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Should You Use an Investment Banker When Selling Your Company?

Selling your business is one of the most important, complex and emotionally challenging experiences you’re likely to face as an entrepreneur. You’ve got one chance to get it right – there are no do-overs – you’ve got to play it smart. There is a multitude of reasons as to why you should consider the input of an investment banker when selling your company.

  • Investment bankers bring knowledge of potential buyers for a business along with expertise at structuring and negotiating business deals – often leading to more money for the seller.
  • When selecting an I-banker, assess both the individual banker, and the firm he or she works for.
  • To avoid misunderstanding and even litigation, negotiate the agreement you make with an investment banker.

Click the image below to read the full article:

Why You Should Use an Investment Banker When Selling Your Company

Other notes and risk warnings

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

Costs Really Do Matter

“Performance comes, performance goes. Fees never falter.”

Warren Buffett, investment legend, Chairman, Berkshire Hathaway (2018 Letter to Shareholders)

Costs, time and compounding are an insidious mix

It is a shame that human beings are so poorly wired to be good investors.  We have many deep-seated biases and behaviours that, whilst once useful to survive in the wild, do us a great disservice when investing. One area of weakness is our poor grasp of the exponential impact of compounding that can work both for and against us.

Imagine three different portfolios that deliver returns of 1%, 3% and 5% per year after inflation, but before other costs, over a period of 30 years: £100,000 invested in each would result in a growth of purchasing power to around £135,000, £240,000 and £430,000 respectively.  Seemingly small differences in the compound rates of return (geometric returns), turn into large differences, in terms of financial outcomes. That’s one of the great positives of a disciplined and patient approach to investing – small returns turn into big numbers, given time.

On the other side of the coin, costs – when compounded over time – eat away at these market returns to a far greater degree than many investors ever imagine.  Let’s compare two managers who deliver 3% gross (before fees) above inflation, where Manager A has costs of 0.25% and Manager B has costs of 1.00%. We plot the purchasing power impact of these different fee strategies on outcomes, across time, in the chart below.  As you can see, costs matter a great deal; an investor in Manager B’s fund is over £40,000 worse off than an investor with Manager A’s fund over 30 years. Put another way, you end up one third more wealthy selecting Manager A over Manager B.

Figure 1: Compounding is a powerful concept (1)

costs

(1) Compounding: Starting amount X ((1+rate of return)^number of years), where ^ is ‘to the power of’.

 

As Jack Bogle would say: ‘In investing, you get what you don’t pay for’. A pound of costs saved is more valuable than a pound of performance gained because you reliably get its benefits every year.

Risk warnings

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

 

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

The Value of Empirical Evidence for Investors

 

In the early 1960s, John ‘Mac’ McQuown, a graduate student at Harvard Business School, recognised the value of empirical evidence for investors. He used a mainframe computer to analyse share prices and then went on to introduce computer-based investment at American banking company, Wells Fargo.

At Donald Wealth Management, we believe that investing money well requires a logical and robust framework on which to build a lifelong investment programme.  It needs to be grounded in investment theory, supported by empirical evidence and enhanced with an insight into the behavioural traps and pitfalls that all investors face, that can and do cost them dear.

Patience is a virtue, so is being a tortoise

Aesop’s fable about the tortoise beating the hare provides a good analogy for investing.  The trouble with investing is market noise.  Investors generally know that with time they are likely to pick up a premium for owning equities relative to holding cash or bonds.  Most investors know that time helps to turn bad short-term market outcomes into positive long-term outcomes.  Most investors know that it is costly to buy and sell investments, incurring tax and transaction costs.  Yet for all this evidence-based insight, investors still get spooked by the noise and uncertainty that they face in the markets.

What turns potential tortoises into hares?

But even so, many investors try to move their portfolios around, on account of short-term noise.  It seems baffling why, but the answer lies in the way in which our brains are wired.  We suffer a range of behavioral biases (immediacy, anchoring, loss aversion, overconfidence to name a few) that tend us towards being hares, rather than tortoises.  These can be extremely costly.  A recent piece of work in 2015[1]  reveals that fund investors give up around 2% per year through trying to time when to be in and out of markets and funds.  It also finds that investor looking to pick up the value premium (by owning relatively cheaper and less financially robust companies), give most of it up through poor timing.

‘On average, investors who invest in value mutual funds do not benefit from the excess returns reported by those funds because of the timing of their allocations…In fact, over periods with a documented high value premium, the average value investor in mutual funds has actually done worse than a buy-and-hold investor in an S&P 500 Index fund!’

It appears that the tortoise in them rightly seeks out value stocks, but the hare in them wants to get in and out to make more money.

The benefits of being a patient and dogged tortoise

A recent piece of research[2] provides us with a useful insight that clearly demonstrates the challenges of being a hare and the benefits of the patience and doggedness of the tortoise.  It estimates the likely distribution of outcomes for a global 60% equity, 40% bond – portfolio based on a sample set of data from January 1975 to August 2016[3].

One can see that in the figure below that in any one-year period, a 60/40 global balanced portfolio has around a 1/3 chance of suffering a loss of purchasing power.  Enough to make any hare jittery.  The benefits of holding firm grow over time as the subsequent chart shows.

Figure 1: Annual cumulative real performance – the hare’s nightmare

Annual cumulative real performance - Hare and tortoise investors

 

Note: 10,000 simulated 1 year periods using monthly data from the Jan 1975 – Aug 2016 data set.

Source: Albion (2016).

With a ten-year holding period (below), only a few investment outcomes do not deliver growth in purchasing power.

Figure 2: 10-year cumulative real performance – the tortoise nears the line

10-year cumulative real performance - hare and tortoise investors

Note: 10,000 simulated 10 year periods using monthly data from the Jan 1975 – Aug 2016 data set.
Source: Albion (2016).

In conclusion

Holding firm is likely to deliver a successful investment outcome for the tortoise, without the activity and ultimate disappointment suffered by the hare.

Tips to help you win the race include avoiding looking at your portfolio too often, ignoring the news, and recognising that in the world of investing, activity is nearly always in surplus. And remember:

‘You may deride my awkward pace, but slow and steady wins the race’
– Robert Lloyds – The Hare and Tortoise, 1757. A Fable.

[1]       Hsu, Jason C. and Myers, Brett W. and Whitby, Ryan J., Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies (May 1, 2015). Available at SSRN: https://ssrn.com/abstract=2560434

[2]       Albion Governance Update, October 2016 (in-house proprietary research)

[3]       Proxy indexes are as follows: 40% global equity = MSCI World Index (net div.); 10% global value = Dimensional Global Large Value Index; 10% global small cap = Dimensional Global Small Index; 40% short-dated, high quality bonds = Dimensional Global Short-Dated Bond Index (hedged GBP), rebalanced annually, no costs deducted, but after inflation.

 

Other notes and risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services.

Getting investing right is difficult; please speak to us before you act independently.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of a unit linked investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

 

Collectables: how do collectables like art, classic cars, and fine wine fare as financial investments?

Classic carSummary

The trappings of wealth such as beautiful art, fine wine, classic cars and old watches may have an aesthetic value, but are they good investments? This note provides a quick look at collectables in an unemotional light. In short, the answer is that their superficial allure and headline grabbing returns fail to match a hard-nosed practical reality. Own them only if you enjoy them!

‘Sometimes your best investments are the ones you don’t make.’
Donald Trump, property tycoon

Collectables: sensible investments or folly?

Everyone has heard the stories about vast profits made on collectables, from classic cars to bottles of vintage ‘first growth’ Bordeaux wines. Take Jon Hunt, the founder of Foxton’s Estate Agency, who sold the company at the height of the pre-credit crisis, housing boom, and bought a Ferrari GTO 250 for an eye watering £15.7 million. He sold it three years later for £20.2 million. Not a bad return for a depreciating asset sitting in a garage!

Substitute the car for a Penny Black, Van Gogh, Patek Philippe watch, or a Stradivarius and the stories are much the same. Recent headline grabbing profits have inevitably increased investor focus and appetite for real, collectable assets, such as fine wine, coins, musical instruments, art, watches and classic cars to name a few. With this interest inevitably comes a spate of new investment products cashing in on the trend. The question that investors need to ask themselves is whether, in practice, these collectables represent a real and accessible investment opportunity that compliments a traditional investment portfolio, or not. This short article provides a framework for answering it.

From sandwiches to investment strategy

The origin of investing in collectables on purely financial, rather than aesthetic grounds, is to be found in the most unlikely place; the old British Rail Pension Fund (Railpen). Whilst British Rail in the 1970’s was stuck in the past, offering up a grim service of old rolling stock, run-down Victorian stations and dried up ham sandwiches, Railpen was well ahead of its time. In 1974 it allocated around three percent of its assets (around £40 million) into 2,500 pieces of art, achieving an 11% compound return over the period to 1999 (1) . In comparison, the UK equity market delivered around 19% and cash 3%. By all accounts, a few key pieces of art drove the bulk of the returns.

By 2011, the collections of the top 14 art collectors alone were estimated to be worth more than US$ 75 billion (2) and that is likely to be higher today. The top three artists by sales in 2014 to date are Andy Warhol ($590 million), Picasso ($560 million) and Gerhard Richter ($170 million). One could be fooled into thinking that art must be a great investment. Yet, the stories of poor performance are less well documented, and the structure of the market is such that most transactions are never known. One instance of art being a truly awful investment was that of the Japanese businessman, Ryoei Saito, who bought Van Gogh’s ‘Portrait of Dr Gachet’ for $82.5 million in 1990 and later reportedly sold it for one eighth of its original value.

Getting behind the stories

It is easy to understand the superficial appeal of investing in collectables, either directly or through some sort of pooled funds. However, it is important to get behind the headlines of the money pages of the Sunday papers and kick the tyres on these investment opportunities a bit harder. Perhaps the first step is looking at broader ‘industry’ data sets rather than the anecdotal stories of success. Each of these collectables now has its own set of indices, tracking repeat transactions. Indices like the Mei Moses ® World All Art Index, the HAGI Top Index of the 50 most valuable classic cars and the Liv-ex Fine Wine 500 Index, appear to provide some transparency and an indication of the risk and return characteristics for different genres of collectables. Statistics from these indices are often quoted in press articles suggesting that collectables have delivered strong returns that are uncorrelated to traditional assets like bonds and equities.

The Economist has created a composite ‘valuables Index’, which is made up of these different indices, according to the weights they are estimated to be held by individuals (3) : 36% in fine art, 25% in classic cars, 17% coins, 10% wine and 6% stamps. They have also added an allocation of 6% split equally between violins and guitars. At first glance, they appear to have performed relatively well.

Figure 1: Index returns from collectable and traditional indices Q1 2003-Q3 2013

Index returns from collectable and traditional indices

Data source: Collectables – The Economist (4) . Traditional assets – DFA Returns Program (5)

But the figures are misleading, as will become evident.

Sensible evaluation criteria – a framework for answering the question

The process for evaluating collectables is no different to evaluating any other asset class that is to be used in a portfolio. There are six fundamental questions that need to be asked and answered to an investor’s satisfaction before an allocation can be made to it:

  • Source of returns: where do the returns of the asset class come from and how robust are they likely to be in the future?
  • Data quality: can the data be trusted and is it long enough to provide useful insight?
  • Portfolio role: What positive contribution would the new asset class make to the existing portfolio?
  • Rewards: are the risks adequately compensated for by the expected returns on offer?
  • Product structure: do products exist that can capture the asset class return characteristics effectively?
  • Risk management: can the risks inherent in the investment be effectively monitored and managed over time?

This evaluation process helps to shed light on the challenge that investing in collectables presents. If each question is answered with some thought, the superficial attraction wanes quickly.

Returns are driven by the global growth in wealth

Traditional investment assets can be valued by discounting back future cashflows into a present value. Companies deliver earnings (and in most cases dividends) into the future. Bonds deliver coupon payments and return of principal. Investment property delivers rental income over time. All of these assets can be valued using their cash flows. Yet, collectables have no positive cash flows and in most cases deliver negative cash flows due to insurance and storage costs. That makes them hard to value by traditional investment valuation methods.

In practice, price movements are a simple case of supply and demand. Collectables tend to be illiquid, rare, often privately owned for both financial and aesthetic reasons, and non-fungible, which means that their supply is limited. Prices are therefore largely demand driven. It is evident that a small number of collectable items – often well-known pieces e.g. a Picasso, or brands such as Rolex – draw the attention of the very wealthy. Take the example of the one surviving 1856 one-cent Magenta stamp from British Guiana, which was sold at auction by Sotheby’s in New York for £5.5 million, beating the previous world record for a stamp of £1.9 million. It had not been on the market since 1980, and was bought by an anonymous bidder. Perhaps it was the Queen, who is an avid philatelist with a highly valuable collection!

The demand is being driven by the very rapidly growing wealthy emerging from Russia, Japan and Asia, and particularly the Chinese who are very keen on collectables. The High Net Worth population in Asia – those with more than $1 million of investable assets – grew from 3 million in 2009 to 4.3 million in 2013, representing an annual growth rate of 17% and now have a total wealth of $14.2 trillion (6) , which is an awful lot of spending power chasing a few rare items. The consumption of wine is growing in China by 20% a year, and the Chinese have been large buyers of fine wines, pushing up prices. Tastes vary across nationalities, cultures and over time, which means that demand, and thus prices, will vary across different segments of the collectables market. The investment returns for collectables thus depend on continued flows of funds and interest driven by growing wealth, the ability to identify trends in taste, and access to the rarest, most sought after items.

Data quality is poor

Despite widespread use of collectables indices, there is a major problem with the data. Most indices use repeat sales – the price between one sale and another – to estimate the change in prices of the asset class (or subsets of it) as a whole. Sales tend to be non-random, with pieces that have performed well or are in vogue coming onto the market more frequently than the bulk of art held by collectors. Many collectables are held and traded by private collectors and these prices are rarely visible and are thus not captured by the data. Many do not rise in value or go out of fashion, affecting prices, and the assets may simply hang on a wall, or sit in cellar/safe/garage, creating a bias in the numbers. Transaction costs are rarely taken into account, yet for art sales these could be as high as 20-25%.

A recent piece of academic research (7) reveals that based on the art index under review (the Blouin Art Sales Index) the annualised return of the index from 1972 to 2010 was in fact more like 6.5% per annum compared to the 10% reported by the index. Other academic research (8) , looking at the price of five long established Bordeaux wines – Haut-Brion, Lafite-Rothschild, Margaux, Latour and Mouton-Rothschild – from 1900 to 2012 revealed that these wines delivered a return of around 5.3% per annum above inflation and around 4.1% after storage and insurance costs, but suggest that these would be lower if transaction costs were taken into account. It also revealed that there was a positive correlation between wine prices and wealth creation, as indicated above. To place these returns from 1900 to 2012 in perspective, UK government bonds and UK equities delivered returns, after inflation, of around 1.3% and 5% per annum (9).

Portfolio role is debatable

Collectables sit most definitely in the risk assets component of any investment portfolio as returns are likely to be highly volatile. For example, fine wines were flat against inflation for the first part of the twentieth century, went through a boom and bust around WW2 and have risen steadily since then (6). As indicated above the data set is poor quality which makes the understanding of the return and risk picture somewhat clouded. The correlation of prices to the growth in wealth, which is quite highly correlated to equity markets is, logically, likely to make them weak diversifiers of equity market risk. A lack of liquidity is not an endearing attribute in a portfolio asset.

Rewards appear inadequate

Leaving aside the extra layer of costs of owning a collective investment product to access assets, the returns of collectables probably sit somewhere between bonds and equities, taking account of the biases in the data and lack of transaction costs. As such, given that an allocation to collectables replaces an allocation to a diversified pool of equities, in the absence of any great diversification benefit, the case is hard to make for their inclusion. The summary conclusion of the research undertaken on the Blouin Art Sales Index is useful:

‘When we compared the investment returns and risk of all the styles of art to a portfolio of other assets, we found that art investments would not substantially improve the risk/return trade profile of a portfolio diversified among traditional asset classes such as stocks and bonds.’

Product structures are likely to be unregulated and costly

Remember that going out and buying a few cases of wine or a painting is a bit like picking a specific company’s stock. An investor may or may not get lucky. Even professional fund managers fail, in the main, to pick stocks that do better than the market after transaction costs and overtime. Will a fine wine manager do any better?

A collective investment approach, via a fund, intuitively makes more sense, but is not without its own material issues. Increased interest in collectables has spawned a rapid growth in art, fine wine and other asset class funds. Logic suggests that the costs of running such funds will be high as each piece needs to be identified, valued and purchased either privately or at auction. Transactions costs will be high. According to the Art Fund Association, art fund management fees range from 1%-3% per annum and they take 20% of the profit on any sale! Funds are also likely to be very illiquid, given the nature of the assets held, and lock-ins of five years or more are not unusual. Performance of the funds will be very dependent on the skills and trend picking abilities of the manager. Given that much of the money invested flows into well-known names and items, small funds may have problems accessing these areas of the market and diversifying their portfolios. The alternative – picking new emerging artists – is a highly risky business. Funds are likely to sit outside of the regulatory regime i.e. unregulated collective investment schemes (UCIS), which are only available to sophisticated investors (10) and carry materially higher operational and investment risks.

Ongoing risk management is challenging

Given that investors are likely to be operating in an unregulated environment and one in which many private transactions are likely to occur, the risk of fraud is far higher than that of a regulated OEIC or similar UCITs regulated product, investing in public market securities. Verifying the existence of assets, and monitoring their safekeeping, insurance and maintenance is no mean task. Reporting of interim performance for illiquid assets is also problematic, as is the risk of withdrawal demands from other investors. As a sobering thought, over 50 fine wine funds in the UK have been liquidated either due to fraud or ‘colossal mismanagement’ in the four years to 2012 (11) and investor losses have been estimated at £100 million.

In conclusion

Sage advice in investing is often short and sweet. When it comes to collectables, investors would do well to remember the words of Donald Trump:

‘Sometimes your best investments are the ones you don’t make.’

Whilst it may seem disappointing that tangible, aesthetic items of historical interest and beauty – about which one can get quite passionate – may not, in practice, represent good investments, it is important to remember that good investing should be dispassionate and logical at all times.

By all means indulge your passion on a small scale. Drink it, gaze at it, wear it or throw the roof down, but don’t think of collectables as financial investments that are contributing positively to your portfolio, unless you get lucky. Luck is not an investment strategy!

(1) Sommer, K., (2014), Though Leadership, The Art of Investing in Art, JP Morgan, www.jpmorgan.com

(2) Forbes Top Art Collectors, 2011

(3) The Economist (2013), Fruits of Passion, The Economist, 17 th August 2013.

(4) Returns derived from data provided in the article above. See data references in article. Classic car

data estimated.

(5) UK equities – FTSE All Share Index; short-dated gilts – FTSE British Government up to 5 years.

(6) RBC/Cap Gemini World Wealth Report 2014. www.worldwealthreport.com

(7) Verwijmeren, P., (2014) Art as an Investment, Issue 14: Spring/Summer 2014, Adam Smith Business

School, University of Glasgow.

(8) Dimson, E., Rousseseau, P., Spaenjers, C., (2014) The price of wine

(9) Barclays Equity Gilt Study 2013

(10) http://www.fca.org.uk/static/fca/documents/fsa-factsheet- ucis.pdf

(11) Barrett, D., (2012), ‘Investors lose millions in fine wine schemes’, Daily Telegraph, 14th April 2012

Other notes and risk warnings

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services.

The past is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

In the news – December 2015

dog reading newspaperThe latest stories in the news – December 2015 – which may be of interest to our clients:

The academic answer for pension savings

Academics at Cass Business School have some answers for people wondering what to do with their pension funds at retirement, says the Telegraph. While the profs say there are just too many variables to give definitive answers – health, life expectancy, inflation, annuity rates and house prices are just some of the ‘unknowns’ that will affect outcomes – they say annuities seem poor value for those in their sixties. They also suggest a formula for drawing income: find your life expectancy, divide it into your capital and take the result as annual income. For example, a 65-year old man has a life expectancy of 21.9 years, so could withdraw £4,567 from a £100,000 fund. They also say it could make sense to buy an annuity in your seventies or eighties.

Millions to lose inflation-linking pension benefit

Neither the government nor pension providers are able to confirm the number of people who will lose out from a change to the way pensions are calculated, says the Telegraph. But over a million people who were ‘contracted out’ of the state second pension in the 1980s and 1990s could lose the right to inflation-linked increases on part of their state pension entitlement. The Telegraph cited the case of a teacher who reckoned her loss at £28,000. The number of losers from the new flat-rate scheme starting next April continues to rise.

BTL lenders finance future losses

Buy-to-let lenders are financing investments that will become unprofitable from 2020, say experts interviewed by the Telegraph. Higher-rate income tax relief on mortgage interest will be progressively withdrawn between 2017 and 2020, and the result is that many higher-rate taxpayers with high loan-to-value mortgages will make losses. The Telegraph gave the example of a £300,000 property financed by a £240,000 loan at 3.99% with rental income of £1,000 per month, which it said made a profit now of £1,440 per year but would make a loss of £480 per year from 2020.

Please note Donald Wealth Management does not provide mortgage advice.

Ageist mortgage lending rules may go

The Building Societies Association is reviewing its lending rules, says the Telegraph. Currently most lenders insist on final repayment of mortgages by age 70 or 75, but the Association is considering scrapping these rules in favour of a more flexible approach based on income and wealth. Its boss said they recognised the need to let older people help their children to get properties of their own.

Please note Donald Wealth Management does not provide mortgage advice.

Watch out for with-profit penalties

With-profits policies for investments and pensions were popular in the 1980s and 1990s but many savers are now trapped by exit penalties, says the Mail. Most with-profit funds now give very poor returns but the way bonuses are calculated makes it hard to work out what you are entitled to. And investors are also often unaware of the exit penalties that can apply if they cash in. It’s essential to get advice before cashing in, says the Mail.

The young don’t have it so good

Over 7 million people age 16 to 24, accounting for 12% of the UK population, are worse off than their parents were at that stage of their lives, says the Telegraph. They live longer at home, have to spend longer in education, and can only afford to buy houses, get married and have children later than their parents did. In 2014-15, the average income for people aged over 60 will be nearly 2% higher than before the 2008 recession, but for people age 22-30 average income will still be nearly 8% lower.

Healthy tech for cash and lifestyle

The use of wearable technology to improve lifestyles is just beginning, says the Sunday Times.  One insurer, Vitality Health, offers discounts and benefits for people who use wearable devices to monitor their activity and fitness, and others will follow.

Watch for dividend tax wrinkles

George Osborne’s promise of a £5,000 annual tax-free dividend allowance is not quite what it seems, says the Sunday Times. It’s true that you don’t pay income tax on dividends until they exceed this amount, but the dividends are still included in your income when working out if you are entitled to child benefit, which is progressively withdrawn when your income exceeds £50,000.

Footballers lose in tax-dodge schemes

Over a hundred retired top footballers and managers stand to lose up to £100 million after the failure of tax-sheltering film and property schemes they had invested in, says the Sunday Times. HMRC has successfully challenged many schemes and has pursued bankruptcy claims against those who have not paid their fines and penalties.

Pension pots and care home fees

A Financial Times reader asked how he could protect his pension pot from being used for care home fees. Experts told him he couldn’t. Once he retires, even if he draws no income, he will be regarded as having a notional income from the fund and that will be used to determine his eligibility for local authority support. If he takes cash from the fund and spends it or gives it away, this can be disregarded by a local authority if it considers he has deliberately deprived himself of assets.

 

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

In the news – September 2015

dog reading newspaperHere are the latest stories in the news – September 2015 – which may be of interest to our clients.

Number spoofing fraud on the rise

A new trick is helping fraudsters steal money, says the Financial Times. They use a piece of software that enables them to change the telephone number displayed as the one from which they are calling to a bank’s fraud helpline number. This helps them convince the people they are calling to follow their instructions about making an urgently required transfer. Banks suggest that people just put down the phone, wait five minutes and then call the bank back on their normal helpline number.

Self-employed not saving for pensions

The Financial Times reported a survey by the Association of Independent Professionals and the Self Employed showing that 37% of self-employed people are not saving towards a pension. Many complain that pension schemes are not flexible enough to cope with variable incomes and contributions.

The self-employed now account for 15% of all UK workers. Our view is that they should consider pension contributions a cost of their work, since they would get an automatic contribution to a pension plan from any employer.

Pensioners to gain over next 5 years

The Telegraph reported fresh research into the effects of the summer Budget by the Joseph Rowntree Trust. Its research shows that the new measures in the summer Budget will result in pensioners being significantly better off by 2020, as will single working people. But families with children will tread water and the low paid will be worse off, it claims, since even the new higher Living Wage will not offset benefit cuts.

Pension age to rise to 70 by 2050

The Office of National Statistics data shows that life expectancy has risen by about 3 years every decade since 2010, says the Telegraph. In 1910 male life expectancy was 51; a century later it is 79 and still rising. Since the government has said that it is realistic to expect a third of adult life to be spent in retirement, that implies a rise in state pension age to 70 by 2050.

Some people may consider this bad news but for active healthy people a longer working life should not be a problem, and the good news is that it gives longer to accumulate the savings you need to rely on in retirement.

Over £40,000 to live near best schools

The Telegraph reported research showing that the average cost of a house in the postcodes of England’s 30 best state schools was £40,728 higher than the average for the surrounding area. For the top six schools, the premium was more than twice as much at £125,000.

For parents, the only saving grace is that provided the school maintains its grade, the premium is still likely to be there when they come to sell.

Where’s cheaper now?

Which stock markets are better value after the summer decline prompted by the 40% collapse in Chinese share prices? The Telegraph’s analysis suggested that the US and the UK had moved from being expensive to about fair value, while emerging markets and Asia now looked cheap, with Europe in between.

 

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