With world stockmarkets having fallen back slightly from their very impressive rise over the past nine months, various investment commentators are predicting the next ‘beginning of the end’ for investors.  As stated in one of my earlier blogs, anyone who bases their investment decisions on what the media and so-called experts say is likely to pay a very high price indeed in the form of lost investment returns.

I have no idea what will happen to stockmarkets in the short to medium term but what history tells us is that in return for price volatility and the possibility of experiencing a permanent loss of capital (remember Enron, Lehman Brothers et al), investors are well rewarded for those risks, as long as they have a long enough time horizon and the discipline to stay the course.  In reality, having a fully diversified portfolio (not all your eggs in one basket) significantly reduces the chance of losing your entire capital.

To help gain some long term perspective, you might find it useful to consider the growth in the stockmarket since you were born.  Clearly no one knows what investment returns will be in the future and they may be higher or lower than in the past but the fact remains that capitalism, for all its faults, has been a good generator and preserver of wealth over the long term.

Exhibit 1 shows the value of the S&P 500 equity index, in US dollar terms, for people of different ages to April this year.  I’ve chosen the S&P 500 because it represents the largest equity market in the world and represents some of the world’s largest and most profitable companies like Apple, Google, and Exxon Mobil.

Exhibit 1 – S & P 500 equity index

Exhibit 2 shows the nominal and real (i.e. after inflation) annualised return from the same index for the same range of ages as shown in exhibit 1. This ranges from about 2% pa real to about 6.5% pa real depending on the age and whether or not dividends were re-invested. Either way, the inflation preservation benefits of a faith in capitalism by investment in world class companies is clear whether you are 40, 50 or 60 years old. 

Exhibit 2 – S & P 500 equity index annualised returns

Source: www.politicalcalculations.com (accessed 04.06.2013).  Returns are in US$ terms. No allowance for costs has been included in these calculations and in reality the returns to an investor would be lower than those stated.  The analysis is designed to be illustrative of the benefits of long term investing and is not meant to be a forecast or prediction.

Although the sterling-based investor’s return would be different from that of a dollar-based investor in this example, and there would clearly be costs associated with investing, the principle that I want to convey is the importance of maintaining a long term investment perspective.  In addition, reinvesting income also has a big impact on the overall returns over the long term due to the effect of compounding (earning returns on past returns).

As I’ve said countless times before, the two biggest risks that we all face are the relentless wealth-destroying effects of price inflation and living too long relative to our financial resources.  On your next birthday why not give yourself a really useful gift, that of investment context and perspective, by calculating the annualised returns from the stockmarket since you were born.  You can do this by visiting www.politicalcalculations.com and clicking on the S & P Index tab on the right hand side. It’s the gift that keeps on giving.

Warm regards

Jason

PS I’ve selected two excellent articles from Dimensional’s Jim Parker - The Art of Letting Go and Do You Believe in Magic? - which you might find interesting; these can be downloaded from the Research & Insights area of this website.

Budget days are becoming more complicated.  In the old days there would be a set of announcements and changes that mostly took effect from the beginning of the next tax year.  Nowadays we have a set of announcements which include new retrospective changes to tax rules; previously announced and new changes which come into effect at the beginning of the next tax year; new announcements which come into effect in one or more tax years’ time and new consultations on things to which the government would like to make changes but is unsure how and when to do them.

To gain a proper understanding of the true contents of the budget, therefore, it is necessary to read not just the main budget document but also the supporting press releases, technical notes and tax impact assessments.  What follows is a brief summary of a range of some of the planning issues which didn’t make the headlines.

Limited liability partnerships (LLPs)
The government is concerned that LLP structures are being used to avoid employment taxes and obtain other tax advantages.  A consultation is to be launched into a presumption of employee status unless the member can pass a self-employed test and further changes to how profits and capital may be attributed.

Quite how this will pan out is anyone’s guess but it is clear that the taxation of LLP structures and their use in tax planning is now firmly in HM Revenue & Customs’s sights and subject to change.  If you already use LLPs in business or wealth planning then I suggest you await the outcome of the consultation before making any changes.  If you are considering such structures then you should defer making a decision until the new rules become clear.

Pensions
Consideration is being given to changing the pension investment rules to encourage the conversion of unused space in commercial properties to residential use.

Inheritance tax planning
Measures will be introduced to prevent individuals using borrowing to avoid inheritance tax, for example the acquisition of inheritance tax (IHT) exempt assets, such as business or agricultural assets.  In addition, the government intends to restrict the reduction of certain loans as a liability of a borrower’s estate where the loan has been taken for tax avoidance.  Quite how these measures will work in practice is not clear but you have been warned that two bites of the same cake is not something HMRC will tolerate.

The IHT-exempt amount which can be transferred from a UK-domiciled spouse to a spouse or civil partner domiciled outside the UK (or treated as such for IHT purposes) will be increased to £325,000 from its current level of £55,000.

Furthermore, with effect from 6th April 2013, a non-domiciled spouse can elect to be treated as UK-domiciled for IHT purposes.  The election may be made notwithstanding the death of the UK-domiciled spouse provided that the death occurred post-6th April 2013 and the election is made within two years of the death.

As announced last December, legislation will be introduced in the Finance Bill to enable trustees to switch UK assets held in settlement made by non-UK domiciled individuals to investments in open ended investment companies (OEICs) and authorised unit trusts (AUTs) without incurring an IHT exit charge.  The measure will be retrospectively effective from 16th October 2002, the date from which the original changes to the IHT treatment of OEICs and AUTs applied.  It will also ensure that no tax will have arisen on those trusts which held OEICs or AUTs when the changes introduced in 2003 came into force.  The measure does not constitute a new tax incentive but will allow the legislation to work as originally intended.

Corporation tax
Various anti-avoidance provisions will be introduced to prevent exploitation of the corporation tax rules relating to ‘loans to participators’, ‘loss buying’ and other loss-related provisions.

Income tax
A cap on unlimited income tax reliefs (£50,000 or 25% of income – whichever is the greater) will apply from 6th April 2013 but not to reliefs within their own ‘cap’, such as enterprise investment schemes (EIS); seed EIS (SEIS); venture capital trusts (VCTs); or business premises renovation allowance (BPRA) investments or charitable gifts and gift aid donations.

The disclosure of tax avoidance schemes (DoTAS) provisions will be further strengthened to ensure that aggressive tax planning is brought to HMRC’s attention.

Property tax
Legislation will be introduced in the Finance Bill 2013 to close down two specific stamp duty land tax (SDLT) avoidance schemes, which abuse the transfer of rights (or ‘subsale’) rules.  SDLT disadvantaged areas relief has been abolished with effect from 6th April 2013.

A 15% SDLT rate came into effect for high value residential property acquisitions by non-natural persons (broadly companies, partnerships and collective investment schemes) on 21st March 2012.  Changes made to the 15% rules (primarily, the introduction of further reliefs) will come into effect from the day of Royal Assent to the Finance Act 2013.

The Finance Bill 2013 will include legislation to implement a package of taxes that affect residential properties valued at over £2 million and held by certain non-natural persons.  These taxes are:

- an annual tax on enveloped dwellings (ATED); 
- capital gains tax (CGT) at 28% on any gain on disposal.

ATED will came into effect from 1st April 2013, although returns will not be required until 1st October 2013 with payment required by 31st October 2013.  Relief from ATED will be available for genuine businesses carrying out commercial activity.

HMRC approach to tax abuse
HMRC has confirmed that it is trying to pursue a ‘joined up’ approach to tackling tax abuse, evasion and avoidance.  Essential components in this strategy are:

- legislation;
- (HMRC/Treasury) understanding of the tax avoidance market;
- influencing behaviours through effective use of official and general publicity so as to change the culture of tax planning in the UK;
- detecting avoidance through a combination of DoTAS and market intelligence.

Then, where an “unacceptable” loophole is encountered it will be acted against quickly by:

- targeted avoidance legislation;
- challenge and litigation and 
- the general anti-abuse rule (GAAR).

as appropriate.

Special approaches will be adopted for

- large businesses 
- very wealthy individuals (through the High Net Wealth Unit)

Through a mixture of targeted task forces, publicity and technology, significant effort has been poured into stemming evasion – a substantial contributor to the ‘tax gap’.  There is very special focus on offshore evasion.  This includes and has included:

- the Liechtenstein Disclosure Facility; 
- agreements with the Isle of Man; 
- new arrangements to be made with Guernsey and Jersey (see below) and
- the agreement with Switzerland.

All of these initiatives recognise that evasion is a global issue relevant to most of the developed world.

 
What you need to do
The key principles that you should take from the new tax regime are:

- avoid evasion;
- avoid ‘aggression’; 
- stay within the ‘centre ground of tax planning’; 
- ‘Tried and tested’ is the new ‘gold standard’ for planning

There are lots of legitimate planning opportunities available to individuals and companies, provided that you have the time and inclination to join up the various planning dots in the context of your wealth plan big picture.  Professional advice has never been more essential.

Warm regards

Jason

PS I forgot to mention that you can now obtain a 100% first-year allowance in respect of qualifying expenditure incurred from 1st April 2013 in the purchase of railway assets and ships (real ones, not models!).   

So now we know the government’s intentions for funding long term care, which are expected to become effective in two stages, the first in April 2015 and then in April 2016.  Despite a chorus of grumbles, criticism and disapprovals from various groups and commentators, I think the proposals are a step in the right direction.

The first two changes will apply from April 2015 and include the ability for individuals requiring care to defer paying towards their care costs, meaning that no-one will be forced to sell their home in their lifetime to meet these costs.  The second and more welcome change relates to the roll out of a national minimum eligibility for support.  The draft proposals indicate that the basis for assessing eligibility for care will be simplified and harmonised to stop the postcode lottery that currently exists.  Whether this is achievable in practice, with hard-pressed local authorities, remains to be seen.

No one aged over 65 will have to meet care costs if these arise after April 2016 and they have assets worth less than £118,000.  Those with assets above this will have to meet some of the costs of residential care up to a cap of £72,000.  They will still have to pay about £12,000 per annum towards the cost of food and accommodation.  It is estimated that the new cap will benefit the 16% of older people who face care fees of more than £72,000¹.

This seems a fair price to pay for the certainty that the state will take on the tail end risk for the minority² of people who will suffer long term health conditions.  It’s a big improvement on the current situation whereby anyone with assets of more than £23,250 has to pay 100% of all their care fees.  In addition, the fact that no-one will be forced to sell the family home to fund care fees until they die should give comfort and certainty to the majority of the population.

Interestingly, parents of those under 18 requiring care will not have to meet any of their care costs because the care fees cap will be zero.  People requiring care between the ages of 18 and 65 with assets above the £118,000 capital threshold will have to meet some of those costs but with a lower, yet to be decided, cap than the £72,000 which applies for those aged 65 and over.

The cost of accommodation and food will however still have to be met by individuals and this has been estimated to be in the region of £12,000 per annum.  I don’t think this is an unreasonable obligation, given that we all incur living costs even if we don’t need care.

Some of the costs of the proposed care framework will be met from raising the amount collected from inheritance tax (IHT), partly by freezing the nil rate exemption at the current £325,000.  However this is unlikely to be the last change we’ll see in inheritance tax rules and I can see further changes to the ability to make exempt and potentially exempt gifts in lifetime, further restrictions on the use of trusts and possibly even an increase in the IHT rate from the current 40%.

Another point worth making is that it is a very bad strategy to carry out planning which has the effect of enabling one to avoid having to meet the cost of care or residential living costs.  I know from personal experience and relatives who have worked in the long term care sector that what local authorities are prepared to pay for care rarely equates with the true cost of the best care homes.  Do you really want you or your relatives to go into a care home that is ‘cheap’ and the one that the local authority has chosen?

The care funding announcement brings into focus the more important questions that a good wealth planning strategy, co-ordinated by a caring and knowledgeable financial planner, will answer:

• Will your wealth last your lifetime, with or without care fees, and what do you need to do to ensure that it does?
• How much of your estate will be taken by the government in tax when you die, and what could you do to minimise or avoid this?
• To what risks are you exposed and what can you do to minimise or avoid those with which you are not comfortable?

I have written a new white paper – The estate planning survival guide – which explains in simple terms (or as simple as I could get) the main ways to protect wealth from inheritance tax and other hostile creditors.  You can download your own free copy from the Bloomsbury website by clicking on the highlighted title above.

If the care fee proposals come into effect then they will provide a little more certainty on the later life costs that we may all face.  In this respect one aspect of the assumptions used in your strategic wealth plan will be more certain… that is, of course, assuming that you do have a strategic wealth plan!

Warm regards
Jason

PS You can now follow me on Twitter to keep up to date with all matters wealth related 

[1] Source: Department of Health – Policy statement on care and support funding reform, February 2013

[2] Source: Commission on the Funding of Care and Support: One in ten people aged over 65 will have serious care needs which will cost more than £100,000 based on 2009/10 prices
 

When I was a child growing up in South London in the 1970s and early 1980s, it was quite clear to me that my family was what would be described today as ‘working class poor’.  My mother and step-father both worked but only in low wage, manual and very menial jobs.  My mother shunned claiming any state benefits despite us being entitled to many (I know I qualified for free school dinners but my mother refused to claim them to avoid me suffering any stigma).

Our tiny terraced house was filled to the rafters with junk and this made it even harder to accommodate my parents, two brothers, sister and me.  There was no central heating, just one gas fire in the sitting room, and we had an outside toilet and no bathroom until I was seven and even then the tiny bathroom extension the landlord added was freezing and, within a year, full of damp.

We lived so hand to mouth that we had a pay-as-you-go cash meter for gas and electricity and every Friday night a debt collector visited to collect money.  My education, particularly my primary schooling, was so bad that I think my school would be classed as ‘special measures’ under today’s strict inspection regime.  Having 40 unruly children in a class, taught by a poorly trained and unmotivated teacher with no national curriculum, certainly didn’t help.

We never had foreign holidays, swanky cars or televisions in our bedrooms.  There was no talk of achieving anything, going to university, building a career or making one’s way in the world.  No family dinners round the table, no board games, no interesting political discussions, no day trips to the countryside or somewhere interesting.

I think it is fair to say that my childhood was far from what any reasonable person would say was comfortable, privileged or secure.  All my memories from my childhood are about how I would improve my life in the future, how I could work to build wealth and have the freedom to choose the lifestyle that I wanted.  But here is the funny thing: I had no idea how I would achieve success but there was never any doubt whatsoever in my child’s mind that I could do anything to which I set my mind.  I never had any worries that my future would not be whatever I wanted it to be.

The reason I’m telling you about my childhood is because it illustrates the power of optimism and the incredible difference that it can have on your life.  My life isn’t perfect and, like everyone, I have down days and frustrations and there are lots more things I want to be and do (there isn’t much, incidentally, that I want to have in the context of materialism).  In general, however, when I consider the progress I’ve made since my 1970s childhood, my optimism was not misplaced.  I feel very lucky to have the life I have but as the golfer Gary Player once said, ‘The more I practice the luckier I get’.  The ability to look for the good today as well as to transcend any present negatives and envision a better future is such a powerful antidote to all the negativity.

“It may not feel like it, but 2012 has been the greatest year in the history of the world.  That sounds like an extravagant claim, but it is borne out by the evidence.  Never has there been less hunger, less disease or more prosperity.  The West remains in the economic doldrums, but most developing countries are charging ahead, and people are being lifted out of poverty at the fastest rate ever recorded…  We are living in a golden age.”

                       “Why 2012 Was the Best Year Ever,” The London Spectator, December 15, 2012

The importance of being optimistic, or not giving in to pessimism, can also have a significant financial implication.  In investment terms, 2012 didn’t turn out to be the Armageddon that the media and so called ‘experts’ suggested would be the case.  Anyone basing their long term planning on the basis of world events and economic malaise would have paid a high price.  I’ve selected two very good articles for you that nicely illustrate this point: Nick Murray’s ‘2012- The year pessimism got skunked….again’ and Weston Wellington’s ‘2012: the year it didn’t happen’ and these can be downloaded from the Wealth Briefings section of the Research & Insights section.

Whether you are just starting out in your adult life, middle-aged or in your twilight years, if you can nurture your optimism for the future, you’re more likely to enjoy the life that you already have as well as an even better life in the future.  Your optimism is infectious and it can motivate other people to see the world in a better light and as such be happier.  Why not have a look at some of the goal questionnaires in the resources section of this website and start 2013 with a renewed sense of purpose, optimism and excitement?  What have you got to lose?

Happy new year!

Regards

Jason

An acquaintance of mine works in a hospice and as a result she regularly comes into contact with people who are at the end of their lives.  Her experience is that when someone knows that they are going to die, they rarely regret the things that they have done in their life but they do regret the things that they didn’t do, say or become.

I devoted an entire chapter of my Financial Times book to the importance of setting and quantifying life goals, whether or not they have a financial implication.  If you are clear what is important to you and how you define success, fulfilment and happiness, then there is a higher chance that you’ll achieve it.  The old saying of ‘being careful what you wish for’ comes to mind.

It was, therefore, with these two principles in mind that I decided to practise what I preach and finally bought myself the guitar that I’d promised myself over a year ago.  While I do play the piano and can read music, I can’t play the guitar or read guitar music.  So, having bought the guitar, I now have to teach myself to play it using a beginners’ guide.

There is no doubt in my mind that eventually I’ll be able to play the guitar at least to a level where others can recognise what I’m playing.  I have thought about how I will think and feel when I can play and what that will mean to me.  This gives me the motivation and discipline to do the practice.  I’m focused on the outcome, not the process.

I did a similar thing when I taught myself to play the piano when I was 12.  My first piano was an ancient, hand-painted, clapped out upright, which was untenable, had missing notes and sounded like it had a duvet stuffed down between the strings.  Despite the limitations of the instrument, I eventually learnt how to play the Scott Joplin piano composition ‘The Entertainer’.  Now, over 30 years later, never a week goes by when I don’t sit down to play my beautiful, and perfectly tuned, Yamaha baby grand piano. 

All those years ago I started with my piano dream, continued with hard work and eventually had sufficient wealth to enable me to buy a lovely instrument.  I hope my guitar dream is equally as successful and who knows, I might eventually be playing a Fender Strat or Gibson Les Paul in years to come.  Either way I try to live my life so that when my time is up, I’ve as few regrets as possible about the things I haven’t done in my lifetime.

So what about you?  If you knew you had only weeks to live, what regrets would you have about what you hadn’t done, become or said?  Once you can answer that question, you are well on your way to living a life which is truly rich, rewarding and meaningful. 

I hope you have a restful holiday and wish you the very best for your future.

Warm regards

Jason

All the evidence supports the contention that trying to outsmart investment markets by taking bets on the future price of shares, bonds and other asset classes, is a fool’s errand.  Speculating is not investing and the market charges a very high price for failure.  The current court case against UBS financial trader Kweku Adoboli illustrates this point very well.

In June 2011 Adoboli took a bet, in the form of short selling (selling what he didn’t own), that the market would fall in value so he could buy it at a lower price than he had sold it for.  Unfortunately the market rose in value and Adoboli ended up with a risk exposure of $1.49bn.  In July he then became optimistic that the market would rise.  The risk exposure to UBS by early August had risen to $12bn.  Adoboli changed his mind again in late August and bet that markets would fall and masked the bank’s exposure through various fictitious trades.  When UBS found out what Adoboli was doing in mid September, they closed out all of Adoboli’s positions which left the bank with losses of $2.3bn^[1].

Now UBS is one of the largest investment banks with sophisticated computer systems, risk management controls and an army of compliance people.  Mr Adoboli has a degree in Computer Science from Nottingham University, so he is clearly intelligent.  If bright people with the best systems at the biggest investment bank can make such a large loss out of speculating, why on earth would any individual investor think that he or she can do any better?

The reality is that speculating is seriously damaging to one’s wealth.  Whether that speculation is in the form of trying to time markets, securities or investing in esoteric investments like hedge funds or structured products, it all amounts to the same thing - a loser’s game.  Low cost passive funds, periodically rebalanced back to the appropriate asset allocation model whenever it deviates significantly, is the slow but sure route to having a successful investment experience.  The case of UBS and Kweku Adoboli is a salutary lesson that the market really does charge a lot for fools and their folly of active investment management and speculation.

Warm regards

Jason

In a world full of uncertainties it is easy to be seduced by those who profess to be able to predict how the future might turn out.  We all want to avoid loss, pain and hardship so anything that purports to help us do so is very appealing.  In my book I explained in some detail the folly of trying to beat investment markets and how to have the best chance of a successful investment experience based on the evidence of what works.

For most investors the investment ‘answer’ will be to hold a fully diversified, liquid investment portfolio of low cost passive funds with exposure to those risks that are likely to be adequately compensated.  Exposure to risk factors is the source of investment returns and the correct level of portfolio risk for an investor will be based on a combination of their tolerance to, financial capacity for and need to take such risks.

Whether you do your own planning or work with a professional adviser, it is very helpful to prepare a financial forecast based on your current financial position and one or more future scenarios based on a range of assumptions.  This will enable you to create a reasonable base planning scenario from which you can carry out further ‘what if?’ modelling using different assumptions.

There are numerous financial planning software tools available to help with the number crunching but you can access for free (via the tools section of this website) a simplified version of Voyant, which is the predominant financial planning software tool that we use at Bloomsbury.  As the old saying goes, ‘rubbish in, rubbish out’ so make sure that you use reasonable assumptions, as explained in my book.

The problem with any financial projection, particularly where it is over a long time period (25 years or more), is that it is almost certain to be wrong in reality.  In the real world investment returns, taxes and spending don’t happen in a straight, predictable line.  That said, it is better to understand the possible impact that different levels of annual lifestyle spending or gifting might have on your wealth before it becomes too late to do anything about it.  In my experience the level of annual lifestyle spending is usually one of the most important factors in determining whether a wealth plan is sustainable, although of course investment returns, inflation and taxes are also important factors.

When I wrote the chapter on financial forecasting I deliberately avoided discussing the various ways that a financial planning projection might be ‘stress tested’ because the various approaches all have shortcomings and invariably suggest a degree of certainty about the future outcome of a financial plan which it is just not possible.  However, a number of readers have suggested that they would welcome some further insight into Monte Carlo simulations and my view on its usefulness in the planning process.

The investment return assumption used in a simple financial plan projection will be an average figure based on either historic returns achieved or (more usefully, as past performance is not a reliable guide to the future) that which the investor expects in the future.  The ‘flaw of averages’ is that they mask the fact that there are usually big variations in the range of returns actually achieved, both above and below the average.  Investors experience investment returns as they occur on a compound basis, i.e. they will vary from one year to the next.

In investment and financial planning, a Monte Carlo simulation  program can be used to examine a random sample of historic or expected returns from an asset or portfolio of assets to determine a range of potential outcomes based on three key variables: the mean return (average from each period), standard deviation (a measure of risk) and correlation (how different assets perform when combined with each other).

The software runs a year-by-year simulation of returns using a random sample of these three main variables to work out the probability of failure.  Other factors such as inflation, expenditure and life expectancy are not changed so no account is taken of the possibility that one or more of these might be affected by the investment return achieved.  Most experts agree that it is necessary to carry out this simulation at least 100 times to be statistically robust, although some think that 300 iterations is the minimum.

The outcome of running the Monte Carlo simulations is a % probability of success, in the sense of how many of the simulations resulted in a deficit at the end of the investor’s time horizon.  Thus if 55 of the 100 simulations resulted in the portfolio not running out, the success rate would be described as 55%.  We prefer to look at the results the other way round, in terms of the % probability of failure and we set a target failure rate of well under 50% to provide an adequate safety margin.  The probability of failure suggested by the simulation is not, in itself, sufficient to say that a planning and investment strategy is or is not appropriate; rather it provides the professional adviser with an additional sanity check or early warning signal that the chance of failure might mean more frequent reviews of the plan are necessary to avoid failure or perhaps that more vigilance as to the level of annual spending is required.  In any event, knowing a probability based on assumptions that are all highly likely to be incorrect is not generally considered a robust basis for decision making.

It is for this reason that at Bloomsbury we rarely go into much detail with our clients about Monte Carlo simulations, even though we carry out this analysis behind the scenes.  It’s a bit like your doctor reviewing a range of tests as part of his initial assessment and diagnosis.  He is unlikely to go into lots of detail on the outcome of every test but rather he will use these to inform his judgement as to the most appropriate treatment.

A Monte Carlo simulator (like any tool where the user’s understanding of it is flawed) in the wrong hands can be highly dangerous, but when used as one of a range of stress tests it can help avoid the false sense of security that a straight line forecast might imply.  Whether you work with a professional adviser or do your own planning, there is no substitute for regularly reviewing the sustainability of your financial planning and investment strategy. Remember it’s a journey not a destination so enjoy the ride.

Warm regards

Jason

____________________________________________________________________________________________________
[1] An excellent in depth explanation of Monte Carlo analysis can be found in The Kitces Report (January 2012) which you can download from the research and insights part of this website.

I recently attended a conference in the United States and among the many interesting and thought-provoking presentations and workshops was one called ‘The Centenarians Project’.  A major life assurance company has been filming interviews for the past five years with as many US residents aged 100 or more who retain mental capacity as it can find.

The insights of these individuals suggested to me that the solutions to present day challenges and difficulties may be found, at least in part, by looking at the wisdom and experiences of these long-lived people.  The same key ingredients to good health and longevity were expressed by most centenarians as:

‘Good clean living’; ‘avoid stress’’; ‘don’t worry’;

‘Chew food properly’; ‘eat less’; ‘eat right’; ‘limit booze’;

‘Exercise’; ‘stay working as long as possible’.

Research into longevity suggests that the following factors have a strong influence life expectancy: having a positive outlook; having a pet; love/long term life partner, loving family, wide circle of friends; avoiding debt/having financial means; hobbies and interests and involvement in the local community.

The centenarians’ view of how the younger generation is managing its money was generally negative.  One interviewee stated that if people think times are tough now they should have experienced the great depression of the 1930s, when the outlook was very bleak.  Another view is that people today have too many material things that they really don’t need, funded by debt that they can’t afford.  However, perhaps a more profound perspective was that they thought today’s young generation had absolutely no idea of the need to plan adequately for when they can’t or don’t want to work.

The centenarians also gave their advice for successful investing: diversify (don’t put all your eggs in one basket) because all asset classes experience disaster at some stage; compounding returns is a very powerful way to grow wealth (reinvesting interest and dividends); and employing the services of a caring and competent financial adviser to keep you on track.

Few of the centenarians interviewed had expected to reach age 100.  One interviewee, Rosie, explained how at age 65 she sold her business for several million dollars.  She wanted to enjoy life while she still could as her sister had died at age 71, her mother had died at age 62 and her father had died at age 39.  She then spent the next ten years travelling the world by first class travel and generally having a good time.  By age 75 she had spent the majority of her wealth but was still in good health and realised that she had to rein in her spending.  Rosie is still alive today aged 104 and in relatively good health.  She stated that had she known how long she was going to live, she’d have planned her personal finances differently and not spent so much when she sold her business.

There are currently over 12,000 centenarians in the UK today; the figure is projected to increase to 140,000 by 2040[1] and the trend is the same throughout the world.  The official estimate is that just under 18% of all people alive in the UK today will live to age 100[2], so if you enjoy above average wealth, health and lifestyle, the chances of reaching 100 is likely to be much higher.  It seems imprudent, therefore, to plan on not reaching 100, particularly if you are financially successful and enjoy a full and varied lifestyle.  I have always used age 99 as the projection age for financial planning calculations with clients, but I’m starting to think that this might not be high enough.

Your money may well have to last a lot longer than you anticipated and many of us are potentially looking at a four decade retirement.  Considering that an inflation rate of just 3% pa halves the buying power of capital in just over 20 years, most investment portfolios will have to maintain a fair exposure to equities to generate the necessary post-inflation returns.  If you get your wealth plan properly established and regularly maintained, you can spend your time enjoying all those extra years and not worrying about whether you can afford to live.

Best wishes

Jason

______________________________________________________________________________________
[1] Office for National Statistics: ‘Estimates of centenarians in the UK’, 29 September 2011
[2] Department for Work and Pensions: ‘Number of Future Centenarians by Age Group’, April 2011

Barely a day goes by without a negative news story.  Whether it’s Spain’s banks about to implode, Greece on the brink of bankruptcy, the euro about to collapse or pasties getting more expensive, the barrage of negative news continues apace.  Against the current economic and social backdrop I watched with great interest the latest BBC modern history programme ‘The 70s’[1], which chronicled the UK’s social, political, cultural and economic situation from 1970 to 1979.

I was a child growing up in the 1970s and had forgotten how bad things really were back then and how much progress we have made.  We made some really awful products back then that no one wanted to buy (remember cars like the Morris Marina, the Austin Allegro and Rover SD1?); we had terrible labour relations with widespread and frequent strikes (three day week and power blackouts anyone?); rampant inflation (circa 25%); we had to go cap in hand to the International Monetary Fund (IMF) for our own financial bailout; and on top of that we had only three television channels and no internet!

Life expectancy for men and women in 1970 was 68.7 and 77.8 years respectively, but by 2008 this had risen to 75 and 81.9 respectively - a staggering increase when you think about it.  Some of this improvement was probably due to the fact that, whereas in 1974 24% of men and 13% of women were classed as heavy smokers, by 2008 this had fallen to 7% for men and only 1 in 20 women[2].  Not to mention the fact that you can now go out for a drink or a meal without having to worry about the potential dangers of passive smoking since smoking in public places was banned several years ago.

By 2007/08 the UK had over 2.5m students in full time education compared with 621,000 in 1970, with a seven-fold increase of women in higher education.  By 2007/08 over 60% of under-fives were attending some form of schooling compared with 20% in 1970[3].  Whereas the state primary that I attended between 1974 and 1980 had over 40 children in a class and we were left to fend for ourselves with little or no teaching, the state primary school my youngest daughter attends has 26 children in her class, the teacher has an assistant, and they follow a structured national curriculum. On top of that my daughter receives several items of set homework each week including spelling, multiplication tables, comprehension and numeracy. How times have changed.  

The 1970s also heralded the introduction of some very important and far reaching legislation including: The Equal Pay Act; The Sex Discrimination Act; and The Race Relations Act. Collectively this legislation has made the UK employment market fairer and more equitable, even if it took a few decades to take full effect.

Another, much underestimated, change that has happened since the 1970s relates to the massive explosion in self-employment and attitudes towards running one’s own business. The UK is now more entrepreneurial compared with the 1970s, with TV programmes such as The Apprentice bringing the idea of self-sufficiency and building a business to the mainstream.
 
While the current economic problems, political pressures and other social issues present real challenges for the UK and many other countries around the world, it also marks the next chapter in the relentless and unstoppable progress of the human race. We’ve come a long way over the past 40 years, with really profound and substantial improvements in living standards and there is no reason to expect any less progress over the next 40 years.

Best wishes

Jason

 
[1] BBC Television ‘The 70s’ broadcast on 16th, 23rd & 30th April and 14th May 2012
[2] Office for National Statistics - Social Trends 40 (2010)
[3] Office for National Statistics - Social Trends 40 (2010)

Bad news, of which there has been quite a lot over the past few years, always seems to be more prominent than good news.  This is not in any way to denigrate the seriousness of some of the bad news that the 24-hour media world delivers, whether it relates to world hunger, military conflict, human rights abuse or natural disasters, to name but a few.  The issue with the relentless focus on what’s wrong with the world is that it can cause us to be unable to take in good news.  This in turn can lead to wealth-destroying behaviour.  My view is that we need to view these negative and distressing world issues in the context of a strong faith in the future and optimism about what humanity has already achieved, is achieving now and can achieve in the future.

I have no doubt that there will be setbacks, challenges and further ‘turbulence’ as we seek answers to some of the world’s most serious issues.  However, what keeps me happy and motivated and disciplined in both my personal and business life as well as in how I manage my own and clients‘ wealth is a strong conviction that the future is exciting and full of promise.  Without a strong faith in the future, it’s virtually impossible to devise any long term wealth plan and, more importantly, stick with it through the inevitable setbacks and problems that life throws up.  There are three key elements that underpin my faith in the future.

The growth of the global middle class
China, India and South America are regions of the world which are seeing a massive increase in the number of affluent individuals - the so-called middle classes.  In India it was recently estimated[1] that the number of high-income middle class families (46.7 million) now exceeds the number of low-income middle class families (41 million) for the first time in history.  These individuals have high real incomes, growing wealth and a desire to improve their standard of living.  This means that the global market for goods and services, far from contracting, is likely to grow at a rate unprecedented in modern history.  Talk of global recession or stagnation seems therefore way off the mark.  Clearly Chinese and Indian businesses will develop to meet some of this huge demand but a significant amount of it will be met from non-Asian businesses, whether they be large multinationals or small family enterprises.

Science and technology
The rate of development of new technology and scientific breakthroughs is such that many of the current and seemingly intractable problems facing the human race today are likely to be solved in the coming decades.  We are not far from major breakthroughs which should see: clean water for all through new non-energy intensive desalination methods; access to self-directed worldwide education for the poor; more efficient non-land based farming; new and improved preventative medical services and virtually unlimited energy from highly efficient solar power and a new generation of safe and cheap nuclear power.

A good illustration of how science is delivering prosperity through the development of innovative solutions to today’s problems was set out in a recent article[2] in the Wall Street Journal (WSJ) explaining how new extraction and processing methods are enabling the United States to ‘liberate’ a century’s worth of its natural gas reserves which had previously been economically unviable to extract.  There is so much natural gas being generated in the US that the spread between the price of oil and gas is at an all time high.

An additional benefit of the ‘dash for gas’ is an explosion in US energy-related jobs from 400,000 in 2001 to over 640,000 in 2011.  In addition, the WSJ points out that numerous steel and petrochemical manufacturing facilities are being built (and rebuilt) along the US Gulf Coast rather than in Asia, due mainly to the cost of US gas being about a sixth of that in Asia.  All this activity is a major stimulus to US economic activity and a key reason why the Fed has decided not to pursue a third round of quantitative easing.

Progress not perfection
Many of us have an ideal of what success looks like in various areas of life - health, relationships, business, hobbies - but if achieving the ideal is the only or main way that you judge your success, the chances are that you will never be happy and fulfilled and will start to lose your motivation and passion for life - this is known as being in ‘the gap’.  If, however, you judge your success by the progress that you have made over time, then the chances are you will avoid ‘the gap‘ and maintain confidence when you realise just how much success you’ve achieved.  For example, even though I’ve coveted having a perfect ‘six pack‘ abdomen, this achievement has, to date, sadly eluded me.  However, while I might not have achieved the perfect abdomen, in the course of my fitness training over the past 25 years, I’ve managed to stay lean, healthy and full of energy.  While I was hopeless at sport at school, I am much happier with my physical fitness today than my old school chums who may have been good at football but have since let themselves go.

If we look at the progress that the human race has made over the past 100 years, it is truly astonishing what we have achieved and the standard of living that much of the global community now enjoys.  Even ‘poor’ people in developed counties today see a telephone, television and motorised transport as a necessity.  One hundred years ago such things would have been the preserve of the seriously wealthy.  I know that there are still billions of people living in dire conditions and experiencing terrible suffering but unless we acknowledge the progress humanity has achieved to date, we might not realise that further success in solving the world’s problems isn’t just possible but completely inevitable.  If you want a more in depth understanding of how science will solve many of the world’s challenges, I can highly recommend a new book called ‘abundance’[3] as it’s done wonders for my own faith in the future.

So the next time you hear negative news, just remember that things really are much better than you think and science is coming up with the answers.  That way you can stay optimistic, protect your confidence and live a full and meaningful life.

Regards

Jason

1 Indian National Council of Applied Economic Research (August 2010), “How India earns, spends and saves”
2 Gold, Russell, The Wall Street Journal (8 February 2012), “Oil and Gas Boom Lifts U.S. Economy”
3 Diamandia, Peter H, Kotler, Steven, (2012) “abundance – The Future is Better Than You Think” (ISBN 978-1-4516-1421-3)