This month, our founder, Steve takes a look at how shares stack up against cash, and how we stack up against other advice firms!
Perspicacious, precocious and perceptive people 🧠 know that when it comes to investing, thinking long term is vital and that changing plans based on current knowledge, news or non-evidenced based nous is a NO NO.
But it’s hard.
It’s really hard, isn’t it? Every day, there’s a nagging doubt, especially when something on the news is screaming at you, or your own emotions are making you scream inside to move your investments into cash.
There’s so much uncertainty. There’s inflation and rising interest rates, there are wars; old wars and new wars. There’s a cost-of-living crisis and multiple political crises.
What should we do? Surely it would be safer to, just sit this out for a while? Don’t worry, we feel it too. I don’t think there’s ever a time when something happens that we don’t think “blimey, what if…”
Risk Comes from not knowing what you are doing – Warren Buffet
But then, I think, let’s review all the evidence. Why is this time different? There have been wars before and there will be again (humans are so bloody thick!). There’s been inflation before and the only assets that have proved to give returns beyond inflation has been the great companies of the world. This has been proven over decades, indeed, over hundreds of years.
So, is it different this time? Probably not. It never has been before. Lulls in economies and stock markets have always been superseded by greater returns eventually.
Understanding how difficult it is, is important. But realise, you are not alone. In the past 6 months, we have had 4-5 clients come to us asking questions about whether they should switch out of investments and into cash.
That’s 5 clients out of 250 so only a couple of percent. I guess more might be thinking about it, but still the percentage is small. So, what are the other people thinking? What do they know that you don’t know? Who is correct?
250 families are a lot of people. That’s around £150,000,000 of money that they have that we look after. So far nobody has withdrawn funds from the market since January 2022 due to market conditions (plenty to spend and have fun; that’s part of their plan! But not for any other reason).
We could easily advise withdrawing money to a cash fund within your ISA or pension. Remember, if you earn more, we earn more. So, our interests are fully aligned.
And yet we don’t advise this, based on the longer-term evidence that staying put is what is most likely to bring you long-term investment success.
What is ‘long term’? Well, it’s the rest of your life. You’re never going to spend all of your money in one year. In investment terms, long term is 10 years. But anything over 5 years and the odds are massively stacked in favour of investing in shares over cash.
What is ‘success’ when it comes to investing? For us, it is maintaining the value of your money against inflation. It is earning at least the rate at which prices in shops are rising and hopefully a bit more.
Let’s take a look at some charts!
The following charts show the investment portfolio that is most commonly used within our company. This is invested 80% in equities on a globally diversified basis in low-cost funds with slightly more than market value in ‘small’ and ‘value’ companies.
A – is the 80% equity portfolio
B – UK Inflation Rate (RPI)
C – Bank of England Base Rate plus 1% (equivalent of what could get in high Street Bank Account)
12 + years
As you can see, the investment portfolio has absolutely smashed inflation and bank accounts. During the period (look at the green line) there have been times when returns have been flat or going down, but eventually, they rebound.
This is what happens over the long term. Over virtually all periods over 13 years, investments in the great companies of the world have produced inflation-busting returns.
10 years
Over the past ten years, the story is similar. Investments in profitable companies (on average, they are all profitable) beat inflation, and inflation usually outstrips cash returns too. In essence, having money in a bank account is a losing game. The interest rates will not be as high as inflation. So, although your money is going up, what you can buy with that money is going down. Since money is a token for swapping for stuff, the amount of stuff you buy with your money is THE ONLY THING THAT MATTERS.
5 Years
If you invested 5 years ago, your investments have slightly underperformed inflation. Not by much though and still in excess of cash. But, although the average from January 2022 is about the same with not big rise or fall in values, if you are still invested it can come back again.
3 years
In the last 3 years, investing is still outperforming bank accounts. But, slightly under inflation. However, this is with a period of nigh on two years with little return. As can be seen by the chart, at any point it could easily bounce back and be beasting inflation again. Cash cannot and does not bounce back.
One Year
Over the past year, investments have done worse, but look how in just the past 12 months, they have been higher! This could return very quickly. But if you make a decision based on recent history to switch out of investments to cash then you are letting ‘Recency Bias’ affect you.
Recency bias is a cognitive bias that refers to the tendency to give greater weight to more recent information when making decisions. In the context of investing, this can manifest as a tendency to overvalue or undervalue an investment based on its recent performance.
As Warren Buffet says, if ‘Risk’ is not knowing what you are doing then let’s stop listening to our inner biases and perhaps listen to:
The academic evidence that says switching to cash will be a bad decision.
No other Lucent FP client has done this. Never say never, but what do they understand that you don’t?
Lucent FP are paid a percentage of funds under management. If we believed you would end up with more money in another way, we would advise it. We don’t. Stay put.
If Lucent Financial Planning are your adviser, come talk to us about your fears, but listen to us and our reasoning, if for nothing else but because… we are your adviser.
Warren Buffet, the ‘Sage of Omaha’ propounds buying and holding. Not buying and selling and buying again. But buying and holding. His favourite holding term is ‘forever’.
Why?
Brainy 🧠 people know that selling when their asset price is lower means they will get less.
Smart 🧠 people know that when they sell, they may be right, but it is unlikely. Then, they have to buy the assets back - and its unlikely they will get that timing right then too...
Complicated Formula: 2 x unlikely = really unlikely
This is known as trying to ‘time the market’. Easy in hindsight, impossible before the unknown events that will happen. Professional investors can’t do this - 90% fail. The 10% that achieve this are never the same in the following period and this figure is surprisingly close to ‘chance’, i.e. what you would expect at random.
If professional investors can’t do it, why on earth do you think you can?
Quote from Kate Evans, Financial Adviser at Lucent Financial Planning –
“I spend a lot of time on adviser web forums and advisers are all moaning, saying they are having problems with clients wanting to cash out.”
And yet, very few of our clients are making these noises with us. Why is this? It’s because we offer a plethora of information sources and from the very start, we advise that investments will fall in value at points. But, like any information our minds will forget things and so we need to top it up. Of course, this will happen at the financial review where we look at each individual ‘financial plan’. But also:
We do investment seminars – to learn the theory behind the investment philosophy.
We have information on Ubuntu, our online community – here you can view our in-person seminars, see videos about investing, and other articles to keep your 🧠 mind topped up.
Monthly newsletter – that’s right! Even in this we are aiming to teach you.
The people that are most worried are the people that don’t interact with any of these things. If you’re a worrier, come for your financial top up and read / watch all the information we have available. Ask us questions too!
How Lucent Financial Planning stack up against other advice firms
Towards the end of October, a research company called Next Wealth issued their Financial Advice Business 2023. This is a research report into financial advice businesses and the following reviews Lucent Financial Planning compared to the average.
Independent or Restricted
A restricted adviser can only offer investments from a small range of providers. Lucent Financial Planning are independent and can offer investments or products from any provider we deem suitable.
Age of adviser
It is true, Steve is nearly 46 and so has slipped into the ‘yellow’ age band of advisers below. But, he’s still got plenty of time left! Most of our advisers are in the first two brackets, this means we are going to be with you a long time! You don’t want firms to be retiring after a few years with you, as this will mean looking for another adviser. You need long-term, consistent support and advice.
Chartered Financial Planning Firms
Only 20% of firms are ‘Chartered’.
Being Chartered as a firm means a minimum number of people are ‘Chartered Financial Planners’ which is the highest standard of advice. Also, there are additional Codes of Ethics that need to be adhered to.
Lucent Financial Planning are Chartered – we are part of the 20%
If being ‘chartered’ is the pinnacle of professionalism, then is it interesting that in 2023 62% aren’t even working towards it?
We are in the top 20%, but - and this is not in the Next Wealth report - there is only one Lifestyle Financial Planner of the year 2023 – Yes, that’s us too:
Here are some of the lovely comments we received on winning:
Rarely have I seen a more deserving winner… you are leading the way. – Ruth Sturkey (judge!)
The award was so well deserved. Your presentation was awesome! Emotional and inspiring. But most importantly, authentic. You are a true leader in the field. Elaine Martinez
Well done, Steve, your case study was brilliant, but your presentation on the day blew me away!!! Calling you an inspiration doesn’t seem enough, it was so obvious that what you do, you do it from the heart and with feeling. You are a STAR!! Sylvia Bentham (Judge!)
Charges
As a company, so far, we are stacking up pretty good! Let’s get down to brass tacks though, no one is bothered about shiny baubles if the basics aren’t right:
From the Next Wealth Report:
Below is a table showing our total charges against the average (taken from Next Wealth Report):
Instant reflections on the above:
Lucent Financial Planning are more expensive than average! Well yes, we are. But you get what you pay for. We offer things to you that no other company does, like:
Ubuntu – Online community – Don’t know about it? Let us know and we will sign you up!
Walking Club – Monthly walk in the countryside to meet like minded people and get reinvigorated.
Psychologist – A free-to-use psychologist to help you through tough times when you need it. Or, to help you make better decisions.
Events – We take you for pints! Or teach you at investments seminars. Or dance with you at garden parties.
That’s why we are award-winning.
And yet, our most common overall charge is 30% cheaper than the average across the profession. Our lowest cost is 1.08%.
Now, you may think this is very self serving, but it is deliberate. We do aim to do a great job! But you may be wondering what the reasons are, so let’s take a closer look.
Brains 🧠 – When you employ an adviser, you are basically buying their brains. We all know that people’s brains are different! So, comparing a cost and assuming you are buying the same thing when you are buying an adviser is a big mistake! Why? Because you don’t know what you are buying.
That’s why we show you what we are going to do before you are committed – you see the power of our collective minds!
But also, doing a job properly and well, means that it is likely to take longer, and we all know time is money. However, what is the outcome of that? Doing a better job should mean a better outcome.
Lucent FP have higher than average charges and yet the overall cost of investing with us is lower than the average. Let’s go through why:
Some firms, particularly large national firms will charge a lower advice fee, because they are earning money elsewhere in the investment chain, e.g., from funds, DFM charges or platform charges. This is known as ‘vertical integration’.
The only vertical integration you should be involved in is if, like me you are 6ft 4, and you need help being folded into an aeroplane seat.
Our fee to clients is the only way we get paid. Nothing from elsewhere.
As we have read and understand the evidence, we know that what is most important in investing is COST along with these factors:
Investment Funds – "come on, you just choose cheaper funds to make the cost lower, anyone can do that."
That is true! We believe in evidence-based investment and one piece of overwhelming evidence is the effect of costs on portfolio value. So yes, we will select lower-cost funds. But we will only select them if they are providing what we want to buy. This too is based on evidence. Here it is below (sketch and evidence provided by Behavior Gap):
The evidence provided by academics, whose only interest is to get a theory through the thousands of other academics that will aim to disprove it, is that keeping costs low is important, and that ‘active’ managers can’t beat market returns once fees are taken account of, in a consistent manner. So, despite all the evidence listed below, some advisers ignore this. Why?
Nope, I can’t find a good reason either. Perhaps, they haven’t read the memo… there have been lots of memos, for decades. This isn’t new. You probably deserve an adviser that can be bothered to. Or, worse still, they have read it, but it doesn’t serve their own needs so have ignored it. I’m putting it down to the former, laziness is more common.
You don’t use a DFM (Discretionary Fund Manager) and so would be cheaper.
Wrong! We employ the services of Timeline DFM to help us build the portfolios we use. This means you benefit from:
Institutional fund prices – the DFM acts as a ‘bulk buyer’ thus being able to secure lower costing fund charges. This brings your fund charges down.
Lucent FP pay for them through our advice charge – this means we can get the overall charge of the DFM much lower than charging you directly as the DFM is more certain of the amount of money they will receive.
These are two examples of the benefits of having an advice firm that is a Yogi. No, not a master of teaching Yoga, just that we are smarter than the average bear.
(Online Yoga tuition is available on Ubuntu though, check it out!).
So what's next?
We hope you have enjoyed this month’s newsletter. We do apologise for the self-aggrandisement in this article, but if we don’t tell you, who will? We are mightily pleased with how we compare to other advice firms in the Next Wealth Report. Obviously, we don’t just want to be better than average, we want to be the best! So, we will be looking at improvements in the coming year, taking the best from other advice firms and also coming up with a few innovative enhancements of our own.
If you already have an adviser and want to know how they compare, why not come and see for yourself!
We offer two meetings at potentially no cost to you. The first, we will see how we get on and whether we are a good fit to work together. After all, we will be working together for a long time.
At the second meeting, we will show you exactly what we would do for you and how we would work together. There is a charge for this as most people think it is absolutely awesome. However, if you don’t and think it’s a load of rubbish, we have a ‘satisfaction guarantee’ so you don’t have to pay. If you think it’s rubbish, I don’t want your money as that would make me feel ashamed of myself.
If you think your current adviser is ‘vertically integrated’ or you know your charges are significantly higher than 1.2%... Or
You have no idea what your financial plan is?... Or
You want to see what award-winning Lifestyle Financial Planning is like...
...then get in touch on:
0121 705 1000 or info@lucentfinancialplanning.co.uk
Or visit our website, and check out our advisers: www.lucentfinancialplanning.co.uk
Interested in finding out more about investments? – email us on:
info@lucentfinancialplanning.co.uk saying: Give me Ubuntu!
To finish, we are always proud to receive glowing reviews from our lovely clients, so we wanted to share a couple:
"As boring a topic as financial services are to most people, but a serious one if they are playing with your money! - Lucent achieve the human element approach to your requirements. All staff seem team spirited and genuinely passionate in working to a collective result for your outcome. It’s as if you are in a family environment with any of their engagements. Advice is knowledgeable and services professionally explained & executed to suit your needs. Remember life is about trust in people. I would wholeheartedly recommend them for their services." - Clive W
"Steve & the Lucent team look after my investments & actively encourage me to spend it before it’s too late! Perfect advice every time, thanks." - Karl B