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Have your cake and eat it

This month, our esteemed founder, Steve, is making us all hungry with his talk of sweet treats... but with an important message about sustainable consumption that applies when it comes to managing your money too.


I like puddings. Or desserts, sweet course, afters, whatever you call them in your house, I like ‘em. Piles of sweet goodness (ok, it’s badness!) covered in custard, cream or ice cream. Whatever your preference, personally, I think, bring the custard out!



When I was young, my grandparents took my brother and I to see ‘Auntie Flossie’ on the Isle of Sheppey in Essex. I have no idea who Auntie Flossie was and that was the only time we ever met them. My Grandad was from deepest, darkest Essex, so I assume they were something to do with him. I am sure you have vague recollections of a distant family trip similar to this. I can’t remember much about it, except the puddings and cakes that were there were AMAZING! There was a spread across the dining room table of sponge cakes, puddings with jugs of custard and trifles and I couldn’t resist! My eyes were wide as saucers as I was used to no dessert or small ones. Sugar intake was rationed at home. So, I ate and ate and ate and Auntie Flossie encouraged me to do so! I remember going on the tree swing outside thinking I am not sure I can keep this down. I spent the rest of the day and journey home feeling quite sick.


In life, we are lucky enough that there is often a bounty of sweet things we can feast on. Or, sometimes there is nothing in the house, the last pack of biscuits is stale, the shops are closed and there is nothing we can do to satisfy our sweet tooth. Whether it is food or something else, we are used to being in situations where we have too much or not enough and the only way to create a steady supply is by careful planning of shopping to get the goods, along with even consumption of it, so there are no feelings of hunger or nausea.


We need enough goodness to sustain our bodies and keep us growing. We also don’t want so much that we grow fat and our health is affected through high cholesterol, type 2 diabetes and creaking knees due to weight they carry.


And so it is with money. We need enough to sustain what we want to do now. But also for what we MIGHT want to do in the future. You have an idea of what you may spend in the future, but guess what? You might change! In the future you might have an expensive hobby or want to help your family unexpectedly.


Your unknown future (it’s all unknown) is what you should be planning for, so you have the best chance of having enough to do what you want, when you want to.


We advise you to ensure you have the best opportunity to succeed in what you want to do but also what you might want to do that you haven’t thought of yet!


Yet all around you, there are other messages, from the media, from politicians and from friends and family telling you to do things that might hamper your chances. They are well-meaning messages, but they are often based on hearsay or information that may not have been fully tested or researched. When we advise you, we do so on a deep understanding of:

  • You and what you want for yourself and the people you love,

  • Taxation on your money,

  • Over 100 years of evidence on investment markets and how it is applicable to you (or not, if we don’t think you should do something).

We ask you to ignore those messages and the messages that are coming from within yourself. We understand that when investment markets take a dive, it is worrying. We feel it too. The issue is whether to act on it or not. The answer, most of the time, is to do nothing.


“Perseverance, the secret of all triumphs.”– Victor Hugo

What you may be feeling now:

Inflation has been high for over 18 months and way beyond the targets of the central bank. In order to quell it, they have increased Bank of England interest rates, and so people's expendable income is restricted due to having to pay more for debt (mortgage etc). This restricts the money supply and it is hoped this will diminish inflation.


This is good news for savers though. And for those of you that are invested in stocks and shares, you may be thinking -hang on, I can get 5-6% interest in a bank account and my investments have fallen in value. Let’s cash them in and get the guaranteed bank interest rate.


Just like me when the dessert trolley is wheeled over, I am thinking “Let’s go!”. I may never see such an array of sweet treats again. But, I know it is a bad move, I know gorging on these delights will make me ill. Both that night through nausea from a distended stomach and longer term through the health issues too much sugar brings. And so it is with those bank interest rates.


The instant satisfaction will feel great! You will feel you are making the best decision, but time will prove you wrong. It’s just a matter of when.

You want sustained growth over time, but there are periods where that won’t happen and this is when you earn your money. Backing out now will most likely mean you are worse off in the future. Remember, the future is never far away… it’s only tomorrow!


“Just because you fail once doesn’t mean you’re gonna fail at everything.”– Marilyn Monroe

Let’s take a look at some evidence. What has actually happened. But first, a recap of inflation and why it is so important:


Inflation affects the amount of stuff you can buy with your money. If inflation has been 10% then this is what it means:

  • If a loaf of bread is £1 in January 2022 then £1 will buy one loaf of bread.

  • If inflation is 10% then a loaf of bread would cost £1.10 in January 2023.

  • That means… you get 10% less slices if you only spend £1. If a loaf has 20 slices then over that year, your money has lost value and will only buy you 18 slices… 10% less.


Maintaining the purchasing power of your money should be your only goal. If you can make more than the rate of inflation, then all the better.



Source: Office of National Statistics – Price of Loaf July 1993 to July 2023.


I have used 30 years of data here as this is the average length of retirement. In the example above, the cost of a loaf has increased from 55p to £1.36.


Even with bread, where global trade and improvements in agricultural yields have helped keep prices lower, this is still an unexpectedly large increase. You don’t notice, because the increases are generally small each year.


£1 of goods in 1993 would now require £2.05 to buy the same amount of goods as it did then.


If maintaining the value of money is the only rational and logical objective for money that isn’t designated for use in the next few years, then let’s test inflation against bank account interest. In the table below, I have used BoE base rate + 1% as a proxy for a Bank interest rate and inflation measured by both RPI and CPI.

Green – where bank account interest has beaten both measures of inflation.

Yellow – where bank account interest has beaten Consumer Price Index inflation but not Retail Prices Index.


Not a great record of maintaining your money. Let’s look across the whole 10 years:



To put that in perspective, against RPI, if you had money in the bank, you would have lost purchasing power of 31.68%. £10,000 in 2013 would now only buy you £6,832 of stuff. You have effectively lost £3168 of purchasing power.


"The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation" – Vladimir Lenin

You all try to reduce taxation where legally possible, but is your wealth being ground away by inflation?


If that’s the case, what can we do instead? Let’s take a look at investment in some of our most used portfolios and see that against inflation over same periods (if possible). This includes the effect of all ongoing investment fees which typically would be 0.85% advice charges and 0.15% platform charge, plus the costs of the funds themselves. Typically, our total costs of investment come out at 1.08% to 1.35% depending upon the portfolio.


2022 – this was the worst year for the stock market since 2008. Remember that, the Credit Crunch?


That’s ok, we can worry about this, but if we don’t sell out, it’s got time to come back in value and exceed previous highs. This is the evidence that perpetuates. When it will happen, we do not know.


In the table below, Classic 100 means there is 100% of the money invested in company shares. 50 means there is 50% in company shares and 50% in fixed-income securities.

Compare the above to the previous table where the Bank deposit only beat both measures of inflation twice in 10 years (green) and one of them in another 2 times (yellow).


Here is a selection from the ‘Green’ portfolios we offer, that filter out worst-offending companies for environmental, social and governance reasons. These have only been available since 2016 so only 5-year performance is included.


In the above, the portfolios or the cash deposit have kept pace with inflation. But the investment portfolios have done better than the cash deposit. Remember, this is whilst capital prices are depressed too. When those capital prices revert, think what the averages will look like then.


What can we conclude from this?


It is that the investments are more likely to perform better than bank deposits in the longer term but also that investments are more likely to maintain the purchasing power of your money. Making a decision on one poor year means you will miss out when the good ones come again.


The view that portfolios are doing badly due to one poor year in 2022 is erroneous. Since January, the returns have been mostly higher than the bank rate now (which you couldn’t get at the start of the year, there have been interest rate increases throughout the year.):


If you feel you should cash in investments, or not invest because you get a ‘good bank deposit rate of interest’ then remember, you are more likely to miss out and see your money depreciate in value in terms of the amount of goods that money can buy for you, as evidenced above.


Stick with it and if you have spare money, invest more whilst prices are a bit lower.

If these investment returns were a spread of desserts, we would say eat a sustainable amount and hold back some cakes for other years. The sugar tax of inflation is taking these desserts from you and bank deposits will not pay for those. Stay invested and there will be another dessert trolley along to load up the table again.


Stay at the dessert table, do not overindulge or starve yourself and wait for more goodies to arrive.

Wait for your just desserts.


Behavioural Biases that may affect your thinking

Linearity Bias

This assumes that returns so far received will continue in the same manner. For example, it’s easy to assume 6% interest rates will continue, when in reality they will fall and rise over time. Also, that poor investment performance in 2022 will continue (when it never has continued and has only ever been temporary). Remember how worried we were in the Credit Crunch? Then it all blew over and the stock markets went on a long run of above-average returns?


This, combined with the ‘recency’ effect where we assume what is happening now will continue to occur, means we make assumptions over what will happen in something that is entirely unpredictable. It is unpredictable as it is the future!


Patternicity

This is the human tendency to notice patterns in things like clouds – we’ve all seen faces in the clouds, haven’t we? Or, in investment returns where people think there is a pattern. This was good when we were evolving. It meant we could make snap judgments and not get killed. For example, if a stranger approached you with an angry face – you needed to leg it! That way, you didn’t get a spear through your eye and so you survived, and those genes were passed down. These days, it doesn’t help us as we notice patterns in contributed things (like money, which humans invented) and make decisions on patterns we have noticed but are irrelevant.


Key points


Only hold money in cash accounts you need for:

  • Emergency funds / rainy day money

  • Spending in the near future (2-3 years)

Invest the remainder, and hold tight.


If you have cash accounts DO NOT:

  • Put in fixed-term deposits of longer than a few months – this may mean you can’t get the money when you need it and then be forced to sell other assets and pay more tax / lose investment returns as a result.


If you have an adviser, then consult them before making cash deposits that are tied up. If you do not have an adviser, we are here to help you, please let us know what you are planning and we can give you a rounded view of all possibilities to help ensure you do not make a mistake.


We can:

  • Give you a list of the highest-interest-paying accounts

  • Advise on cash management strategies

  • Taxation is having an increasing effect on your returns now that savings rate allowances are being taken up more quickly by higher interest rates. Don’t be fooled by the high headline rate. After-tax returns are all that matters.


This article does not constitute financial advice – we recommend you to speak to a qualified financial adviser about your individual situation.


We would be happy to help you on this so please contact us and we can do a full review of your finances to ensure you are in the best possible position. We don’t have much space for more clients at the moment, so contact us as soon as possible.



Our clients say it best!


We are always honoured to receive glowing testimonials from our lovely clients - and what better way to help you understand how we can help, than hearing from them, in their own words?

"Straightforward clear advice based on their (Luke in my case) understanding of financial planning options. All done in a relaxed atmosphere in which they take the time to understand where you are at and where you want to be heading before tailoring their advice accordingly." - Alan, Nuneaton
"My wife and I have been extremely happy and feel that they looking after our retirement funds to the best ,enabling us to live life to the full. We have been with them since 2018 when I retired, they are so friendly and polite, helpful, Steve Rowe is BRILLIANT and Luke also BRILLIANT as he is our financial advisor, and doing a BRILLIANT job both very professional, ALL the girls are BRILLIANT, so friendly and professional, we are so pleased and HAPPY being at LUCENT." Jonah, Stourbridge

Want to read more? Check our reviews on Google to see what some of our other clients have to say.


Interested in finding out more about investments – email us on:

‘support@lucentfinancialplanning.co.uk’ saying: Give me Ubuntu!

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