Investment Book Recommendation

The Little Book of Common Sense Investing
by John C. Bogle.
 

This is probably the only book on investing you’ll ever need to read. At the 2017 AGM of Warren Buffet’s company, Berkshire HathawayJack (John) Bogle was introduced as the “person who has done the most for the American investor.” He has contributed immensely to making investing accessible to the general public.

We attended the Berkshire Hathaway 2017 AGM and picked up a copy of this book on our return. The book’s message is simple yet powerful. Whether you are a novice or professional investor, you’ll learn something. This is probably the best book ever written for investors to help understand how the investment markets and financial services industry operates. So if we had to pick one book on investing this is it.

“The two greatest enemies of the equity fund investor are
expenses and emotions.”

John C. Bogle, The Little Book of Common Sense Investing

Bogle provides a detailed overview of two different investment options: actively managed funds and index funds. The book provides evidence of why it’s better to invest your money in a low-cost index fund instead of giving it to a high-cost investment fund, run by a fund manager.

He also outlines why;

  1. The way to wealth is to capitalize on the magic of long-term compounding of investment returns.
  2. Most funds will underperform a simple index fund.
  3. The stock market increases and how to value it.
  4. Simplicity will always beat complexity.
  5. The stock market is a giant distraction to the business of investing.
  6. How to calculate future investment returns from the stock market.

Common sense investing is not as easy as it sounds. Let us know if you would like a copy of this Little Book of Common Sense. If you would like us to help you implement some common sense investment strategies do get in touch. We’d be delighted to help.

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Compound Interest, 8th Wonder of The World

The 8th Wonder of The World

A Simple Idea.

Charlie Munger, the vice chairman of Berkshire Hathaway says, “Take a simple idea and take it seriously”. The simple idea that should be taken seriously by every investor is the ability to earn compound interest on your savings over the coming decades.

Compound Interest and College Fees

Let’s look at a simple example. We all want to give our kids, or even our grandkids, the best possible start in life and a good education is half the battle. However, education, particularly third level education does not come cheap. College fees may be free, but other costs certainly add up. Conservative estimates suggest annual costs vary, but begin from €10,000 to €12,000. Currently, the monthly child benefit amounts to almost €300 per month for two kids. Take the following scenario: 

  • Save €300 per month.
  • Investment strategy is market related.
  • Timeframe is for 10 years.
  • Assume annual interest rate, net of costs, is 5% per annum.
  • No indexation of contribution applies here.

Compound interest adds €11,544 to the value of your investment. We’ll leave you contemplate the difference between this and the current deposit based returns, which are small fractions of 1% per annum. Simple interest would have added €1,800 over the 10 years.

Snowball Effect

Think of compounding as like a snowball rolling down a steep hill. As it gathers more snow along the way, momentum increases and the ball becomes deeper and broader as it moves forward. Compound interest is amazing but just like most things in life, there’s no free lunch. The simple truth is that it takes a long time to work. To get the rewards you have to stick with it and stay the course during good times and bad. Problems arise with the snowball if you start making withdrawals, a 10 year horizon rather than a 10 month plan is required.

Investment Plans @ 5% p.a.

Focusing on trying to grow your wealth by compounding is a key element of any investment plan. The same applies with retirement plans. Just take a look at the graph below which JP Morgan Asset Management created to illustrate the power of compounding. One line shows the example of somebody starting to save at 25, let it be for retirement. This clever person that starts to save at 25 years old, accumulates circa €284,000 more in retirement funds than the person that starts at 35 years old. The 35 year old has still done well!

Investment Returns – What to Expect From Here.

Perhaps you are wondering about the 5% return piece of this jigsaw. Complex investment options can give the illusion of control. Our theory is that advice doesn’t have to be complicated to be good. Equities have delivered the best investment returns for investors over the long-term. Despite various recessions, business progress has been the order of the day in developed and democratic countries. Equities, which are essentially a collection of businesses, have reflected this.

The MSCI World Index has generated 10 year annualised returns of 7%, 6% and 12% for each of the last 3 decades, respectively (see table below). In our view the easiest way to ensure that a portion of your money will compound at a consistent rate over the coming decades is to invest in a strategy that gives you exposure to world equity markets.

We help you invest in portfolios that focus on large and medium sized companies that are globally diversified. Focusing on dividends plus dividend growth is, in our opinion, the most reliable way to invest in and make money from equities over the longer term. This applies particularly in today’s extraordinary bond market environment, where so many Euro government bonds have negative yields.

Meanwhile, European investment markets remain some 35% below its March 2000 highs, while Emerging Markets equities remain some 25% below their October 2007 highs. Japan is still 45% below its 1989 peak. The world is still concerned about global trade wars, rising Middle East tensions, Brexit, a slowing global economy, a possible recession next year, slowing industrial production, earnings estimates being revised down, possible impeachment of President Trump, etc. 

We do understand these fears, but perhaps investors are too negative in their views. In summary, while we are very aware of the global issues out there. Cautious optimism is a better market view than pessimism – Just look at the investment returns below for the disciplined investors availing of the eighth wonder of the world (Albert Einstein).

 

Pat Leahy, Certified Financial Planner.

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Investment Book Recommendation

The Little Book of Common Sense Investing
by John C. Bogle is probably the only investing book you’ll ever need to read. At the 2017 AGM of Warren Buffet’s company, Jack (John) Bogle was introduced as the “person who has done the most for the American investor.”

What is the Investment Outlook

What’s the Investment Outlook? Covid-19; What is the Investment Outlook? Covid-19 is first and foremost a human tragedy While markets were aware of COVID-19 in China, the catalyst for the market drop in late February was when the virus hit Europe. Then it became clear...

How to Pick Winning Investments

How to Pick Winning Investments

There’s no greater feeling than being on the right side of a winning stock. The joy of being ‘right’ and making money in the process is insatiable. Jason Zweig, in his excellent book, “Your Money and Your Brain” describes how the brain activity of a person that’s making money on their investments is similar to a person who is high on cocaine. It’s that powerful!

Picking Winners

The problem with picking stocks is that it tells us nothing about the future. Companies and industries change on a continual basis, as technology and human creativity move forward.

Similarly, the stock market, which is essentially a collection of businesses, is always changing. An investor in 1910 would have been excited about the choice of car companies they could invest in. By the 1990s, investors’ attention switched to the new economy as characterised by technology companies such as Cisco, Microsoft, and Netscape.

Even over the last decade, the list of the world’s biggest companies has evolved significantly as the fortunes of different industries ebb and flow. Picking tomorrow’s winners is not simply a case of looking at the companies that have been successful in the past.

What are the chances?

So, what are your chances of successfully picking winning companies? Not all companies are created equal and a large amount of companies provide mediocre returns at best. In his recent study[1], Hendrik Bessembinder, a finance professor at Arizona State University, found a minority of companies provide the majority of the returns in the stock market. Mr. Bessembinder estimates that $32 trillion of wealth (returns in excess of Treasury Bills) was created between 1926 and 2015 via approximately 26,000 stocks that have traded on the New York stock exchange, American stock exchange, and the Nasdaq (All US exchanges).

Of these 26,000 stocks, only 86 of the top-performing stocks (less than 0.33%), were collectively responsible for over half of the wealth creation. The most astonishing fact is that just over 4 per cent of the companies account for all the wealth created. The other 96% only matched the return of the one-month Treasury Bill – with many of them producing less. This is extraordinary. It demonstrates that if you try to pick stocks, you’re very likely to miss the relatively small number of companies that turn out to be winners.

[1] Bessembinder, Hendrik (Hank), Do Stocks Outperform Treasury Bills? (May 28, 2018). Journal of Financial Economics (JFE)

What simple solution should investors implement?

Investors do better when they apply simple solutions to the complex world of investing.  Occam’s Razor is the problem-solving principle which states that simpler solutions are better than solutions that are more complex. If we apply these thoughts to investing, the message is clear; simplicity always beats complexity.

So, what simple solution can an investor implement? Investing in a ‘simple’ globally-diversified equity portfolio will increase the likelihood of having a better investment outcome as you have exposure to all the winners. For example, from 1994-2017, the annual return from an all-World equity index was 8% (see graph below)[1]. If you excluded the top 10% of best-performing stocks, your return dropped to 3.6% per annum. If you excluded the top 25% of the best-performing stocks, your return would have been -4.4% per annum. Stock returns are not uniformly distributed- some stocks do well, some not so well, but by remaining diversified you maximise the chance of capturing the returns available from investing in the stock market.

[1] The ‘all stocks’ world index consists of all eligible stocks in the developed and emerging markets. Returns in USD. Diversification does not eliminate the risk of market loss. Past performance is no guarantee of future results. Index data from DFA.

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Will We Have Enough? – 5 Ways We Believe We Can Add Value

Will We Have Enough? – 5 Ways We Believe We Can Add Value

Time never stands still. Everything in the world seems to be moving at a quicker pace than before. Nowadays, the most common question we answer for the people we deal with is ‘Will I have enough?’. We are continuously looking for ways to improve how we answer this question and add proper value.  As Certified Financial Planners we are continuously evolving. Information gathered and used in the right way can help create a realistic financial plan. 

Truly Independent & Objective Advice

For many of us, money, although we may not what to admit it, is a very emotional subject for us and our families. It often hard to talk about, difficult to make decisions about, and it’s particularly difficult to make totally objective decisions. Part of the value of having a trusted advisor is a second opinion, someone who is completely independent of you or your family, who can provide advice without emotional attachment. In our experience, most individuals benefit greatly from an independent source of advice that allows you to focus on enjoying life instead of worrying about money.

Confidence 

Our initial complimentary consultations typically begin with a discussion about your investment portfolio, and your insurance policies. This transpires over time to a relationship that covers every aspect of your financial life. We try to give you the confidence and reassurance to know that while you are above ground, what type of lifestyle you can afford, and furthermore if you weren’t around, that your family would be taken care of.

By using lifetime cash-flow modelling tools we help you create a financial plan that matches your priorities and fits your lifestyle.

 

Asset Allocation
Considerable academic studies have shown that over 90% of variations in funds’ investment returns were attributable to the underlying strategic asset allocation. Setting an appropriate strategic portfolio mix, between equities, bonds, and other asset classes, is a starting point for all our clients before considering investment selection. This important decision will have a big impact on your investment outcomes.

“Wealth isn’t primarily determined by investment performance, but by investment behaviour.” Nick Murray

Behaviour

When asked how the stock market will perform, the financier JP Morgan said that “it will fluctuate”. We recognise that while investing is a long-term activity, the long-term is made up of a series of short-terms which can be difficult for investors. Because investing evokes emotion, we look to help you maintain a long-term perspective and a disciplined approach. We aim to help our clients to handle periodic volatility without abandoning their investment plan.

Tax

There are distinct measurable benefits to enlisting the services of a Certified Financial Planner, including disciplined rebalancing and tax loss harvesting. Also, the allocation of assets between taxable and tax-advantaged investment accounts, is one area we can add value each year, with an expectation that the benefits will compound through time. Deciding where to allocate assets from a taxation perspective is crucial to a client’s overall financial plan.

How we invest

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework”

Benjamin Graham, (1894-1976) Legendary American Investor, scholar, teacher, and author of the book, “The Intelligent Investor”

 

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7 Things to Do If Investment Markets are in Freefall

7 Things to Do If Investment Markets are in Freefall

INVESTMENT PLANNING
7 Things To Do If Investment Markets Are In Freefall
Pat Leahy, Certified Financial Planner
August 23, 2018

First things first, the investment markets are not in freefall as we type. Investment markets have been calm for the last number of years. So much so that some investors may have forgotten how frightening economic crises can be.

Looking at past economic crises, we can see that the markets have never told us precisely when, where, or how steep their short-term movements were going to be. But, they have reliably recovered and soared – usually without warning. Those who did not panic-sell at the bottom and then tried to guess when it might be “safe” to return were ultimately rewarded with healthy returns.

So let’s pretend we are in a state of emergency, with the following fire drill. Here are seven timely actions you can take when financial markets are tanking, and, hopefully, even when they’re not.

1. Don’t panic (or pretend not to). It’s easy to believe you’re immune from panic when the financial sun is shining, but it’s hard to avoid the ‘world-is-going-to-end’ news headlines during a crisis. An emotional decision made at the height of an emergency is likely to be an expensive one. Even if you only pretend to be calm, that’s fine, as long as it prevents you from acting on your fears.

2. Remember the past. We do know that history tends to repeat itself. History tells us that from 1900 – 2016, the markets have experienced a correction about once a year. Therefore, there are pretty good odds it will happen again. A market correction is when the markets decline by at least 10%. One way to ignore the doomsayers during market corrections is to heed what decades of solid evidence have taught us about investing: Capital markets’ long-term trajectories have been upward. Thus, if you sell when markets are down, you’re far more likely to lock in permanent losses than coming out ahead. Stick with the plan.

A History of Declines (1948 – December 2017)

 

TYPE OF DECLINE AVERAGE FREQUENCY AVERAGE LENGTH LAST OCCURRENCE
-5% or more About 3 times a year 46 days Jun.-16
-10% or more About once a year 117 days Feb.-16
-15% or more About once every 3 years 275 days Oct.-11
-20% or more About once every 6 years 425 days Mar.-09

Source: Capital Research and Management Co

3. Manage your exposure to breaking news. There’s a difference between following current events versus fixating on them. In today’s multitasking, multimedia world, it’s easier than ever to be inundated by breaking news. This ‘breaking news’ can make it challenging to retain your long-term perspective.

4. Review your investment portfolio regularly. When you planned your personalised investment portfolio, it was carefully structured around your lifetime financial plan. Typically, your investment portfolio should be globally diversified, allocated to various sources of expected returns, and sensibly implemented with a low-cost approach in an evidence-based manner.

“The key to successful investing is to get the plan right and then stick to it. This means acting just like the lowly postage stamp that does one thing but does it well. It sticks to its letter until it reaches its destination. The investors’ job is to stick to their well thought out plan (if they have one) until they reach their destination. And if they don’t have a plan, write one immediately.”

Larry Swedroe, Financial Author

5. Reconsider your risk tolerance (but don’t act on it just yet). When you create a personalized investment portfolio, you also commit to accepting a measure of market risk in exchange for those expected market returns. Unfortunately, during quiet times, it’s easy to overestimate how much volatility you can stomach. If you discover you’re miserable to the point of breaking during even modest market declines, you may need to re-think your investment plans, post-recovery.

6. Increase your market exposure – if you’re able. If, on the other hand, you discover you’ve got nerves of steel, market downturns (when the market flips from a bull to a bear and values drop more than 20% for a more extended period) can be opportunities to buy. This is not for the timid! This approach is implemented if you are investing with your long-range lifetime financial plan in mind and puts you well-positioned to make the most of the expected recovery.

7. Talk to us – we don’t know when. We don’t know how severe it will be, or how long it will last. But sooner or later, we expect the investment markets will correct or even downturn again for a while, just as we also expect they’ll eventually recover and continue upward.

We hope today’s fire drill will help you be better prepared for “next time.” We also hope you’ll be in touch if we can help. After all, there’s never a wrong time to receive good advice.

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More Insights From Our Blog

Investment Book Recommendation

The Little Book of Common Sense Investing
by John C. Bogle is probably the only investing book you’ll ever need to read. At the 2017 AGM of Warren Buffet’s company, Jack (John) Bogle was introduced as the “person who has done the most for the American investor.”

What is the Investment Outlook

What’s the Investment Outlook? Covid-19; What is the Investment Outlook? Covid-19 is first and foremost a human tragedy While markets were aware of COVID-19 in China, the catalyst for the market drop in late February was when the virus hit Europe. Then it became clear...

Compound Interest, 8th Wonder of The World

The 8th Wonder of The World A Simple Idea. Charlie Munger, the vice chairman of Berkshire Hathaway says, “Take a simple idea and take it seriously”. The simple idea that should be taken seriously by every investor is the ability to earn compound interest on your...

Learn why your world cruise at great risk today?

Learn why your world cruise at great risk today?

Baroness Ros Altmann, a former UK Pensions Minister is of the opinion that ‘the cash equivalent transfer values are so attractive and the freedoms for personal pensions now make Defined Contribution (DC) pensions far more user-friendly than ever before’. This quote was taken in direct response to the question ‘Why are Defined Benefit Schemes (DB) winding up?’

Transfer value

Taking a transfer value reduces the employers DB Scheme liabilities, so therefore they may provide ‘enhanced’ transfer values to encourage leavers. If you are close to retirement age you are first in the queue to get paid, however if you are perhaps 20+ years from retirement age, will there be funds left to meet your employers covenant of a fixed pension amount for life?

Just ask employees in Waterford Crystal, Irish Independent, AIB, British Home Stores and many more, about what happens when the sponsoring company gets into financial difficulties. Defined Benefit schemes are struggling. They are underfunded, mainly due to the cost of an annuity of €10,000 pa for an employee,increasing by over 50% in the last 10 years from €166,000 to €253,000, at age 65*. (Source https://goo.gl/u91zVa) Hence, a requirement for employee, employer or combination of to increase contributions, or alternatively people at the back of the queue will be left with nothing.

 

Control

Control is the major reason many are taking a transfer value. Employees that have changed jobs, known as deferred members, can take control. Existing employees can also take control where the DB scheme is being wound up, and most likely being replaced by a DC scheme. Transfer values are based off bond yields, which are relatively attractive today.

 

Risks

Taking a transfer value means you can decide how your fund is to be invested. This can be good, or it can be bad. The investment fund can grow tax-free in a retirement bond or approved retirement fund (ARF). Risks include volatility of short-term performance, the risk of being too conservative, and the risk of living too long, and ‘running out’ of money.

Death Benefits

At present, members of a DB scheme pension the pension may die with you, or at best a spouse may get 50% of it. Taking a transfer value provides control and ownership. It also provides an Approved Retirement Fund option, which means that residual funds can be passed onto dependents, as opposed to the pension fund dying with you.

Access

Taking a transfer value means you can access funds, or ‘retire’ from age 50.

Chief Economics Editor of the Financial Times, Martin Wolf, has said ‘at current ultra-low interest rates, the transfer value of a DB pension has become significantly overvalued.’

Defined Benefit scheme pensioners in payment have preferred rights versus active and deferred members in a scheme wind-up (not a joke). Furthermore, a DB scheme is open to rule changes outside members control eg retirement age increase, or indexation being cancelled.

To say there is some injustice in this is an understatement, but the reality is if the company goes wallop or decides not to pump in the increased funds required to meet the covenant

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