Navigator Financial Planning - The Shipping Forecast

The future is difficult to predict, in shock sensation

Mon, 13 May 2013 08:26:59 +0100

We've known for a long time about the evidence that good past performance doesn’t persist; think of the FSA’s disclosure statement, Past performance is not a guide to the future. But what about other indicators? Surely the independent ratings agencies should be able to give us some idea?

A number of years ago I started recording some of these independent ratings, which take into account a whole range of objective and subjective criteria. Just for fun, I pulled these out from May 2010 to see how the ratings have done in predicting future performance.

The short answer is, Not very well.

If an investor or adviser selected a fund based on the ratings, the chances of it doing well over the next three years turns out to be pretty much random.*

There is no denying that some fund managers do better than others. The difficulty is in predicting which ones to pick.

There is a better way…

David Crozier CFP

*Source of data: Financial Express Analytics. Data: UK All Companies sector between May 2010 and April 2013. Correlation between Financial Express Crown rating and quartile ranking of 3 year cumulative performance was 0.133.

It must be true, I read it in the newspaper

Thu, 25 Apr 2013 08:57:06 +0100

The Wall Street Journal once published an article, written by one of its eminent financial researchers and columnists, revealing that shares of US companies beginning with the letters A through M outperformed those from N to Z in the period studied, which was up to 2001.

What was even more significant was that this trend held up, very consistently, for any period, up to as long as 30 years.

This would seem to be remarkably robust data; enough, on the face of it, to influence the way investors and advisors should approach investing in the US.

Until somebody pointed out that A-M contained Microsoft, and N-Z self-evidently didn’t! As Microsoft was, by far and away, the best performing US stock of the last quarter of the twentieth century, any portfolio that didn’t contain it was always going to underperform.

It is simply not good enough to look at an investment idea – buy gold, use structured products, invest in property – and assume that one should adopt it, simply because of a period of apparent good performance, or because someone, however eminent, says so. There has to be a good reason why one investment is better than another.

If something looks too good to be true, it usually is. Evidence, data and science will win out eventually.

David Crozier CFP

Pro tanto quid retribuamus

Thu, 18 Apr 2013 08:53:03 +0100

In case you’re wondering about the sudden outbreak of Latin, pro tanto quid retribuamus (what shall we repay for so much that we have received) is the motto of the city of Belfast, and is a quotation from Psalm 116 in the Vulgate Bible.

Obviously, the city fathers must have been feeling pretty good about the way things were going in the late eighteen and early nineteen hundreds, and with good reason – one of most productive cities in the Empire, world’s first air conditioned building, world’s first medical use of x-rays, one of the world’s greatest shipbuilders (the Titanic was fine when it left here, mate!)

And we’ve generally been pretty good at giving some of it back. Even now, organisations like Giving Northern Ireland and Community Foundation NI do a great job of promoting philanthropy in Northern Ireland.

If you are thinking about leaving some money to good causes in your will, you should speak to a specialist about it. Estates that leave a significant share to charity are taxed at a lower rate of Inheritance Tax, as well as enjoying certain exemptions. Because of this, it is sometimes possible to significantly increase the amount left by a will to charity without reducing the amount inherited by heirs.

Philanthropy is about so much more than just giving money, or leaving some money in a will. But it’s a reasonable place to start, and if you are thinking about it, you might as well make sure that it counts for as much as possible.

David Crozier CFP

Stargazing

Fri, 12 Apr 2013 08:52:52 +0100

One of the UK’s most popular active fund managers, Richard Buxton, announced last month he is leaving Schroders for Old Mutual. His £3.5bn UK Alpha Plus Fund has performed well by conventionally accepted standards and is ahead of its FTSE All Share benchmark over most time periods.

People who hold Mr Buxton's fund might be wondering, therefore, whether to follow the star to Old Mutual. Schroders is so concerned about an exodus it warned that up to £1bn was at risk of exiting the fund.

But what is really driving performance? Are we buying the man or the market and which is more reliable in the long term?

Mr Buxton's fund, for example, is billed by Morningstar as one that buys large companies with no particular bias towards value or growth shares. But it has a distinct tilt towards companies that are smaller than the market average it is measured against. This means when small companies outperform the wider market, as they tend to do over time, Mr Buxton's fund will probably also outperform. This is good for investors in the fund who share this outperformance but, given the fund's billing as a large companies fund, they may be unwittingly exposed to more risk than they expect.

And given that investors in smaller companies can expect higher returns for taking that additional risk, they might want to compare the fund's performance to them rather than the whole market. On that basis, the fund's performance is very much as you might expect.

This is not to say that Mr Buxton is not a skilled investment manager and should not be followed, or that his successors cannot continue his good track record. The point is simply that successful investing is often more about understanding the sources of market return (and how to capture them in a systematic, low-cost way), than it is about picking a star manager and hoping to ride on their coat tails

Two star or four star? Me, I say, fill her up with unleaded.

David Crozier CFP

Irrational exuberance

Thu, 14 Mar 2013 08:43:38 +0000

Stock-markets have continued to climb this week, with the FTSE-100 pushing over 6,500 a couple of times. So should we all be buying stocks, now that they’re doing so well?

Not necessarily. And certainly not simply because markets have gone up.

Beware the emotional cycle of investing – buying with the heart instead of the head will almost certainly cost you money.

There is no doubt that it is difficult. People feel best about investing when things are going well, but that’s also the point of maximum risk.

It’s not what the market is doing today that matters, it’s what it will do during the time-span of your financial plan, which is measured in years, and more likely decades, rather than weeks and months.

Stick to the plan – it’s as important now as when markets are down.

David Crozier CFP

Steady as she goes

Tue, 12 Mar 2013 07:15:40 +0000

I love boats and anything to do with them. In fact, it was one the reasons 'Navigator' resonated with me when we were choosing a name for the company.

I'm just completing my studies to achieve the Royal Yacht Association Day Skipper theory qualification. It's been very interesting and useful, particularly the sections on navigation.

If I want to sail from, say, Bangor to Carrickfergus, I first of all need to define where I want to go. Then I must make a number of assumptions about how my course will be affected, positively or adversely, by wind speed and direction, tides,and so on. I can then plot a course to steer.

In practice, one or more of these assumptions will almost certainly turn out to be wrong, because nature doesn't often work in straight lines, or obey human rules.

A bit like life, really.

And so, when sailing from Bangor to Carrickfergus, I have to keep checking where I am against where I want to go, and make corrections as necessary.

A lot like financial planning, really.

David Crozier CFP

Predicting the future just got cheaper

Fri, 15 Feb 2013 15:31:28 +0000

Now that we're in a world where no commission is paid on active funds, and therefore the cost differential is coming down, the major argument for rejecting active fund management in favour of strategic asset class funds is gone. Right?

Actually, no.

The argument does not revolves simply around charges. One huge benefit of passive funds is the lack of style drift which is unavoidable with active funds. With an asset class fund, I know exactly what is in it - and can therefore control the risk in client portfolios - whereas an active manager has the freedom to rove all over the spectrum of value, growth, large and small; even between countries. For example, I think most people with an actively managed UK equity fund would be surprised to find they own overseas stocks in their fund - but they can, and very often do.

There is also the issue of diversification. Active funds will only hold a subset of the available market. Diversification can be extended by owning more than one active fund but they may – and often do - hold substantial holdings of the same securities, therefore there is no guarantee of achieving the diversification we seek; on the contrary, it may even lead to greater concentration.

On the other hand, if we invest in an active fund which does have broad diversification, we are actually getting close to the index, but at higher cost and with potentially far higher turnover costs.

Even if we focus purely on costs, a basket if active funds will still cost in excess of 0.75% a year, compared with maybe 0.45% or less for passives. That's an increase in cost of nearly 80%.

Also, when we get into the less liquid markets (such as smaller companies or emerging markets) managers think there are more opportunities to exploit and tend to trade more. And the cost of each trade are higher in these markets. High turnover and high trade costs results in a drag in performance against which the active manager has to swim even harder to stay level with his passive competitor.

Although it is only one of the factors we consider, it seems to me that the argument for asset class investment on the grounds of cost is still valid. Bill Sharpe’s 1991 paper, The Arithmetic of Active Management is still true – “after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar.”

Even if none of this were relevant, we are left with the inescapable conundrum of which manager to pick. There is no doubt that good active fund managers do exist - we just have no way of knowing in advance who they are going to be.

Just because predicting the future got cheaper, doesn’t mean it’s any easier, or less risky.

David Crozier CFP

Psst! Want to buy a cheap camera?

Fri, 18 Jan 2013 13:53:06 +0000

Some well-known high-street names have gone into administration in recent weeks. It is a shame for all the employees of HMV, Blockbuster and Jessops but few people were surprised at their demise. All three were caught flatfooted by changing consumer trends and the writing had been on the wall for months or even years.

This latter point is often used to extol the virtues of stock picking – the suggestion being that with the right research and analysis you can avoid stocks on a path to self-destruction.

Intuitively this story sounds like a reason to favour active managers, but it does not stand up to much scrutiny. Risk and return are related and some risks, like investing in small and value companies, have repeatedly rewarded long term investors. This means investing in these companies is riskier, but investors are usually rewarded, on average and over time for taking that additional risk. In financial jargon, these risks are the small and value premiums.

When you buy small or value companies, you should expect some of them to perform badly – that’s the nature of the additional risk – but you should not worry about this for two reasons. First, by holding a large number of stocks in a portfolios, no single stock will neutralise the small or value premium. Second, the small and value asset classes you hold have historically outperformed the wider market in spite of the failure of some of the individual companies within them. In other words, some of the companies in a portfolio will perform badly, but on aggregate the winners beat the losers.

Yes, stock pickers can sometimes avoid blow-ups, but the unrewarded risks and management expenses they impose on investors in doing so are rarely worth it.

David Crozier CFP

L is for Lemming

Wed, 02 Jan 2013 17:43:42 +0000

Happy New Year, everybody!

So President Obama finally knocked enough heads together to stop the US running off the so-called fiscal cliff. I'm not going to explain the detail of what that is, but everybody's says it would have been bad.

It was interesting to watch the markets. When it looked like a deal wouldn't be done, the FTSE-100 finished the year at 5,897, down 1% from just a few days previously. At the end of Wednesday, the first day of trading after Barack did his stuff, the FTSE-100 closed at 6,027, up over 2%, and its highest for 17 months*.

Anybody that reacted to the news of the deal, selling when it looked to be off, and then buying once it was on - and clearly a lot of people did, otherwise markets wouldn't have moved as they did - is out a fortune. They've lost twice: at worst, 1% on the way down; and then up to 2% on the way up. And 3% is a lot of money to claw back in a low-growth environment.

Yes, some people would have got lucky, but it was only luck. It was not clear what was going to happen; still isn't, for that matter. Markets react much too fast nowadays for most people to be able to take advantage of them. The only sensible option is to hold on, and wait until short-term difficulties unwind themselves.

By the way, maybe we should start calling Obama, President Obi-Wan Kenobi - after all, the great Jedi Master was also known as the Negotiator.

David Crozier CFP

Source: Financial Express and BBC

Letter to G Osborne

Wed, 05 Dec 2012 09:04:00 +0000

Here's a letter I wish I had the nerve to send to the Chancellor...

Dear Mr Osborne

According to the press, you are considering changing, yet again, the rules concerning pension contributions and tax free cash. This is daft, on a number of fronts.

It is unfair - people should be taxed on income when they receive it. Contributions to pensions are essentially a deferment of income, and should be taxed only on receipt of pension income, as they are now. To disallow higher rate tax relief on pension contributions would, effectively, be to tax those contributions twice.

It is prohibitive - why would anyone contribute to a pension and only get 20% tax relief, when they will pay 20% income tax (or maybe more) on the pension in payment? There would be absolutely no point in tying up money until at least age 55 without some tax advantage.

It is confusing - I have been involved in financial services since 1994 and I am having difficulty remembering a year in which there was not some change to pensions regulations; certainly the last five or six years have seen changes every single year, sometimes within a year, and sometimes to the same rule. Financial advisers have trouble keeping up; how do you think our clients feel?

If you don't want people investing in pensions, why not just say so, and throw out the most successful private pension programme in Europe, which has more money in private pensions than the rest of Europe put together.

I would urge you not to sacrifice the long term future of UK pension savings for the sake of short term political expediency.

Yours sincerely

David Crozier CFP

Fools and their gold

Tue, 30 Oct 2012 16:56:46 +0000

One of the great investment stories of modern times is the success of the big American university endowments. The funds are massive – Harvard’s stands in excess of $30 billion – and have been widely touted as the way everybody should invest, moving their assets into hedge funds, commodity futures, and private equity. Many other colleges and other institutions copied them, moving away from simple, asset class investing to alternatives.

In the latest returns to June 2011, now starting to be reported, this strategy seems to have come unstuck. In a year when the S&P500 (the benchmark by which many Americans would judge how the market is doing, in the same way as Britons would use the FTSE-100) went up by 5.5%, the Harvard endowment lost 0.05%. Endowments of all sizes have underperformed a simple mix of 60% shares, 40% bonds.

When Harvard and Yale were starting down this road, they had, because of their size, access to the best deals, and it did work. Now that everybody’s at it, the bright light of the market shines into every dark corner and prices become fair for everybody.

And because costs for alternatives are much higher than for the more usual liquid assets, they have to work much harder to achieve a market return.

In the end, alternative assets can become a very expensive alternative to assets.

David Crozier CFP

Baa baa black sheep

Mon, 22 Oct 2012 08:57:12 +0100

I read last week that July 2012 was a record for investments in bond funds, most of it from cash*. People that were keeping their money safe (as they saw it) saw fit to take €15 billion and put it into an asset class that, because of falling interest rates and demand from pension funds, has seen a multi-year rise in prices.

The best reason for buying an investment is because it contributes to the risk-return profile the portfolio is trying to achieve.

One of the worst reasons for investing that I can think of is a rise in price – especially if this has been a sustained rise. I don’t know about you, but I prefer to buy things when they’re cheap, and sell when they’ve gone up in price!

Unfortunately, many people follow their hearts rather than their heads, and get it the wrong way round. As Carl Richards says in The Behavior Gap**, “Repeat until broke”.

Baaaaaa! (Or whatever sheep noises look like written down.)

David Crozier CFP

*Source: Morningstar

**He’s American, so please excuse his spelling.

The feel-good factor

Tue, 16 Oct 2012 10:02:22 +0100

It doesn’t really feel like good times, does it? Greece, Spain, rising fuel costs, low GDP growth, fragile consumer confidence.

However, here are the facts – UK and world shares are up almost 10% so far this year, and investors in UK value and small shares have seen even better returns, of over 15% and nearly 25% respectively.*

The fact is that, in general, the economic numbers and the feel-good factor usually follow the market.

If an investor waits until the market falls before getting out, he loses; and if he waits until the market goes back up before buying, he loses out again.

“If you see a bandwagon, it’s too late!” Sir James Goldsmith

Most investors’ circumstances have time horizons measured in years, if not decades; waiting to see what happens this year or next really doesn’t make a lot of sense.

David Crozier CFP

*Data source: Financial Express. FTSE All Share, MSCI World, Dimensional UK Value Companies, Dimensional UK Small Companies

Dave Brailsford is a genius

Fri, 05 Oct 2012 08:55:10 +0100

I can't believe I got this far without writing about the Olympics.

One of the key areas of success for Team GB was cycling. And although, ultimately, the individual athletes needed to perform magnificently, the team success was in large measure due to Dave Brailsford, responsible not only for Team GB, but also for Bradley Wiggins and Team Sky that stormed to success in the 2012 Tour de France.

Brailsford coined the phrase, 'aggregation of marginal gains'. He examines, in minute detail, every aspects of the athletes' lives, experimenting with everything right down to what pillows they sleep on and how they wash their hands. An improvement might only shave a few thousandths of a second off a lap time, but when all the gains are added together, they matter. Especially in a race where the difference between gold and no medal might be a few hundredths of a second.

The result? Out of 14 races entered, Team GB won 12 medals, including eight golds. Plus first and second in the Tour de France.

So small differences do matter. Which is why it is important to work hard to drive investment costs down. For example:

We recently moved the UK component of the Navigator portfolios from Legal & General to Vanguard, to reduce the Total Expense Ratio from 0.23% to 0.15%. Worth it for a saving 0.08% per annum?

Maybe not, but when it's added to the 0.24% saving we've managed to achieve in the property asset class, and the 0.05% reduction in Transact's fees this year and last year, you can see how the principle of the aggregation marginal gains applies to investing.

And it's even more when powerful when you consider that most people's investment time horizon is, or should be, measured, not in years, but decades. Over 25 years, that all adds up to an 11% improvement in investment returns, or putting it another way, an extra £110 on every £1,000 invested.

Every little really does help*.

David Crozier CFP

*With apologies to Tesco, but it's just the truth!

Fancy a flutter?

Tue, 19 Jun 2012 08:36:48 +0100

This is Royal Ascot week, and among all the fuss about hats and dress code in the Royal Enclosure, there is an investing analogy to be related.

Black Caviar, the most famous Australian racehorse since Phar Lap, has made the journey half-way round the world to compete in the Diamond Jubilee Stakes on Saturday. Black Caviar is on a 21-race unbeaten run; and what's more, has never looked like getting beaten.

If you wanted a small flutter, you could get odds of 7/11*.

Today (Tuesday 19th June) Sir Henry Cecil's Frankel is the runaway favourite in the Queen Anne Stakes, at odds of 1/7*, which means that if you wanted to have a chance to win £100, you would have to bet £700. So not much point in a small flutter then.

So where's the investment story?

The share price of companies is calculated based on the cash flow that the market expects to receive from them over the coming years, in the form of dividends and future growth.

Companies that "everybody knows" will do well over the next few years tend to have higher prices relative to their asset base than less successful companies, with less visibility in their profits.

Think Apple: people keep asking me if they should buy Apple shares. After explaining that they already hold Apple in their portfolio anyway, in proportion to its share of worldwide markets, I say this: people know that Apple is doing well and expect it to continue doing well; the share price is already reflecting this information. The odds, if you like, have already been bid up to take account of that multi-year/21-race record.

And fancied horses do lose. Think Facebook. Think Russia and Holland exiting the Euros in the first round.

The similarities end there. Gambling is not like investing. With a properly constructed buy-and-hold investment portfolio, everybody can win. Just because your portfolio makes money in a rising market, doesn't mean that someone else is losing. With gambling, there are winners and losers; and remember that the bookie always wins, no matter the outcome of the race.

Apparently. I'm not a betting man, myself.

David Crozier CFP

*Oddschecker 18/6/12. Odds are to win.

The value of investments can go down as well as up, and you may not get back your original investment.

Happy Tax Freedom Day!

Tue, 29 May 2012 11:47:59 +0100

This is the day (30th May) when George Osborne metaphorically sends you a card to say, Thanks for that; you can call the rest of the year your own.

Up to now, you been beavering away to pay the salaries and pensions of the public sector, the interest on the UK's debt, and useful stuff like that.

(Just in case you think I'm anti-public sector, a lot of it most certainly IS useful - nurses, doctors, teachers, and many others: we couldn't do without them.)

And if you thought that was bad, consider this: if we were paying enough tax to cover all Government expenditure, Tax Freedom Day would be 26th June!

Enjoy the rest of the year!

David Crozier CFP

Deja vu - again!

Tue, 22 May 2012 14:50:20 +0100

Or should that be, Το έχουμε δει αυτό πριν

One of these days the BBC is going to run a headline, something like.

"Markets collapse!

Dividends will cushion the blow.

And they'll probably recover again anyway. Chill!"

Or maybe not. It's a bit too much like, "Dog bites man, man curses a bit, but nothing happens." It's just not news. And it's not news because it happens all - the - ruddy - time!

Yes, it's uncomfortable; yes, it would be nice to avoid it; but no, it's not fatal.

Remember the principles.

Faith in the future - we're in this, together, for the long haul, and in the long run we believe that the most successful companies in the UK and around the world will innovate beyond our wildest dreams, and produce dividends and capital growth along the way.

Patience - this may not, will not, happen overnight. There have been long periods of time in history when markets went sideways for years (but all the time producing dividends). And we're not in this, any of us, for tonight or tomorrow - we want to protect and preserve wealth for the long term.

Discipline - there is no point in having a system, only to bail out of it when the going gets tough. The whole point of the system is make sure that you get through trouble. Imagine the navigator of ship saying, in the middle of the hurricane, it's all getting a bit nasty, maybe we should try something different to get us out of the storm.

As an aside, I would point out that the Navigator Prudent portfolio is currently breaking even over one year, and is showing a healthy profit over two, three, four, five years* and beyond.

Greek crisis? What Greek crisis?

David Crozier CFP

*Source: Financial Express, as of 17/05/12. Past performance should not be taken as a guide to the future. The value of investments can fall as well as rise, and you may get back less money than you invest when investing in real assets.

How to kill a goose

Wed, 09 May 2012 17:49:27 +0100

One of the unexpected proposals in the recent UK Budget was the proposal to limit all previously unlimited tax-deductible opportunities to the lesser of £50,000 or 25% of income.

Fair enough, on the face of it: given that there is evidence that some of the wealthiest people in the UK pay little or no tax, using perfectly legitimate arrangements, maybe we need to find some ways of getting some tax out of them.

But we need to be careful of the law of unintended consequences.

While we all, I am sure, put our hands in our pockets for good causes, it really is the very wealthy that contribute most, with 48% of all donations coming from just 7% of the population. And it's not just the money; they tend to get actively involved. So while your tenner or mine is certainly welcome, it is obvious that, without the wealthiest donors, the philanthropic sector in this country is in deep trouble.

The problem seems to be one of ideology. Governments think they can allocate resources better than anybody else, whereas some people believe that any organisation that spends 39%* of its revenue on administration shouldn't be in charge a municipal bazaar, much less a country. Such people prefer to allocate their funds where they feel it can help most, and where the dead hand of Government bureaucracy will have less of a drag on it.

Politics aside, let's look at the numbers.

Today, if someone** donates £800,000 to a registered charity, the charity can get another £200,000 in Gift Aid and the donor gets £300,000 tax relief. The gift has cost the donor £500,000, and the charity has received £1,000,000.

Next year, according to the proposals, our putative donor will only be able to afford £500,000, because there's no tax relief. Let's assume for a moment at Gift Aid still operates; the charity will get £125,000 from HMRC. Total cost to donor £500,000; total revenue to charity £625,000.

And that's at best. Under the present rules, Gift Aid can only be claimed if the donor can reclaim the tax. Unless that's changed, in the scenario above the charity will only get £500,000.

My point here is that, regardless of whether you think wealthy people will or should continue to make charitable gifts (and there is some evidence that, by and large, they will) the changes to the system mean that, even if the gifts continue at the same level, the revenue to the charities will fall by either 32.5% or 50%. Even if it only affects gifts from the most wealthy donors (say the 7% mentioned above, although that is almost certainly an underestimate) that will result in a minimum 16% reduction in revenue for charities.

Somebody needs to introduce Mr Osborne to Aesop's fable of the couple that killed the goose that laid the golden egg because they thought it had a lump of gold inside it.

David Crozier CFP

* Heritage Foundation 2012 - tax take as % of GDP

** The proposals will only affect top rate taxpayers, so I've done all the calculations assuming 50% Income Tax, and that they've already used up the £50,000 or 25% cap.

Pensions are complicated, Chapter 27

Wed, 18 Apr 2012 10:44:00 +0100

Back in heady days of Thatcherite privatisation, one of the things that was privatised was the ability to decide where part of one's state pension was invested. We could take the bit of our pension that was more than the basic old-age pension and invest it as we chose in a personal pension.

Given the way successive governments have changed the rules on state pensions, taking the money and building up a personal fund has proved to be a fairly good move for many people. The question really came down to, Do you trust the government more or less than you fear investing in the market?

Those days of contracting-out are fast drawing to a close, having passed the last year end for which rebates are due; these will trickle in over the coming months.

Given that those rebates could be fairly chunky - in many cases amounting to thousands of pounds a year - their absence will leave a hole in many people's pension planning. And the self-employed never got them anyway, so they were behind the pensions eight-ball to start with.

There is some good news. The funds built up by these rebates were subject to additional rules at retirement, which were really quite restrictive. These limitations have now gone, and contracted-out funds can be used in exactly the same way as any other personal pension fund.

If you have been in receipt of contracted-out rebates, now might be a good opportunity to have a look at your retirement planning. Either the loss of rebate will enforce a change of plan, or the removal of restrictions means you can now benefit from an income profile that suits you.

One thing is sure: a change to inputs will inevitably lead to a change to the outcome. Make sure you understand what that new outcome is for you, and if you like it.

David Crozier CFP

Buy! Buy! or Bye-bye (for now)?

Fri, 02 Mar 2012 11:29:45 +0000

Facebook has announced what will be the largest flotation of an internet company to date, as they seek to raise $5 billion in an initial public offering (IPO). The company is very profitable, with profits of $1 billion from turnover of $3.7 billion. This is a profit margin that would make most “real” business green with envy, and it’s been an increasing trend.

So it’s an easy decision – buy Facebook as soon as you can, because the price is going to go up and up?

Maybe not.

IPOs do not have a great track record of providing good returns for clients, and there’s a good reason for this. The media hype surrounding the bigger, more interesting, businesses inevitably stimulates interest. More people want to buy, and demand for the shares pushes the price up, probably beyond their real value. A chart of the average price following flotation of eight of the largest and most hyped IPOs of recent years makes for sobering study.

“The four most dangerous words in investing are, This time it’s different.” Sir John Templeton

This is absolutely not a recommendation not to buy Facebook, either now or in the future. But perhaps it might be better to wait for a while until the market decides what the true value of the share is, when all the razzmatazz settles down. I have no reason to doubt, by the way, that Facebook will find its way into our portfolios in a considered way over the coming months.

Buying today in the hope of making some money on the share price going up is speculation; true investing is buying a great company at a fair price and holding it for ever to enjoy the dividends that will inevitable arise from a profitable business.

David Crozier CFP

Give me strength! Who is telling people the truth about risk?

Fri, 24 Feb 2012 14:25:43 +0000

Apparently the latest research by the FSA shows that majority of people (61%) are unwilling to take risk with their investments.

Welcome to Realville: THERE IS NO SUCH THING AS A RISK-FREE INVESTMENT! Investors have to make a choice; even doing nothing is tantamount to making a choice. If they choose to “invest” in cash so as not to risk loss of capital, they will then be taking other risks; inflation, or currency, to name two.

The same research found that around 20% of people sought some form of financial advice. There may be some correlation here, because one of a financial planner’s jobs is to educate their clients about money.

But I have a question: what is the regulator doing to educate people? Not very much, I would submit, if this is the outcome they get.

Let me leave you with two quotations that I think, together, make my point about risk aptly.

"A ship is safe in harbour, but that's not what ships are for." William Shedd

“The use of money is all the advantage there is in having it.” Benjamin Franklin

Have a great, risk-appropriate weekend.

David Crozier CFP

Harrods is more expensive than Lidl, in shock sensation

Wed, 18 Jan 2012 16:51:38 +0000

Well-known consumer group Which? has published a report into the fees financial advisers charge, and has found huge variations in the cost of advice for “exactly the same service” and have called for much greater transparency in the fees charged.

We agree with this principle. In fact, we agree with a lot of the conclusions this article draws, in particular the eight questions they suggest you should ask a financial adviser (down at the bottom of the article).

We completely support the call for transparency, both in this article and by the Financial Services Authority. We are, and have been, an advocate for the Retail Distribution Review, due to come into effect in January 2013, which, inter alia, insists that financial advisers must agree with their clients how much they pay for advice.

Where we don’t agree with Which? is their call for a “rate guide” to be published on advisers’ websites. This implies that financial planning can be reduced to a series of financial transactions, whereas we believe that the arranging of any products recommended is the least important part of the process.

Financial planning is the most important part: the creation of a strategy and a road-map that will direct you to your long-term financial goals, over many years, and the oversight and coaching to make sure that it all happens for you.

Financial products are commodities; financial planning is a service. Commodities are bought on price; a service is bought on value.

Only when the service is explained and the prospective client understands the value of financial planning to their situation can a judgement be made on price.

It is (usually) cheaper to fly Ryanair, but I (and almost everybody I know) will fly with another airline, if possible. Why? Because they value the service that other, less commoditised, airlines provide.

“A cynic is a man who knows the price of everything and the value of nothing.” Oscar Wilde

David Crozier CFP

It's official...

Mon, 16 Jan 2012 15:24:58 +0000

I am delighted to be able to use this first blog of 2012 to bring you some fantastic news about our company. At a conference last week in London, Navigator Financial Planning was awarded New Model Adviser of the Year 2012 for Scotland & Northern Ireland.

Given that this award is based on facts and figures and processes, and that some of the top financial planning firms in our region were shortlisted, this says a lot for the services we provide and the robustness of our processes. It's an achievement of which I think we can be proud, but I promise that we will continue to develop and improve what we do for our clients, so that, whether you use Navigator Financial Planning yourself, or refer others to us, you can be confident that our financial planning and wealth management service is up there with the best in the country.

It begins to sound a bit like the Oscars, but I really would like to thank the entire Navigator team and, in particular, Harriette and David for their efforts - without them, it would not be possible to do what we do, and we would not have received this award.

All the best for a successful and prosperous 2012.

David Crozier CFP

The Ghost of Christmas Yet to Come

Wed, 21 Dec 2011 17:15:47 +0000

I wanted to use this last blog of 2011 to reflect on what has happened during the year, and it seems to me that the major theme that sticks out for the year past, is Bad News. Whether it be unemployment or the euro; city riots, storms in the Philippines, or the tragic accident on the M5 - there seems to me to have been a steady drip, and sometimes a flood, of bad things that are happening in the world.

I have no problem with the reporting of bad news as such, as long as it's factual. But what really irritates me is the extrapolation of what has happened in the past, and what is happening now, for years into the future. For the purposes of this blog, I'm calling this the Jacob Marley* syndrome - the Ghost of Christmas Yet to Come shows Ebenezer Scrooge what will become of him, based on his past actions and attitudes.

Yet I urge you to be like old Scrooge, ignore the doom-saying of Robert the Pest and his ilk, and plan and act based on where you are now and where you want to go.

The fact is that market forecasters, investment gurus and, at least of all, journalists can do no more than guess at what might happen next year, never mind 10 or 20 years from now.

If you look back 20 years (and bear in mind that most of us have an investment horizon of at least 20 years, and usually much longer) you will be staggered at what's happened in that time. We were then in the middle of a rocky time economically, with lots of families in property negative equity and the first Gulf War was kicking off causing high oil prices and a spike in inflation. Since then we've had a technology bubble burst, the worldwide explosion of Islamic terrorism (including its most infamous manifestation in the destruction of the Twin Towers), the credit crunch, the creation (and now near implosion of the euro), major wars in the Middle East, a series of crises in the Balkans ... the list goes on.

And with all of that, the world's major stock markets have increased in value by 287%.**

Why? Because we've also seen in that same period unimaginable developments in science and technology. Not just the obvious advent of the internet, and all its attendant advantages, but in all sorts of widely diverse fields, such as medicine, renewable energy, digital cameras, to name three at random.

At the risk of sounding like a scratched CD (oh, there's another technological improvement I forgot about) we don’t know how things are going to come out right, but investors just know that they will.

On that (I trust cheery and positive) note, I leave you with Bob Cratchit's toast, "A Merry Christmas to us all, my dears." And Tiny Tim's response, "God bless us every one!"

See you in 2012.

Kind regards

David Crozier CFP

*If you don't what I'm on about, you might want to re-read Dickens' classic, A Christmas Carol.

**Data courtesy of Financial Express: increase in the value of the MSCI World Index from 20/12/1990 to 21/12/2011

We're getting there!

Thu, 24 Nov 2011 09:04:32 +0000

This week is Financial Planning Week, when financial planners and the Institute of

Financial Planning do all sorts of things to raise public awareness of what financial

planning is, and why people need it.

This is the fourth year of Financial Planning Week, and it seems as if the message might

be getting across.

Only 12% of people now agree or strongly Agree that financial planning is only for the very

wealthy, with a further 13% neither agreeing or disagreeing*. This means that fully three

quarters of the population believe, at some level, that financial planning is relevant to the

ordinary man or woman in the street. As well as the wealthy, of course!

And they are right: anybody that sets out to accomplish something in their life with a

financial implication - in short, pretty much anything - stands a much better chance of

achieving those ends with a structured and costed plan.

By failing to plan, one is planning to fail, is a cliche with a lot of truth in it!

David Crozier CFP

*Source: YouGov plc

This way up

Wed, 16 Nov 2011 22:19:37 +0000

Believe it or not, Planet Earth has two North Poles: one at the very top (the bit where the spindle comes out of the globe), known as True North; and Magnetic North, which is where magnetic compasses point.

True North is always at the top. No matter where you are on Earth, True North is always in the same place. In the Northern Hemisphere if you can see Polaris, the Pole Star, that’s where North is.

Magnetic North, on the other hand, is not so constant. For a start, it’s not located at geographic True North, which means that a compass will not point to True North. And it depends where you are on the planet how far away from True North it points.

To complicate matters even further, Magnetic North moves about. At present it appears to be moving from Northern Canada towards Russia at a rate of about 35 miles every year.

So you can imagine how careful small boats and other navigators that use magnetic compasses have to be. If they steered according to Magnetic North, they would, sooner or later, end up on the rocks.

I trust you can see the analogy with investing and financial planning. The economic and financial landscape changes, and the temptation is to steer where the current situation might take you. Yes, there will be rocks, sandbars and storms (and maybe even the occasional limpet mine!) but you still want to get to True North.

Overoccupation with what’s happening in the short term will pull you off course. Remember that you’re not planning (or investing) for today, tomorrow, or next week; you’re planning for the next five, ten, twenty years and for the rest of your life.

Look through the clouds for the Pole Star. Stick to your plan!

David Crozier CFP

Who chased whom how many times around what?

Thu, 10 Nov 2011 14:34:05 +0000

The classical scholars among you will no doubt recognise the barbarian allusion to heroic Greek poetry* in the title. For the rest of us, how much do we actually know about Greece? While on holiday last week with a group of friends, we had a discussion abut the Greek crisis, during which the following exchange took place. "I don't even like haloumi." "Is he the Greek president?" I think that sums up the general lack of knowledge of the country; so how can we be expected to know the details of its financial troubles and how it might affect us?

The Greeks have a different way of looking at things. After all, this is the nation that in 480BC, sent an army of only 300 men (ok, technically they were battle-hardened Spartans) to hold off an invading force of Persians estimated to be up to 300,000 strong. They succeeded in doing so for three days, and their brave action in the face of calamity at Thermopylae, ultimately led to a crushing defeat for the Persians!

So maybe it’s not surprising that at a time when Greece’s sovereign debt crisis is worrying many investors and increasing the volatility of stock markets across the world, the Greeks themselves seem to be taking a more resilient attitude. In contrast to most of their European counterparts, they have some considerable experience in defaulting on their debt. History records that the first default in Greek history occurred in the fourth century B.C., when 13 Greek city states borrowed funds from the Temple of Delos. Most never repaid their loans and the temple took an 80% loss on its principal. And in more recent times, Greece has defaulted on its external sovereign debt obligations at least five occasions - 1826, 1843, 1860, 1894 and 1932. The country has been in default for 90 years since it came into existence in its modern form in 1821.

So maybe we have to accept that debt, and defaulting thereon, is an ingrained part of the Greek psyche. It certainly doesn’t seem to have curbed their spending habits, as this recent article in The Athens News reveals. Do you know which city tops the global list of per capita ownership of 100,000 euro Porsche Cayennes? Why, it’s Larisa, of course. Never heard of it? Then you’ll be interested to learn that this town of about 250,000 inhabitants is the capital of the agricultural region of Thessaly in central Greece. And surprised to learn that there were more Porsche Cayennes in Greece than people declaring an income of more than €50,000. So how were they paying for them?

It strikes me that the Greeks seem to be remarkably free of the navel-gazing, self-recrimination which plagues other nations. Not for them the calm acceptance of personal responsibility! The anti-austerity riots of recent weeks, while doubtless appalling, speak to me of a people who are saying to an overwhelming European horde which they deem to be bearing down on them “Up with this we will not put”. In fact, it brings to mind their brazen response to another threat, some two and a half thousand years ago. One questions remains though – will there be a similarly catastrophic result for their modern day adversaries?

I don't think so. Western civilisation is still standing despite the long history of Greek financial improbity listed above. Maybe that's at least partly because its economy is only equivalent to the US state of Maryland, and is somewhat less than such economic powerhouses as Iran.*

Will Greece default? Possibly, even probably. Does it matter? Long term, almost certainly not.

David Crozier CFP

* For the non-classical scholars, Achilles chased Hector three times around the walls of Troy. Apparently.

* Sources: Wikipedia and the CIA

Sometimes, standing still is the best strategy

Tue, 11 Oct 2011 19:12:36 +0100

Imagine it’s the world cup final in Brazil. England is playing against Northern Ireland (look, I know it’s unlikely, but bear with me here....). The score is nil all. There are 45 seconds of play remaining. England has just been awarded a penalty. And you are the Northern Ireland goalkeeper.

Rooney places the ball on the spot. He steps back a few paces, grins menacingly at you, then makes his approach to the ball. What do you do? The hopes and expectations of the whole of Northern Ireland rest on your shoulders. Should you fling yourself impressively to the right? He might kick it that way and at least you’ll stand a chance of making a save. Or at the very least you’ll look cool. Perhaps Rooney will deliberately kick to the left instead? In which case, should you dive there? Decisions, decisions!

What’s the rational thing to do!

A recent study found that the chances of saving a kick when the goalkeeper stays in the centre is almost 50% higher than diving to either side. But most goalkeepers do not behave rationally when attempting to save penalty kicks. They dive far too often and would be better served by staying in the centre more.

It occurs to me that investors would do well to adopt a similar, rational approach in our response to the fluctuations in the market and stop trying too hard in a difficult situation. Instead of floundering around trying to exert control over outside circumstances, we should perhaps stay calm and centred. More often than not, "masterly inactivity" is the best thing (after all, it was good enough for Prime Minister Jim Hacker).*

A more traditional word for it might be “discipline”!

David Crozier CFP

*Here's the long version - 15 very funny minutes. The relevant bit is just under 5 minutes in.

Azar, Ofer H and Bar-Eli, Michael Bar-Eli ‘Biased Decisions of Professional Football Players: Do Goalkeepers Dive Too Often For Penalty Kicks?’ (What will these academics think of next to spend their money on?!)

Man, Monkey, or Monitor Lizard?

Wed, 28 Sep 2011 08:44:20 +0100

Another month, another round of financial crises and wild market swings.

There is no denying the hard numbers underlying some of the stories, but it's how we react to the stories and, more importantly, to the movements in investment markets that matter. Our reactions will determine nothing less than our financial future, so it's important that we react correctly.

Our brains are very complex organs, but there are three areas I would like you to understand.

First of all, there's the reptilian brain, which is concerned with survival. It wants to know where the next meal is coming from, and whether it has to run away from danger. Our brains were designed (created, evolved: choose your own word, the principle is the same) at a time when the biggest danger came from real bears, and the correct reaction was indeed to run away. Running away from a stockmarket bear, a period when the market has fallen, is, on the other hand, not a good move. It locks in any losses made, without any chance of recovery and guarantees that we lose twice: once on the way down, and again when the market goes back up, as it surely will, leaving us behind.

Then there's the monkey brain. Among other things, this part of the brain is motivated by emotions and, dare I say it, sex. The roller-coaster of emotion we all feel (yes, me too!) when markets go up and down is rooted in this part of our brain. If we make decisions based on these emotions, we will buy when investments are doing well (which is when they are relatively expensive) and sell when they go down (when, obviously, they are relatively cheap).

If you think about it, the point when an investment is about to go down in value is the highest value it's been for a while and is therefore the point at which investors feel best about it. But it's also the point of maximum risk. Conversely, the bottom of the market is when investors feel the worst, but is also the point of greatest opportunity.

If you understand this concept, you will never again invest based on emotions or feelings.

You may think the media and financial services companies deal in facts, and so they do, up to a point. But what do you think is happening when a headline reports "X billion wiped off pensions"? Or if a particular company or fund is advertised using a picture of a pretty girl? It's an appeal to the emotions.

Finally, there is the human brain, the part where we do our higher thinking. This part knows that the logical action is to buy things when they're cheap and sell when they're expensive. It knows that, even if Greek debt is out of hand or the UK economy isn't very strong, people still have to eat, they will still buy cars, they will still use their mobile phones; that the seven billion people (and counting) on Earth will still strive for a better life. And that companies will continue to fulfil those needs and wants, and make a profit in doing so.

Listening to the media and looking at advertising appeals to a very deep part of our natures. We quite enjoy having our emotions stimulated, even negatively; it's part of the human condition.

But please don't allow these parts of your brain to make decisions - it will cost you money.

David Crozier CFP

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Good news is no news

Sat, 10 Sep 2011 15:57:56 +0100

All the main news agencies make much of their impartiality and delivery of fair and balanced reporting. In terms of general news coverage this is all fine and dandy....but when it comes to reporting on the markets, I’ve noticed an interesting trend of late.

Messrs Peston et al are quick to jump on the bandwagon of gloom and doom when the markets go down with a bang...which they have been doing with some frequency of late. Then the talk is all of ‘convulsions in the market’...and ‘fears that the world economy is sliding back towards recession...’, with ‘millions wiped off shares’ and ‘panic in the pensions market’.

We're all doomed! To the barricades!

This may or may not be the case, but surely it is just as important to highlight when the markets jump back, as they have also done. Indeed as I write today (8th September 2011) the market went up 2.78%, back over 5,300, and there hasn’t been a squeak about it from our economic soothsayers. So it really does seem that no news from the pundits, means good news on the markets!

I believe there’s an important point to be made here. I am not denying the very real national and global economic forces that have driven our economy into its present state. However, confidence plays an integral part in market performance and confidence comes from having a balanced view. Surely it is imperative that our economic correspondents play their part in this by maintaining fair and equitable balance in their coverage of market events.

David Crozier CFP

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