Most financial powerhouses seem to hang their coat on bullish new year predictions for the stock market to woo investors, only to disappoint them later before another bout of over-bullishness.

The financial powerhouses’ predictions for where the FTSE 100 will end 2012, taken from the Daily Mail, are:

The Share Centre – 6565
UBS – 6100
Killik & Co – 6100
Credit Suisse – 6100
Brewin Dolphin – 5850
Charles Stanley – 5800
Goldman Sachs – 5800
Legal & General – 5500
HSBC – 5400
Morgan Stanley – 5000

Last year they were pretty much all wrong; some in a spectacular fashion.  The truth is that over the short term, market movements are so unpredictable that a prediction is simply no more than a guessing game.  I had a guess myself – I suggested somewhere around 5000 but I fully acknowledge that this is simply a guess and nothing more.  Unless it turns out to be correct in which case I will puff out my chest and provide a post-event rationalisation that makes it seem as if I knew all along.

To prove a point I am conducting an experiment throughout this year using a highly scientific instrument – a coin.  That’s right. Against the might of these financial titans I dare to wield the mighty coin.  I am using a £1 coin in fact.  If you want to join in and try this at home remember not to use a Euro in case you have to change coins half way through the experiment thus ruining your carefully controlled scientific conditions.

The FTSE closed at 5,572.28 on 30th December 2011 and re-opened on 3rd January 2012. Every day I will flip a coin to form a closing price for each day of trade. If it’s heads, the index increases by 1%, if it’s tails, the index falls by 1%.  The random walk that this will follow until the end of 2012 will be compared with the knowledge and foresight of various titans of finance, including those above. The daily close will be recorded on Twitter @mel_kenny with the hashtag #FlippingFTSE and there will be a recording every Friday from different, sometimes exotic, locations. There will also be important quarterly investment bulletins explaining the complex decision making processes behind the coin flipping.

You may be asking yourself ‘What’s the point of this nonsense?’  Well, it’s fun to do and write about plus there’s really nothing like a practical demonstration to make a point.  There will be important messages throughout the experiment – there’s one just below.  And who knows, I might get on the telly again!

So here is important message number 1:  You cannot predict short terms movements in the FTSE 100, or any other market. Sensible investors stop trying to time or predict the market. Research by Dalbar (July 2008) found the average annual stock market return between 1988 and 2007 was 11.6% whilst the average stock market investor return was just 4.5% because on average, people tend to rush into the market when it does well and leave when doing badly – even among some of the professionals.  Attempts to time the market have in the past generally reduced investor returns.

However, as Warren Buffett stated in 2008 “I have no idea what the stock market is going to do next month or six months from now. I do know that the economy, over a period of time, will do very well, and people who own a piece of it will do well.” In other words, he believes that short term thinking is guesswork but he has a view about the longer term future.

Signing off for now but the coin will return shortly!

Ronald Reagan once said “inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”.

Inflation of 4.5% per annum over 15 year reduces the value of fixed incomes by 50%.

Ronald Reagan is right.

I blogged before about the growing use of financial diy what with disillusionment with some poorly skilled financial advisers picking funds from mid air coupled with greater information being available to make investment decisions. Since the start of the financial crisis, both the use of the internet and financial diy – that’s where the man on the street invests on his own accord without incurring the cost of advice – has boomed. But how are those novices doing? Are they making the same mistakes that Dalbar’s research identified as covered in a recent blog?

Research by Dalbar (July 2008) found the average annual stock market return between 1988 and 2007 was 11.6% whilst the average stock market investor return was just 4.5% because on average, money tends to rush into the market when it does well and leaves when doing badly.

So what’s been happening? Well, true to form the Financial Times reported on Saturday 13th August 2011 that as the markets hit lows, financial diy mistakes were being repeated on diy platforms – “while 73% of Hargreaves Lansdown sharedealing clients bought this week, 55% of fund investors were sellers“.

It’s the classic human behaviour which occurs when left to our own devices.

Age UK has becomed renowned for producing a “Silver RPI index” which reflects the personal inflation rate for the over-55s. In the two years to October 2010, prices for over-55s increased by 2% and for the over-75s by 4% more than the Retail Price Index. This increase above the published RPI figure reflect a higher concentration of spending by that age group on consumer staples which have been subject to significant price increases. Continual rises in the cost of food, fuel and more recently electricity is likely to see further if not frightening increases to these RPI+ figures. All eyes will be on Age UK in October.

At a time of low interest rates and few low risk alternatives, this presents a serious headache for senior citizens looking to preserve the value of their income and savings.

For those with little in the way of savings, Index-Linked National Savings Certificates can represent a straightforward solution. However, they only provide a return of RPI + 0.5%. So there is still a loss. For those reliant on fixed and level incomes or have more significant savings, things are more complicated and advice is crucial.

Certainly those entering retirement should bear in mind the retirement income options that provide some protection against inflation rather than previous tendencies to rely on a level annuity income that provide a higher income only in the shorter term.

Some of us were beginning to think the long period of low inflation would last forever, hoodwinked into ‘no more boom and bust’ and what goes with it. We might need to get used to the opposite. Remember the 70’s?

They may be one of the most vulnerable groups in society, yet the needs of those who require long term care have been shamefully ill-addressed by successive government ministers. 

It’s left the general public with a chronic lack of awareness surrounding:

  • the cost of care – the annual outlay and how long people will live in supervised care
  • where to get appropriate financial advice and what the options are to meet the cost of care
  • likelihood of needing care

The stats are crazy

  • 1 in 10 self funders receive advice

But can you blame them when

  • 3% of financial advisers advise in long term care (CF8 qualification required and practising)


  • there is 1 in 4 chance that we will need care

Meanwhile, a recent investigation by the Financial Times found the quality of care in private sector homes to be significantly worse than homes run by non-profit organisations or local authorities.

It’s a sorry state of affairs all round.

However, some positive steps have recently been taken. Local authorities now encourage those who represent patients going into a home to receive financial advice, albeit this has been driven by self funders becoming eventually reliant on the local authoirty. More and more advisers are becoming qualified in long term care, especially in the lead up to the Retail Distribution Review. More insurers (Just Retirement) are coming into the market currently occupied by Partnership and Lifetime Care. Finally, the subject of long term care is increasingly on the radar. The next round of discussion on the subject by the government is due in July 2011.

Let’s hope that the standard of physical and mental care is addressed too.

Gold has recently broken through the $1,500-an-ounce barrier and has hit the headlines. There follows the natural question, “is gold a good investment?”.

In order to answer the question, first of all we need to identify the recent drivers – quantitative easing, a weak dollar, low interest rates, worry over future inflation and following on from that, the worry that paper currencies as we know it will come to an end as they become worthless. In other words, the main driver is speculation. That’s the possibility of great returns or major losses largely based on sentiment, as opposed to underlying profitability or
growth that is associated with traditonal investments.

Whether gold will rise or fall is no more than a guessing game and that predicting the market could be just as random as flipping a coin. We could put together a great case for the gold price to rise, but it ignores the next Black Swan surprise that sends the price hurtling up or down – so good luck!

Should there be a gold rush, as greater numbers purchase gold, prices will rise, but it’s purely due to demand and supply of gold rather than the creation of growth.

On the other hand, any interest rates rises in the US makes the dollar stronger, which in turn traditionally makes the gold price weaker.

Is gold a good investment? Well, you won’t be paid for holding the stuff – there are no dividends payable. So to invest in it alone is nothing more than taking a punt. A sound portfolio on the other hand, would have some exposure to gold as it is a useful diversifier at the very least.

I’m in favour of being able to access part of your pension pot early as I think it will encourage more and more people to save into a pension scheme. This is despite reading “How not to be a professional footballer” by ex-footballer Paul Merson where upon reaching the footballer retirement age of aged 35, he describes how easy it was to blow his £800,000 pension in just two months!

It seems that pension companies are raising short sighted and selfish concerns over the potential pension crisis that early access could create – perhaps they are concerned by the potential loss of funds under management.

For sure, preventing access your pension until at least age 55 ensures provision for retirement. However, because contributions are locked away, I believe people save less into the retirement pot, leaving more money in accessible accounts that can be spent in the short term anyway. If this money was in a partially accessible pension pot, this is likely to produce a better outcome as mental accounting (Thaler: individuals divide their current and future assets into separate, non-transferable portions) is likely to keep the pot intact rather than create a crisis. As the Arsenal fans used to chant, “There’s only one Paul Merson”.

The Coalition government is currently consulting on whether to allow early access to pension pots.

We all want to be successful long term investors. But some of us don’t know where to start or simply get distracted. Here are some tips to get on track:

Save and use tax breaks

The investment markets maybe the place to be, but you need to be a participant to benefit and when you’re in, take the time to minimise the tax you pay on returns by making use of the various tax breaks available to you.

Save early

Albert Einstein once said the most powerful force in the universe is compound interest. That’s the process of making returns on returns. Don’t ignore Albert Einstein.

Buy low and sell high

Feelings of “normalcy” in markets, when markets are higher rather than lower, make most people complacent and more inclined to take on more risk. The best time to buy is when markets are falling – that’s when everyone is selling. This strategy is reserved for the hardy few. Normal human investment behaviour explains why investment outflows are at their highest when markets are falling and inflows are highest when markets are doing well. Now, we are not looking to convert you to being a hardy soul, we don’t advocate you try to time the market, for what will happen next requires the roll of dice. But we do advocate that you don’t sell out in times of distress and to rebalance regularly. Rebalancing your portfolio back to your original risk based asset allocation enables you to trim back assets that have performed well (sell high) and buy into poorly performing assets (buy low), adding around 1% to investment returns every year in the process.

Seldom trade

Not only are you more likely to get swept into making the big mistake of selling out of the market when markets are falling but one thing for sure is that dealing costs will eat into returns. By drip feeding money into the markets instead, you will catch those high and lows and regular rebalancing will tidy things up. Note that if you invest in the average UK Equity fund, which by definition will be a poor performer, you can expect up to be paying an extra 1% a year in hidden dealing costs on top of all their other fees (annual management charge and added expenses).

Don’t listen to the mate who’s made a killing

It’s already too late and he got lucky. You will buying high and with skewed judgement. He’s also probably lost money before but you didn’t hear about it.

Diversify, diversify, diversify
It was tempting to pile into property because it could only go up. It is tempting to pile into gold because of unstable currencies and the prospect of inflation. When gilts are out of favour, it can be tempting to sell out and reap returns elsewhere. But even if you think the house won’t burn down, you still buy insurance, and that’s what diversification does. If world growth turns sour and you hold no gilts, prepare to feel sorry for yourself.

Only invest in things you understand

If you can’t explain it to your friend, then you probably shouldn’t be invested in it. That isn’t to say it’s a bad investment, it maybe just a cue for you to understand more about how to be a successful investor. All too often however, people underestimate how much risk they are taking. This has been played out the losses some investors have made from investing in “structured products”. Conversely, some people overestimate the risk  they are taking and should be more adventurous. 

Listen to what a good financial planner has to say

It can be difficult to find the right tax breaks, to be confident of knowing how much to save and why, to know what to invest in and to know how much risk you are taking. That’s where a good financial planner is worth their weight in gold.

Roll up! Roll up! It’s the with-profits announcement season!

If you’re lucky to get one, it’s time for the miserly annual bonus to be handed out.

And when you come to get your terminal bonus, you had better hope the market had done well in the preceding years.

You see, it’s all changed for the loyal investor in with-profits. Many years ago the promise was an attractive annual return and a top-up final bonus at the end. However, the loyal investor has seen the original strategy replaced by a dire annual return with the potential for a big bonus at the end. The argument by the major with-profit insurers is that a smaller annual bonus reduces the commitments of the insurer and allows them greater flexibility to invest in potentially better performing assets which in turn may provide greater returns in the long run.

Now, this strategy may be fine for those signing up now, they know where they stand – with-profits investments are a higher risk than they were many years ago. However, this is not fair on the long standing client. This is no longer the cautious investment they signed up to.

So VAT has gone up and it’s got all the leaders and pundits talking. No sooner had we started the new working year, Punch & Judy alias Cameron and Milliband were at loggerheads over how it was necessary and unnecessary.

Depending on whether you go for wholly or partly chocolate coated biscuits (subject to VAT) or chocolate chip biscuits (VAT exempt) the rise in VAT from 17.5% to 20% will, on average, add £33 a year to the average family’s annual supermarket bill.

VAT is a controversial tax because it is largely argued to be a regressive tax – the poor will suffer more because it affects a larger proportion of their income. Whilst a range of essentials are exempt and that we might have a choice over the type of biscuits we eat, VAT is still nonetheless present in so many goods and services.

But as it affects so many in every day matters, it raises money very quickly – to the tune of a staggering £13bn a year!

The Tories argue that hand in hand with the cuts, this will make large dent into the annual and structural deficit of the country. And this is important to do. Had the UK continued spending like the US, the ratings agencies may have been less kind to the UK compared with the provider of the global currency. This could have weakened gilt prices and if the subsequent dumping of UK gilts by foreign investors had resulted in higher long term interest rates (as a result of higher gilt yields) for the highly indebted UK, what would have been the worst outcome? Getting the house in order through some short term pain, or risk possibly greater longer term damage of higher interest rates?

Although unusual compared with recent times, it’s sensible to look beyond catering for today.

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