that matters, rather than the numbers themselves. Our assumed growth rate on invested assets (eg The Great Companies of The World (GCOTW) held in your pension and ISA pots etc) is 3% over inflation, at 7% a year. This seems reasonable. It’s not guaranteed and never can be. Cash returns are estimated at 2% a year, or half the inflation rate. Again, feels about right. Again, is not guaranteed and never will be.
So annual assumptions used in financial plans (yours and mine included) are
4% inflation (RPI)
7% Great Companies of The World (GCOTW)
2% cash savings
Quick aside: somewhere a compliance person who has passed every known financial services exam and is simply dripping with accreditations is shrieking into the void about this. I don’t care. I never did care.
What have been the actual annual returns over the last decade? Source: Dimensional Fund Advisors ten years to end October 2023. Cash figures based on Moneyfacts 90 Days Notice
4.1% inflation (RPI)
8.4% GCOTW (our default world equity fund net of management fees, gross of advice/platform fees)
1% cash savings That was the very best rate I could find. I haven’t cherry-picked it.
So the assumptions are amazingly close to the actual lived experience (stupid phrase: what the hell is “unlived experience”?)
Back to the relationship thing: should inflation bake in at, say, 8% then we would increase the expected return on The Great Companies of The World (GCOTW) to, perhaps, 10-11% per annum. Company share prices are driven largely by nominal company earnings (profits). In times of high inflation, companies raise their prices and increase their profits. That’s a very quick and dumbed-down explanation for what drives share prices and it’s at the very outer limit of my comprehension; already I feel a migraine coming on.
Your author bestriding the stage in God-like fashion
With a level of God-given prescience that is staggering even for a genius like me, I talked about a likely bout of future higher inflation at a conference in 2021. Called “Inflation Nation: 1962-1991” it was a typically majestic and bravura piece of work, informing the enthralled delegates (paying delegates, at that, mad loons) that in those three high-inflation decades, the Great Companies of the UK (The FTSE-AllShare) returned 14.1% per annum including dividends, whilst inflation ravaged along at a terrifying 8.1%.
The relationship between the numbers here? If you invested in UK plc through those 30 years, you effortlessly picked up an inflation-adjusted real return of 6% a year. That’s not just warding off inflation. That’s kicking it into the outer realms of space, where nothing ever happens. Think Joe Biden’s cerebellum and you get the idea.
To conclude: we don’t like awake at night thinking about inflation assumptions. We understand that it’s the relationship between the numbers that matters and that, even in periods of high inflation, owning a beautifully diversified portfolio of around 13,000 of The Great Companies of The World (GCOTW), via our preferred global equity fund, is probably your best defence.
in life, relationships aren’t always constant. but in financial planning, they should be. make sure your planner knows her onions on this. it matters.
“Now that I’ve won a slam, I know something that very few people on earth are permitted to know. A win doesn’t feel as good as a loss feels bad, and the good feeling doesn’t last as long as the bad. Not even close”
WINTER PRACTICE UPDATE
OF AUTUMN STATEMENTS AND AWFUL EVENTS
Nick Lincoln, IFA and owner of V2VFP Ltd
My 84-year-old father recently took a tumble in his Spanish garden. In doing so, he managed to badly break his leg. Cue a lot of therapy, rehab, and anxiety for our family, as we navigated the Spanish health system.
Lincoln Snr is in a private rehab home and will be until February at the earliest. He’s making great progress, thankfully.
Away from the Costas, in the real world, most Spaniards don’t speak English. I know that’s lazy of them but what can you do?
Helping the family look after Dad has made me realise I need to up my language skills. So I’m trying to learn Spanish (yes, really). Via an app on my phone, I’ve mastered how to order a table for two with a ticket to Santiago eating nothing but apples, whilst bleating that the museum is closed and the bank is open. It’s a start. Sort of.
Stretching my abilities to the limit, the Spanish for “nothing” is “nada”. And that, in a word was this year’s Chancellor’s Autumn Statement. A lot of “nada”. Yes, there was a tiny tax bung with some more fiddling with National Insurance but there wasn’t anything else of note.
And, for that, I tip my hat to Mr Hunt. He could have done the cynical give-away. Maybe that’s coming next year - the General Election is still a way off. Maybe he’s given up, given how far behind the Tories are in the polls.
Whatever the reason, there was very little in the Autumn Statement for you and me to worry about. Even the devilish detail appears to contain little malice, although pensions - at the edges - have been made a little bit more complicated. Que sera sera.
Middle-Eastern Events
Given the awful events of 7th October in Israel and the subsequent outpouring of hatred on our streets, I have, in one form or another, made contact with my Jewish client friends to give them my support, for what it’s worth. This is not something I would normally do but in this instance to not speak up is to condone. And we should never condone barbarism.
Like many, I carried a dread feeling going into Remembrance Sunday. Thankfully, it passed off without too much unpleasantness.
On one of my interminable walks to get to my 14,000 daily step count I took the above shot on my mobile. The sun was shining (for once) and was just in the right place at the right time.
I hope you like it.
Practicing Gratitude
The shortest day will soon be behind us. For that alone we should be immensely happy.
Thankfully, I have numerous other reasons to be so. The Lovely Penelope (TLP) remains a steadfast joy in my life, although she is running on fumes as the school term end approaches, a school over which an imminent Ofsted inspection hangs and has done since September.
Those of you in education will know what a drain this kind of thing is.
In summary: I appreciate you all and wish you and yours a very Merry, Happy Christmas and the very best 2024 you could wish for.
Until the Spring, then, Dear Reader. Take care.
“All I want to know is where I am going to die, so I will never go there.”
CHRISTMAS COMES EARLY
the gift that keeps on giving, gives yet again
If people knew that, throughout a bang-average retirement, the safest place to store their wealth is in owning a fabulously diversified portfolio of The Great Companies of The World (GCOTW), not tinkering with the portfolio one little bit as the decades roll by, then I wouldn’t be needed. I’d have to earn my crust another way.
But people don’t know it. Because the culture tells them the exact opposite: the stock market is dangerous, it’s where fortunes go to be lost. It’s the implicit message in the hoary “How do you make £5M on the stock market? You start with £10M!”
In a vicious mental pincer movement. the same culture, from cradle to grave, will tell you that cash is “safe” and is where you go to “protect your capital” or a similar lame cliché.
Financial media is a key component of this culture. A key member of that fraternity is Paul Lewis, a well-known, respected and highly influential commentator on all things money. Mr Lewis has done an awful lot of good in his work. I say this before plunging the knife in below.
Via such luminaries as Mr Lewis, in reality, my work will never be done: I will forever be able to earn a crust helping protect good folk like you from a culture that will see enormous numbers of lesser blessed people either run out of money and/or live denuded, sub-standard retirements because of perpetual fear of doing likely doing so.
And as if to confirm the above, Mr Lewis has given me, and you, and all of my client friends, a little Christmas gift via a recent interview in The Daily Mail.
Here, without shame, Mr Lewis tells the reader that his entire pension fund is in cash and has been for a decade or so. Presently his pension fund is in a National Savings and Investment Bond earning 6.2%. Two thoughts:
I don’t think you can put NS&I things in your pension (I could be wrong)
there’s nothing currently in their range paying anything close to 6.2%.
That aside, the interview is a catastrophe of misconceptions, of somehow looking down the barrel from the business end whilst simultaneously thinking “There’s no way this can blow my head off.” Below is three minutes or so of me dissecting Mr Lewis’s points in an adviser-focused podcast that I am part of (and which is remarkably popular, for reasons none of the four participants, who mildly loath each other, understand):
In essence, Mr Lewis’s pension fund has been figuratively dying for the last 10 years. As I mentioned in article two, the best cash account I can find delivered 1.0% per annum over that span, whilst inflation was whipping along at four times that amount, effortlessly smashing the real value of cash and permanently, irrevocably destroying its purchasing power.
Let’s assume Mr Lewis had a £1,000,000 pension pot 10 years ago. Today, to keep pace with 4% annual inflation, to merely retain its purchasing power and no more, it would need to be worth £1,480,244.
Instead, we find it worth just £1,104,622 after sitting in cash for 10 years at 1% per annum.
That’s a real, permanent, irrevocable loss of purchasing power of £375,622, or 38% of his original £1M pot. It gets worse: think of the lost hours Mr Lewis spent over those 10 years continually sourcing the best (least bad?) rate he could get. This, to me, is the very definition of futility and pain, akin to trying to speak sense to a member of the Green Party.
But, hey, “capital isn’t at risk” in the wacky world of Mr Lewis, and personal finance media in general. This is the essential misconception of our times.
Well, we know better. Mr Lewis could have got 7% (at a minimum and in no way guaranteed etc) a year on his pension pot, just by investing in The Great Companies of The World (GCOTW) and figuratively staring out of the window for the next decade. Result? A £1M pot becomes an inflation-busting £1,967,151.
The culture screams “risk” when it means “safe”, and “safe” when it means “risk”. understanding this essential misconception is the Real gift.
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 easily 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 or more a year, just to keep standing still, to keep buying the exact same “stuff”.
If you really must, some prosaic evidence: in 1993 a First Class stamp cost 25p. Now? £1.25. See the detailed graph below:
Some nuggets to lessen the gloom (past performance is no guarantee of future returns etc):
Three decades ago - Winter of 1993 - the S&P 500 (The Great Companies of The USA) was valued at 466;
Today, 30 years on - Winter of 2023 - The Great Companies of The USA are valued at c.4,500;
In three decades, these Great Companies have grown in value by a factor of ten;
In addition, the dividends paid by these Great Companies have risen five-fold in those 30 years.
The last three decades have seen four "get me out of here I can't stand it anymore" bear markets (2001-3, 2007-9, Q1 2020 and right now) 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.”
