Portfolio politics gone mad: Managing your investments through another (!) UK vote

Financial markets HATE uncertainty. It can generate enormous tidal waves of volatility in stock markets and have investors, professional and novice alike, running for the hills with their fistfuls of hurriedly bailed-out cash – or at least towards the so-called safe-haven of gold reserves. And when it comes to uncertainty – political, economic or otherwise – it doesn’t come much bigger than the snap General Election on June 8th, as has been instigated by UK Prime Minister Theresa May.

While horror stories of a tumbling FTSE dominate the headlines, you might be worried about the impacts on your pension pot or equity portfolio. Well, don’t flap just yet. These are actually quite familiar waters we’re about to traverse and we will do so safely and serenely, I assure you. Let me explain why.

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Treading carefully

As soon as Mrs May announced her decision to hold a Parliamentary vote on a snap General Election, stock markets in the UK plunged, with the FTSE 100 finishing the day 2.5% down. The heavy dose of uncertainty she had syringed into the financial landscape had got investors on edge, which in turn causes them to re-evaluate their investment strategies and ultimately adopt a more cautious approach. For now!

They sell their investments, especially the more risky equity-based ones, and hold it all as cash or filter it into secure, low-rate long-term bonds – or, as I say, gold. This causes demand to collapse and, therefore, company stock valuations to slide. But it’s only because of this new wave of uncertainty, nothing more. And it’s just temporary. When it comes to stock markets, no news is bad news, and any news is good news (almost).

Sterling and stocks

Meanwhile, that same day May shocked us with her announcement outside No.10, the value of the Great British Pound bounced upwards 2.2%. The two major financial factors at play here – Sterling and big company stocks – are very tightly linked. A falling Pound often spells good news for large multi-national firms based in the UK, such as those on the FTSE 100, because so much of their revenue and profit actually comes from sales made abroad. This profit is then converted back into Pounds in the UK at better rates than before, so they’re effectively getting more pounds for their dollars, their euros, their rand, rupees, renminbi and so on.

Since the Brexit vote last summer, Sterling has struggled badly. Investors suddenly didn’t like the look of the UK as an economic region to pile their money into, which tugged on the value of the Pound compared to other major currencies. But it was a huge boost to the stock prices of the biggest global firms in the UK because of the higher value they found when changing those international profits back into British money.

If you invest in a diverse portfolio, and on a global scale, these potential ‘issues’ become merely nuances. But if you have all your money invested in a selection of company stocks you could get badly burned. Make sure your investments are diversified

Polling day – again!

You could argue that this isn’t actually a General Election at all. You might rather call it a ‘Brexit Election’. Many pundits see it as a bizarre precursor to the impending Brexit negotiations – or even a second Brexit vote, which will either give the government great confidence to go into battle with the EU member states on their terms and with great gusto – or, erm, not!

History tells us that the markets swing in time to the pre-Election opinion polls. We can expect to see more volatility in the lead up to the June 8th UK General Election and, if the pendulum suggests a hefty Tory majority, it will likely strengthen the value of Sterling and down-weight stock prices on the FTSE 100. Or vice versa. 

Bring the noise

However, all this doesn’t necessarily predict the post-Election scenario. We have two good recent examples. Firstly, the Referendum last summer. Many commentators expected a significant crash in markets in the event of a win for the ‘Leave’ vote. So far, we’ve seen anything but. Secondly, the US Election. The surprise Trump victory initially dented investor confidence and spooked the struggling US stock markets but they very quickly rallied and have been steadily rising ever since.

So in the run up to polling day, don’t be hoodwinked by the alarmist press or confused by mass storm of punditry noise. Ignore them. Put the ear-mufflers on. And when it comes to your investments, DOING NOTHING might well be your best approach. Hold a long-term passive investment strategy and you won’t go far wrong in my view.

These are typical times, when the nervous get nervous and can lose money badly, while the informed stay rock solid and breeze over the speed-bumps in relative carefree comfort. 

Peas in a pod: The DNA of a financially independent frugal warrior

On my journey towards financial independence (FI) I’ve soaked a lot of great content – books, blogs, podcasts and the like. They’ve helped me along the path. The best of them have become dear friends, or sharp tools to my armoury, or new ingredients for my melting pot of ambition. And the more I have read and absorbed, the more commonality I have noticed in the authors and creators of this content.

I’ve concluded that FI-seekers are a rare breed that share some striking similarities in the way they value life and approach a challenge. Here, I’m going to deconstruct that DNA, the make-up of your typical FI-seeker, as best I can. I’d love to hear your thoughts! Do you agree with these common traits, or not? And do they reflect your own life values?

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Time not money

I believe the classic FI persona upholds one core principle over all others – life is NOT about money. It is about time.

Perversely, while eagerly sniffing out ways to cut our spending and accrue wealth, FI-seekers are actually not that interested in money at all. Far from it. The focus on our finances is a necessity we must go through in order to achieve our true desire, which is to have more time, and more importantly, more quality time – the time to do what we want, to devote to things other than work and chores and simply ‘getting by’ in life.

Investment style

The vast majority of FI-ers / early retirees / call-it-what-you-will, discover one single truth about sensible investing and that is to adopt a passive, diverse approach to portfolio management.

Passive, diverse investing is where you establish a strategic long-term mix of investments – eg, 60% global stocks, 40% corporate bonds and gilts – invest your money across indexes, such as the FTSE100, and then stick to this portfolio mix as the financial markets ebb and flow, knowing it is likely to give you decent, reliable long-term returns. You’re simply tracking the markets. The flip side to this is active investing, where you research individual industries and companies and trade stocks frequently in an attempt to beat the market.

Active investing is dying on its arse. Over the last 10 years, 83% of actively managed investment funds in the US have failed to beat their target benchmarks. Nearly half of them have folded within that 10-year period. With the advent of technology and low-cost index-tracking investment tools, things are getting even worse for the active investors.

Active investors are greedy. Passive investors are smart. FI-ers tend to learn this quite quickly and keep a large proportion of their investments in a passive style.

Liberty

We want control, we want choice, we want freedom. As I said, it’s high-quality time that gives you that freedom and money is simply an enabler. But we stand for more than just that. We believe in equality for all, creative expression, clean air and long walks, learning, loving and free-living. We think a lot. You could say we’re a little bit hippy!

But that’s not to say we’re wild or flagrantly spontaneous. As a companion to this desire for ‘liberty’, FI-seekers also have a strong river of analysis and science coursing through their veins. We’re measured, considered open-book libertarians, not afraid to ask questions or push the boundaries, but often do so after much research and within our quiet realms of self-knowing.

Morality

I have found that many FI-seekers have very specific moral standards. They may not jump up and down and scream about it, demanding others live by these same measures – quite the contrary, in fact; FI-seekers are generally more concerned with how they and their immediate circle behave – but they believe vehemently in respect. It is morally important to FI-seekers that they show respect to others and trust others to display the same level of respect in return.

On a macro level, we hope and dream that the world can one day embrace greater levels of moral decency and do away with the greed, hate and anger that’s chewing it up.

Family

While those lofty global aspirations are held dear in our heart, they are not as dear to us as our immediate family and network of close friends. Because we appreciate the importance of high-quality time, we want to spend that time with those closest to us, the ones we love the most. We cherish and protect our family at all costs. We create an environment of warmth, sharing and support.

Bravery

FI-seekers don’t tow the line. We don’t simply take what we’re given in life, say thanks and move on. We want more. And to look for more, to swim against the tide, you need bravery. We never say never, we experiment and try new things, we ask searching questions, we call time on bluff talk, we don’t take ‘no’ for an answer, and we will take (considered) risks as we strive for a new, better way of being.

Individuality

The most important trait of all.

A few years ago, when I first became intrigued by the concept of early retirement, I found a very emotional attachment to some writers in the field. They inspired me. The book Your Money Or Your Life blew me away. I was hooked and excited about potentially making a significant life change, stepping off the traditional conveyor belt of work and taxes. At the start of that journey I was desperately looking for allies – a champion, a success story, a teacher. I was looking for more and more clues as to how I could unlock my own little life conundrum. I would latch on to any glimmer or comfort that I was doing the right thing. And I ended up feeling a real sense of fandom towards certain academics and bloggers.

But over time, this has waned. I’ve come to realise that, while I think we share many similar characteristics, the biggest and most important commonality among FI-seekers is, strangely enough, the fact we are all different. It’s our individuality and our spirit and determination for being unique that truly defines us. We have the verve to take the plunge and stick to our guns.

At the end of the day, we don’t need to follow others, or have heroes. We’re writing our own story, each and every one of us. Every day.

The Lifetime ISA is NOT a savers’ salvation – be warned!

It’s been heralded as an innovative new way to help first-time homebuyers on to the property ladder and plug the pensions gap. Two of the biggest problems UK adults under 40 face today. Amazing. But tread carefully. The Lifetime ISA, which is available from April 6, 2017, is not all it’s cracked up to be.

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Another brick in the wall

The government loves a gimmick. It particularly loves a gimmick in the shape and form of an ISA – the Individual Savings Account that gives you tax breaks.

At the turn of the century we had the Mini ISA and the Maxi ISA, later renamed to the Cash ISA and the Stocks & Shares ISA. You can save (in to a Cash ISA) or invest (in to a Stocks & Shares ISA) a certain amount each year (up to £20,000 for the tax year 2017-18) and, for the whole time you keep the money in your ISA, it’s free of capital gains tax.

Then we had the Help To Buy ISA, where you can get a 25% top-up on your savings to help you build up a deposit for your first home. We’ve also had the Junior ISA – effectively a mini Cash ISA you can open for your kids – and last year came the Innovative Finance ISA, which covers investments in peer-to-peer lending platforms, and the Flexible ISA, which is really just a set of optional add-on features surrounding transfers and withdrawals.

Got all that? Good. So let’s tell you a little more about the latest ISA off the government’s conveyor belt. The Lifetime ISA.

An ISA is for life. Or is it?

If you’re under 40 you can open a Lifetime ISA and pay in up to £4,000 a year up until your 50th birthday. The government will add an annual bonus of 25% to any amount you put in. So, for every £4,000 you save, the government will add £1,000.

You can then use these savings to buy your first home , up to the value of £450,000, or keep it in savings until you turn 60. For both options, you can withdraw your money, including the 25% government bonus, tax-free.

Sounds simple. Sounds great. And for some people it is. But don’t run to open your Lifetime ISA just yet. The terms and conditions, when examined closely, show that it is not great – or simple – for everyone.

If you need to access your money before you are 60 for any reason other than to buy your first home (costing less than £450,000) or because of terminal illness, you will pay a hefty penalty. Not only will the government reclaim the 25% bonus and any savings or investment growth on that bonus amount, it will also charge an additional 5% of the total value. So you could ed up with less than you put in.

Compared to a pension, the Lifetime ISA is treated differently for tax purposes. Some taxpayers may be better off contributing to a pension. If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you will lose the benefits of the employer-matched contributions.

Oh, and you can’t buy a property and then rent it out – you must live in it. And it must be in the UK. If you already have a Help To Buy ISA you can transfer it to the Lifetime ISA or save into both, but you will only be able to use the bonus from one of them to buy your first property.

Two words. Devil and Detail.

Capital-C Conservative marketing

The Lifetime ISA is good for some but it is not the golden bullet. It is actually another headline-grabbing savings initiative, sneakily and strategically linked to two hot topics for millennials – housing and pensions – that has a lot less substance than the Chancellor would have you believe, once you’ve kicked the tyres and absorbed all the small print.

For one, the name ‘Lifetime ISA’ is curious. Why choose to label it ‘Lifetime’? It doesn’t last your entire lifetime. Is this to make us feel like it’s even bigger and better than the previous ISAs? A magic cure to all our long sufferings? Perhaps I’m being overly cynical here, but it does have a strong whiff of clumsy marketing about it, like it hasn’t been given its full consideration and due diligence.

And herein lies the source to a long and growing history of ISA problems. ISAs have always been rushed out, part of the annual Budget statement by the Chancellor each March, when they’re invariably looking for a piece of good news to announce and project into the media, to detract from the negative news – usually tax hikes, or spending cuts. The ISA has become something of a saving grace for the government in this sense. It’s a cheap trick and an easy yet flimsy get-out-of-jail card.

Tax con

The government is quick to hone in on the fact that ISAs give you generous tax breaks and ISAs are often advertised as ‘tax free’. Don’t be fooled. They’re not. You avoid capital gains tax on funds you hold in an ISA, yes, that’s true, but they’re not strictly speaking ‘tax free’. You may still have to pay tax on dividends, for example.

More importantly, we all have a separate tax allowance on capital gains from investments anyway – and from dividends! For the tax year 2017/18 those annual personal allowances – the amount you can earn before you have to pay any tax – are £11,500 on capital gains, £5,000 for share dividends and up to £1,000 on savings accounts. The vast majority of people won’t be making anywhere near £11,500 in capital gains on their ISAs in a single year. They’d need in the region of £100,000 or more in ISAs to have to worry about that. And if you’ve got that much, you’re unlikely to worry.

Shifting goalposts

There are countless other ISA rules and regulations to baffle you too and they change every year. The annual ISA allowance itself has changed most years over the past 16. At one time you could only have a Cash ISA or a Stocks & Shares ISA but now you can have both. You can now transfer your ISAs but you can’t take a Stocks & Shares ISA into a Cash ISA. If you have a Help To Buy ISA that counts as your Cash ISA for that year. ISA allowances generally run for one year, except the Help To Buy ISA which runs over multiple years.

The list of technical details and restrictions designed to confuse goes on and on and on. And all the while, the most common Google search term related to ISAs is, by a long way, ‘What is an ISA?’

The learning zone

The government has a lot of work to do on financial education. They should be less focused on repackaging gimmicks and devote more continued effort to communicating good financial habits to the public in a real, meaningful and engaging way – while cleaning up the foggy rocky landscape of financial apparatus too, of course.

To be fair, there are a number of excellent industry working groups beavering away at this right now, looking at ways to simplify common money issues for UK adults and create rules and nudges that resonate to promote better financial planning. I know because I’ve been involved in some of these projects, albeit in a small way. But these projects are so stealthy and drawn out that they’re unlikely to ever see the light of day. By the time they’re done, the ISA will have skipped ahead several more steps, or we may even have a new government in place that wants to take an entirely different direction.

One world, one vision

So how do we sort out the ISA mess we have? I’m not saying it’s easy but there are obvious changes that could be made, all in the name of simplicity. For starters, we should have just one ISA. There’s no need to have all these different flavours. The ISA and the pension can also be moulded into one. It’s just an account, a savings account, and you should get your tax relief on whatever amount you put in up to an annual limit of £50,000. You should then be allowed to use it on whatever you like, whenever you like. It’s your money after all!

Next, scrap inheritance tax. Completely. The savvy savers use these products and criteria to squirrel away their wealth and protect it as best they can while the less literate (financially speaking) are left to the dogs.

There would be budgetary details that make all this complicated behind the scenes, I’m sure, and there’s no denying it would need careful thought, but that’s what the government is there for. Guys, don’t push such complications front of house and expect us, ‘the customer’, to understand your difficulties and deal with them on your behalf. That’s your job, mate!

But I fear we’ll never have that level of common sense or support. Certainly not in my ISA lifetime! So I leave you with a final word of warning on ISAs…

Do your homework. Sadly no one is going do it for you and, despite the government’s overtones, they’re not giving you a shiny new savings present on a plate with the Lifetime ISA. In fact, it could do you damage and you might not even know it until it’s too late. BUT, if it ticks all the boxes for you and you’re sure it’s not likely to ruin your pension pot elsewhere or tug at your tax liabilities later on, then go for it – take all the help you can get.

Bitcoin: Past, present and future

When it comes to modern-day currency investing, there’s nothing quite as mysterious and alluring as Bitcoin. The crypto-currency has attracted millions of investors worldwide and has shown faster gains than any other asset in history. In its first 4 years it went from being worth less than $0.01 to a whopping $1,000. As of today, it is hovering around $1300. So how did it become the fast-tracked investment monster it is today, and what does the future hold for this most enticing of technical innovations and digital investment assets?  

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Growing up fast

Bitcoin is still considered the proverbial new kid on the block by many – a niche crypto-currency for speculative traders. But that reputation could be about to change. The new kid is suddenly growing up very fast, with the first ever Bitcoin ETF (exchange-traded fund) due to be approved by the SEC (Securities & Exchange Commission in the US) any time soon. This will mean it gets listed on the New York Stock Exchange, making it a genuine mainstream investment.

As well as shifting it significantly towards the mass market, a Bitcoin ETF means that investors can then invest in a fund that tracks an index of Bitcoin exchanges. The ETF also allows ‘normal’ investors like you and me to invest in Bitcoin without actually having to buy or hold the digital currency themselves.

Race for the prize

A Bitcoin ETF called Winklevoss Bitcoin Trust (COIN) was recently denied its application but it’s widely believed a new application, or one from a different supplier, will pass the regulations this year. COIN was primarily the work of the Winklevoss twins, Tyler and Cameron. Priced at $100 million and more than three years in the making, the ETF would give investors exposure to Bitcoin via a mainstream instrument on the NYSE for the very first time. If not COIN, the first Bitcoin ETF to get SEC clearance will be a clear statement that Bitcoin is set to stay and become a part of investor portfolios of all shapes and sizes.

So what would this do to Bitcoin’s valuation in 2017 and beyond? Bitcoin prices have been on a steady incline for weeks in anticipation of a positive decision from the SEC, consistently reaching new record highs. Many think there’ll be a new wave of activity pushing it higher still once an ETF gets the green light.

Is it time to snap up Bitcoins?

I’m not in to crazy speculative investments but do find interest in very early-stage investment vehicles, even if they’re very volatile like Bitcoin. I’m prepared to risk and potential totally lose the amount I put in so I’d only go for small ‘bets’ on assets like Bitcoin, just the same as I treat the new P2P platforms where I have put a few £k into the likes of Property Partner, The House Crowd and Ratesetter. Bitcoin too is still one of those fascinating early-stage volatile markets.

There is a good chance we could see Bitcoin prices above $2000 by the end of the year as investment flows into the Bitcoin market and the many companies that operate within the Bitcoin eco-system. There will still be some growing pains, I’m sure, especially around scaling the technology as a payment network, and it still has work to do to shake off its negative associations with dirty money, drug rings and so on. But in the race to become the first globally accepted and endorsed crypto-currency, Bitcoin is lapping the competition, so it will continue to generate huge interest.

Despite its relatively young age, Bitcoin has already been on an amazing journey. Back in 2009, it was worth next to nothing. Today, it is priced around $1,300 (and climbing). And it has seen gains in seven out of those eight years. Bitcoin is now set for a colourful new chapter in its already-vibrant history. There will be challenges ahead and bumps in the road, no doubt, but the appeal of Bitcoin continues to grow at an incredible pace.

Investing in a Trump-dominated universe

Unless you’ve been living on Planet Zog for the past 12 months (and to that, some may say, “lucky you!”) then you’ll have noticed the election of Donald Trump has caused an emotive and dramatic response around the world – and in all walks of life.

The financial markets are no different. So if you’re an investor, what does that mean for you? How do we ponder our finances in a Trump-led western economy? And, given the mass-hatred Donald has infused in so many of us, should we feel guilty about making money off his pro-business capitalist ideals? Hmmm. Now there’s a conundrum.

Here are my views on how the stock markets have reacted to Trump policy so far and how they may evolve in the months and years ahead. And a few thoughts on the g-word. 

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Trump wins! Wall Street’s initial scare

Hillary Clinton was long perceived as the frontrunner throughout the presidential race. On Wall Street, she was widely seen as the preferred candidate, and whenever she pulled ahead in the polls, the market reacted positively. So it was no big surprise that when the official results were in and Trump was declared the winner, Wall Street panicked, and the top indices crashed.

However, it was short lived, and once the markets settled, the negative trend reversed pretty quickly – screens turned green, the US Dollar started climbing and the US markets in particular were soon hitting record new heights on a daily basis. A fresh period had begun. Business confidence and investor optimism was sky high.

Trumponomics

In hindsight, that’s not so much of a surprise. Let’s not forget that Trump was considered a very successful businessman for decades. The upward trend that has been sweeping Wall Street could be attributed to the traditional republican perception of keeping the government small, with little interference in the economy, which Trump will most-likely uphold. Trump has also made very strong promises that could boost the American economy – and his background in business might have given more validity to these claims once he got elected.

So far, the market is booming. Leading stock markets continue to show steady gains and the Dow is showboating above 20,000 points for the first time in its colourful history.

Where next? International relations

We are all looking for signs as to where the Trump effect will be felt the most and his outspoken views on US relations with other nations is a great starting point.

The economy in Mexico – America’s closest neighbour to the south – has already taken a big blow and could be set for further disruption in the future. Every time Trump strengthened in the polls before the elections, the peso would lose value against the dollar. It’s dropped even more since Trump won. In the last two months Trump has been consistently taking jabs at companies who have a presence in Mexico, further dampening investor appetite for the region, and there are no signs that Trump will let up any time soon in his unwavering, singular approach.

The relationship between the US and China is a bit more complex. It’s also arguably more important because, given their combined stature, any changes here will undoubtedly impact every financial market around the world. An announcement from Trump and Alibaba’s Jack Ma, which stated they will work to increase the Chinese eCommerce giant’s presence in the US, supposedly creating one million new jobs in the process, is a strong indication of Trump’s commercial desires above all else.

The tweet that moves markets

If you’re an investor or trader of any level of experience, it can help – I’m sorry to say – to follow Trump on Twitter. Generally, social media has been Trump’s weapon of choice in conveying his robust policy ambitions and he has often been able to influence the economy with 140 characters or less.

When Toyota said it would build a Corolla factory in Mexico, Trump took to Twitter saying he would impose specific taxes on the car makers if it tried to export cars to the US from Mexico. Whenever Trump tweeted his opinion, or intended actions, regarding a car maker’s intention to manufacture in Mexico, that company’s stock would go down.

Another example is Trump’s criticism of Lockheed Martin’s F-35 jet, calling it overpriced and saying he had asked Boeing to manufacture a rival plane. That tweet sent Lockheed’s stock price crashing, shedding 2%, and caused Boeing shares to rise 1%.

The Trump era has begun – but where will it end?

The effects of Trumponomics are already very present in the market and are here to stay – for at least four years. The American economy is already adjusting to the new reality and major financial bodies are already making adjustments. The Federal Reserve, for example, has raised rates in December, and will probably raise them at least once more this year.

Traders who want to benefit from Trump’s presidency should pay close attention to his announcements regarding the US market in particular, his reforms and planned courses of action. These are the areas that are likely to cause big waves in financial markets and create opportunities for investors.

With the Brexit vote putting a lot of pressure on the European and British economies, Wall Street and the US appear to have a more stable foundation in the coming years, which should also present some interesting opportunities for investors, both in the short and long term.

Spread it around

Personally, I always favour a very VERY diverse approach to investing, as anyone who reads my blog will know and understand. By that I mean that I’m not in the habit of picking out individual company stocks or singular opportunities as such. That’s a very risky way to invest your money in my view. It’s a fool’s game. But, with Trump’s influence on the world being as great as it is there will undoubtedly be many enormous changes – and therefore opportunities – in financial markets. US big company stocks, more broadly, look like a good investment for the next 5 years.

I’ll also be looking for ways in which US economic improvements may provide good news for emerging markets, where stocks are relatively cheap in some quarters and where US boosts could reverberate quite quickly, and how US trade relations with Japan and the UK could give a healthy kick to global businesses based in those countries – again, a positive sign for many large-cap stocks in western economies.

Investing with a conscience

I mentioned the G word at the start of this post too – GUILT.

I intensely dislike Trump and his approach to life. I don’t agree with it at all. I know some that do, but not many. The vast majority of people I converse with in life are vibrant opponents of the Trump philosophy. So a challenge has been put to me many times in recent months – how could I look for stock market opportunities that might give me financial gain and cause others pain, all as a result of Trump’s dramatic manoeuvres and often scandalous new policies?

Firstly, I can’t control it. I don’t even have a vote in the US. So his existence and role in the world is far, far beyond my powers, no matter how repulsive I find it. Secondly, I don’t believe in 98% of our current world leaders and their beliefs. Jeez, I wish I could pull the strings there, but it just ain’t going to happen. So regardless of who’s in charge and who’s saying what, I’ll always think they’re a tidal wave of dough-ball lunatics and I’m going to take them for as much as I can, quite frankly – as little as that may be in the grand scheme of things.

My hope of all hopes is that the Trump era is short-lived and relatively painless. But that doesn’t mean we shouldn’t continue to look after ourselves and our families and provide a good, healthy, responsible and ethical environment for them and those we love, as best we can, for as long we can.

Snap! Trade the latest tech stock to IPO? You must be joking

Snap Inc, the makers of world-renowned photo app Snapchat, debuts on the stock market this week and it will be to a veritable frenzy of trader activity. Touted as the biggest social media IPO since Twitter, it has got investors in a lather as they look to turn a quick profit on the newly-listed stock. Me? No chance. It’s fraught with danger and idiocy. I’m not a stock picker – and here’s why…

snap-generation-a-guide-to-history-of-snapchat-garyvee

Many new companies hit the stock market every year but only a handful of them have the global media salivating and mainstream investors nervous with excitement. Snap is most definitely in that category. The column inches dedicated to Snap’s public offering have been steadily growing over the past six months and, now the stock is imminent, investor fever is past boiling point.

It’s getting hot in here

It’s no wonder financial markets get over-excited when a giant household name goes public. The brand name and the product is familiar, so it’s easy for the proverbial man on the street to take a view on which way the company will go, no matter how ill-informed that view might be. And believe me, it usually is ill-informed.

Why would the novice investor think they can understand the true market value of a complex corporate beast like Snapchat, let alone be able to confidently predict how its share price may fluctuate and evolve in the weeks, months and years ahead? But they do. They think they can. They ALL do.

The incredible volume of interest and speculation this creates – often wild, blind speculation – can be the breeding ground for quick and big trading profits and quick and big losses. The experienced heavy-hitters are out there to make top bucks and prey on the misguided masses. But even they get it wrong half the time! All in all, it’s a lottery on a ridiculous, lunatic scale. You may as well chuck it all on red over black, or odds over evens.

Just look at what happened with the Twitter IPO

Back in November 2013, popular opinion had it that day one trading on Twitter stock was going to be your golden chance to invest early, and at a great price, in this wondrous new breed of tech company. Twitter’s IPO was hailed a momentous success by the trade press. It raised $1.8 billion for the social media giant, with the share price of $26 valuing the business at an incredible $26 billion. The next day, the first day of trading, its opening share price was a far loftier $45.10. Within an hour that had rocketed to $50 before immediately slumping back down to $44 levels and finally ending the day at $44.90.

It was a crazy day of trading, with half a billion shares bought and sold in the first two hours alone, and there were no doubt some big winners and some big losers – not least those who got blinded by the stock tickers and mis-took Tweeter for Twitter. Shares in the little-known Tweeter Home Entertainment Group Inc, a bankruptcy consumer electronics firm, shot up from 5 cents to 13 in early trading as over-eager investors leapt before looking. Some even reported, in their maniacal bubble, and on Twitter ironically, that they’d bought Twitter stock for pennies and that it had since shot up 1800% just moments later!!! As if. (You should have to pass some form of test before you’re allowed to trade stocks, seriously).

It doesn’t always follow, but a big, high-profile IPO like Twitter or Snap can generate enormous price swings in the first hours, days, weeks and even months of trading, because there is such ludicrous media hype, greedy trading and an unrelenting sheep-herd mentality to the whole show. Twitter is a good example in point – it’s share price today is around the $20 mark, compared to its $45 starting point just three years ago – but there are plenty of others too. The five biggest IPOs of all time have endured some considerable swings of their own:

  1. Alibaba Holdings Group – went public in 2014 for an astonishing $21.8 billion raise. Four days later, underwriters exercised an option to sell more shares, bringing the total IPO to $25 billion.
  2. ABC Bank, one of China’s five largest banks, took a bow on July 7, 2010 at an initial offering raising $19.228 billion. The total was over $22 billion.
  3. ICBC Bank fetched a total of $19 billion in 2006.
  4. NTT DoCoMo hit the markets in 1998 raising $18 billion. Underwritten by Goldman Sachs Asia, this IPO launched NTT to the third largest market cap for a Japanese company.
  5. Visa Inc. The card processing company raised nearly $18 billion in 2008, despite being in the guts of the global financial crisis.

Back to the future                                               

Snapchat isn’t quite in the same ball park as these guys but 2016 was a dry year for IPOs so by recent standards it’s one of the biggest stock launches and, for other specific and fascinating reasons, it’s very high profile…

As we’ve discussed, the familiar household brand name alone generates much buzz across media outlets and among novice investors. But Snap is also of huge strategic importance for many industries. The success or failure of Snap will be a big signal for the future fortunes of other tech and social media giants who may be looking to go public over the next few years – mega-names like Uber, Pinterest, Dropbox, Spotify and Slack. Their company values and future reputations are very much linked to the public demand for Snap stock over the next few months and the company’s commercial performance over the next year.

All this introduces even more unknowns and risks into the mix. It makes the whole process of investing in stocks a melodrama of gigantic proportions. Or a tragedy, if you happen to be on the wrong end of a considerable loss.

If not Snap then what? 

Don’t get me wrong, I will gladly look at investment options that are high risk. I frequently bet on sports, after all. But only £2 at a time, or £5 as a rare maximum. I invest in a number of new, unproven peer-to-peer platforms. But I only have 2% of my money there and wouldn’t budge it upwards much beyond that until such firms have proven their worth over a longer period of time. My investment portfolios are all 95% or more in equities. But, and here’s the point, that money is spread across thousands of different stocks and bonds and other assets, in very small proportions.

This – having a globally diverse portfolio – is in my mind the ONLY way to invest smart in the financial markets these days. It means you can track the best companies out there in a particular sector and dilute the risk of losing big chunks of money by having your money invested in little pieces across a lot of ‘horses’.

Be more snail

The other major beef I have with the glamour show that presides around a stock launch like Snap is that it irresponsibly promotes short-term day-trading. It has been shown in countless studies now that high-frequency active trading in stock markets, no matter how experienced you are at it, will more often than not fail to deliver you long-term profits that beat the natural market rises. So, in other words, you’re better off just lumping your money on an index like the FTSE100, or a collection of such indices, and letting those markets just do what they do. Ignore it, go live your life and pick up the profits without lifting a finger or opening a page of the Financial Times.

Here’s one of my favourite proof points that staying the course long term and holding tight – and not constantly buying and selling individual company stocks – pays dividends (to pardon the pun)…

Looking at UK stock market data since 1969, you’d have had a 55.2% chance of making gains if you’d invested across the entire market for 1 day – similar odds to the toss of a coin. Investing for one month ups your probability to 63.9%. Investing for one year boosts your chances to 82.1%. And investing for 10 years or more pushes it to an amazingly attractive 99.4%.

Sorry to put a dampener on the Snap festival but it’s not a bandwagon I’ll be venturing near any time soon. If you’re still tempted, please don’t put in more than you can afford to lose – it might just happen.

 

 

My top 10 financial freedom blogs

Over the last few months I’ve been soaking up some amazing blogs, books and websites, from early retirement journeys to self-sufficiency and permaculture to plain and simple wellbeing ideals. Here’s my current top 10 blog sites. No doubt my favourites list will change over time but all these are wonderful sites and each has struck me with its energy, vivaciousness, honesty and candour.

I hope you like them too. Please let me know your favourites – @themoneygiraffe

Brave New Life       

My glorious awakening to the possibilities of early retirement, frugal living and rejecting consumerism was when I stumbled across this amazing blog. BNL writes brilliantly, sustains unbelievable perspective, offers excellent insights and above all keeps a wonderful balance of confidence and humility as he portrays his journey towards, through and beyond financial freedom. Oh, and he just bought a farm. Very cool.

Honey, I Bought a Farm

Early Retirement Extreme         

I love an extremity. And I love the notion of early retirement. Put them together, what have you got? ERE. Run by Jacob. (He’s great.) The site is much more a plethora of functional resource to those eager to find early retirement than a personal recount of a lone experience. If you want to know how far you really can push things, this guy is for you.

Mr Money Moustache

Introducing… The famous MMM. His blogging has struck a chord with many thousands and engendered many a journalistic approach, who find his demeanour, verbiage and bombastic wit entirely charming. I agree with them. He’s an effortless and engaging writer with a single-minded approach to maxing out on life’s true meaning, happiness. All achiebed via the medium of his self-proclaimed ‘badassity’. Get in.

Rob Greenfield

A very new discovery for me is the www.robgreenfield.tv site. This Wisconsin-born lad is more adventurer-activist than early retiree per se. Rob has gone on an incredible four-year journey wherein he has been a year without showering, travelled America for free and found the secrets to living a footprint-free existence: Reduce – Re-use – Recycle. Dive on in, folks.

Biography

1500 Days

Mr 1500 and Mrs 1500 are a fascinating couple. I identify with them hugely because their situation a few years back is so much like mine right now. I’m starting with a reasonable amount tucked away in the financial markets (around 300k including pension) and have an aim of 3-4 years to amount enough to jack in the day job and live primarily off a £600k total equity fund (£200k pension, £200k property, £200k stocks). A great-looking site and expertly well written throughout. Check out their goal progress for some impressively high investment growth.

Get Rich Slowly

Not as colourful and addictive as many of the personal blog in this list, I grant you, but this site is jam-packed with many very well thought out educational articles and an abundance of sound financial thinking. The attitude is spot on – there’s no get rick quick, not without ridiculous risk. Absorb, commit to memory and move on up. Stuff of legends.

The FIREstarter

So popular he now appears ahead of The Prodigy song in Google search results! And, I believe the first of my top 10 to come from my part of the world, the UK. FIREstarter is a lovable, ambitious, smart techie. His site showcases all of those attributes and more, covering a vast range of wild thoughts, insightful topics and tips for owning your financial freedom.

Simple Living in Suffolk

Another from the UK. Whoo-hoo, we’re on a roll now. ‘Breaking free of the rat race and living intentionally’ is such a great tagline for this blog. Ain’t that the truth. SLIS is a wonderful storyteller and thought-leader – and all this from inside the mind of a former engineer! 😉

slis

Canadian Dream: Free at 45       

Blow me down, another engineer. What is going on in that industry? 😉 They’re clearly smart cookies. Primary author Tim Stobbs set out to retire early, at 55. And then pulled it in to 45. And now he’s targeting 40. Great evidence that once you’ve truly ‘awakened’ the possibilities of financial freedom are far greater than you could ever have previously imagined.

Go Currycracker

Right, first of all… what a great name for a blog? That’s what drew me in. What kept me there was Jeremy and Winnie’s incredible, inspiring drive to ‘spend little, save more, travel the world’. And that’s exactly what they do. The colourful ride is broadcast in full techni-colour glory right here.

 

Life After Buffet: The Active Investors’ Last Supper

There’s been a lot written, digested, spat out and sensationalised recently over the apparent demise of Warren Buffett. Also known as the Sage of Omaha, Buffett has long been hailed as the greatest genius the investing world has ever witnessed.

buffett1

There’s no denying his incredible successes over many decades of investing with his business Berkshire Hathaway. If you’d bought £1,000 of Berkshire shares in 1964 you’d find they are worth £18.3m by the end of last year. But now at 84 and with a few significant losses tarnishing his recent portfolio strategy – he admitted the $678m hit he took on Tesco shares was a “huge mistake” – many media pundits are looking to the next generation of prodigious stock-pickers.

They can give up looking right now. The start truth is that there is no future generation. Active investing – that is, frequently buying and selling shares in companies you think will deliver you the best profits – no longer works. It’s a dead art. And Buffett’s exit march will be the final nail in its common.

Don’t look back in anger

Times have changed since Buffett started making a name for himself. Back then, glorious insight into low-value and low-risk companies to invest in was a rare and precious commodity. Buffett had the ability to pick out the value and used that ability in abundance to his own ends.

1950s trading floor

He has made mistakes along the way, of course, and several times people have questioned whether the great man had lost his golden touch, only for him to bounce back with a fresh ‘win’, or calmly hang on to any investments that had dramatically tanked and watch them rise again from the ashes.

But things are different now. His decision to sell Tesco shares after they bombed is telling. That could have been his second biggest error in recent years. Buffett appears to be going against his own philosophy and looks unsure. His ardent followers – and there are millions the world over – will be feeling nervous. And so they should. Stock-picking is officially a mug’s game.

Beating the best

Everyone wants the edge; everyone wants to make more than the next man. And herein lies half of the problem. We’re all on the look out for the next Buffett, the next superstar fund manager. So we go in search of the guy who made stellar investment returns last year. “He’s got it! He’s a genius!” we tell ourselves. “And he’s new. I’ll get in there first, put my money – and trust – in his fund and he’ll make me a ruddy millionaire!” Wrong.

The media coverage soon builds up a near-mythical status around any fund manager performing well over a short space of time. They are catapulted to stardom appearing in top 10 best fund lists from here to Timbuktu, winning awards for best broker, best regional fund manager, best commodities trader, and so on. Collectively, the apparently elite in investment management.

Catch 22

It’s all hogwash. They just had a lucky run. They don’t have secrets or special insight or data modelling systems that are more sophisticated than any other. But people back them, they put their money with them and this means that the shares they pick go up in value.

It’s catch 22, a self-fulfilling prophecy perpetuated by nothing but media hype. And when it goes wrong and a Tesco or an RBS in their portfolio bombs, you’ll see everyone question that very same fund manager. Under the scorching spotlight of scrutiny his or her investors pull out and go in search of the next big thing. It’s a complete fallacy and an entire industry, the biggest and most powerful industry in the world, is built on this hot-air, illusion and fabrication.

Pulling the plug

The truth is slow to emerge because it puts many people out of business. The fund managers, their accountants and traders, the banks that look after the money, the journalists and broadcasters that write and pontificate about it day and night. There’s nothing in it for them to declare the whole thing a myth. But that’s what it is.

buffett2

So, to the alternative. Passive investing. If you’re looking for your next big thing, that’s it.

Passive investing is boring. It’s sensible. It gives you reliable, long-term returns on your money. It works but it doesn’t make for catchy headlines so there’s not much written about it. And it doesn’t require millions of people to do it. When it becomes the norm, and it will, it effectively puts more than half the current investment industry workforce on the dole. It relies on technology and data, not instinct or chance. 

Spread investing

Passive investing is where you spread your money across hundreds or even thousands of different companies to track the large financial markets, like the FTSE in the UK or the S&P in the US. You can do the same with stock markets all around the world, not to mention bond markets, commodity markets, commercial property, and more.

The theory is simple: All big companies that can go tits up. You invest heavily in one such bad apple and you lose a lot of dosh. Passive investing protects you from that. It tracks the best of breed investment opportunities in a way that doesn’t leave you in danger of losing the lot on a bad pick.

Passive is trending

It’s starting to catch on. Assets in actively managed US funds rose by 38.7pc from 2007 to 2014, while their passively managed peers grew by 169.9pc.

tracking

More and more research is emerging every year to demonstrate the benefits of passive investing and highlights the pitfalls of active investing. Using data from 1982 to 2010, economists Eugene Fama and Kenneth French found that after the fees charged by actively managed funds, only about 3pc of these funds outperform their passive peers – the funds that attempt to mimic the market as a whole, rather than to game it.

A Dalbar study in the US has shown that over the the 30 years to the end of 2013 fund investors earned an average annual return of 3.69%. If they’d simply tracked the S&P 500 in that time they’d have got 11.1% return. But most investors jump in and out of the market all the time, looking for opportunities, trying to beat the market in their crass active way.

Man or machine

The bottom line is that human instinct (greed) takes over. Our behaviour cannot be trusted in a financial environment.

Life after Buffett? It’s going to be very different. And we’ll miss the big man, because he’s an incredibly engaging, fascinating showman. In some ways, to me at least, he’s the embodiment of the old-school trading room hustler.

But the future is bright. The future is going to be beautifully elegant in its simplicity and technical sophistication. It’s time to embrace it, ditch active investing and drag the industry into more modern times. 

Get rich, slow: The golden rules to successful investing

Painted-Snail-Shell-6-1600x900

Whether you’re share dealing or dabbling in property, the path to successful investing is simple: Give yourself a goal, think long term and don’t let emotion cloud your judgment. It sounds easy enough, right? Yet so few people manage to stick to these basic guiding principles.

Many investors, even the really experienced ones, make the same frustratingly obvious mistakes time and time again. Take a look below at the most common balls-ups, avoid them like the plague and you’ll have a half-decent chance of making some decent returns from your investment pot – just don’t expect an overnight gold rush. Which brings us neatly to rule number one…

1.       Give it time

Set yourself a timeframe for your investment; the longer the better, as it means you can take higher risk in the search of higher reward. For a portfolio of company stocks and bonds you should be looking at an absolute minimum of three years, but aim to stretch this out to 10, 15 years or even more if you’re hoping for some really good profits.

I love this stat… Looking at UK stock market data since 1969, if you’d invested a sum of money across the whole market for any one single day in that period, you’d have had a 55.2% chance of making a profit. Pretty much the same odds as a coin toss, right? If you’d stayed invested for a one month period your chances of seeing a positive return edge up to 63.9%. Invest for one year and your probability goes up further, to 82.1%. But invest for 10 years or more and your likelihood of turning a profit is an impressive 99.4%!!

2.       Have an objective

Whether it’s a yacht in the Bahamas, supporting your kid through University, or building up a savings pot that will give you a luxurious retirement, having a clear goal in mind will really help you focus your investment decisions. Without that, the devil of human instinct will very quickly have you chasing short-term gains in the stock market – a recipe for disaster.

3.       Embrace risk

Now, I don’t mean take big risks with your money. Not at all. But understanding risk and the level of risk you’re comfortable with is essential. Low risk generally comes with low reward. If that sounds like you, government and corporate bonds could be a good investment. High risk is more likely to generate higher returns. If that’s you, you’d probably look at buying company shares, perhaps in the more volatile Asian markets. But it’s a personal choice.

Embrace investment risk

4.       Spread it around

The famous American industrialist J Paul Getty once said: “Money is like manure. You have to spread it around or it smells.” How true. Investing in just a couple of company stocks is a dangerous game. Spread your investment across, for example, the list of FTSE 100 companies in the UK, and you can spread risk and your chances of soaking up some good profits.

5.       Stay balanced

Rebalancing your investments… This is always a tricky one to grasp. It’s quite boring to be honest, a little complex and, when you do understand it, it still feels at odds with your inherent desire to invest where the money is. So what is it? Rebalancing is basically a way of keeping your investment portfolio, well, erm… balanced. That is, ensuring it stays in line with your objective and the level of risk you’re comfortable with.

Let’s take an example. You have a medium-risk investment portfolio with around 70% in UK and US stocks and 30% in bonds. The value of your stocks goes up significantly within the first six months. The temptation is to sell some bonds and buy more stocks, since they have been doing so well. You should in fact do the opposite. Your overall holdings in stocks has gone above the 70% you started with, as their value has increased, and this means your portfolio has become more high risk and therefore ‘unbalanced’.

Keep cool on your finances
6.       Keep your cool

If your investments go down, don’t panic. That’s very normal and should be fully expected. Stocks markets ebb and flow all the time and can do so for long periods before you realise good profits. Similarly, don’t become dazzled by so-called insider tips or media hype. There are plenty of newspaper column inches to fill with the latest and greatest insights on the week’s stock market movers and shakers. If the all these forecasters and pundits were as knowledgeable as they made out, they’d be making millions from their predictions and they’d be too busy to actually write about it.

In many ways, investing is a supremely rational activity. It is founded on data trends and financial facts. Yet we as humans are ultimately very irrational beings. We are inherently driven by emotion. Therein lies the problem – but also the solution. Strip out the emotion from your investment journey and there’s a fair chance it’ll be a more pleasurable and fruitful ride. Bon voyage!

Stock market shockers: 5 big brands that went belly up

stockmarket chaos

Picking out the next stock market success story is like looking for a needle in the proverbial haystack. No wonder then that so many investors stick religiously to the big brands, the likes of Barclays, Sainsburys and Vodafone. They are established global businesses after all, making millions if not billions in profit every year, and will surely continue to return annual dividends forever more, right? Don’t bet on it. Some of the biggest, seemingly impenetrable, businesses in the UK and even around the world have gone bust, leaving investors’ portfolios in tatters.

Enron

At the start of 2001 Enron was sitting proud as the seventh largest business in America, with annual revenues of more than $100 billion. Fortune magazine proclaimed Enron “America’s Most Innovative Company” six years in a row. Soon after, revelations of accounting fraud on an unprecedented scale, and secret recordings of employees conspiring to keep the power off during power cuts – to boost electricity prices and thus Enron profits – brought the company to its knees.

ENRON

Enron filed for bankruptcy in November 2001, which also triggered the collapse of accounting giant Arthur Andersen.

Woolworths

Ah, the darling of the British high street for so many years. When Woolworths was liquidated in the early part of 2009, it had to close 807 stores and more than 27,000 people lost their jobs. Woolworths’ main issue was that it was a generalist store that catered to no particular niche. Add to this its failure to compete on low-price terms with the likes of Lidl and Primark and consumers’ increasing reliance on internet shopping, and you had a recipe for failure.

Blockbuster

The pace of change in online retailing has been the undoing of many a successful business. Blockbusters is one of the most high-profile examples. With the emergence of the online Amazon model, there were suddenly cheap DVDs on sale everywhere and the video rental market was seriously under threat. Blockbuster was the emblem of that sector and it failed miserably to react.

A Blockbuster rental shop

Similarly, on-demand services like Netflix ate further into their market share. Ironically, Netflix approached Blockbuster way back in 2000 with a business proposal, which was turned down point-blank. Since then Netflix has gone from strength to strength. Blockbuster fell into administration for the second time earlier this year with 264 stores and 2,000 staff put at risk.

General Motors

One of America’s most successful and well-known companies of all time, General Motors was founded at the start of the 20th century and led the post-war automobile revolution for many decades to come.

General Motors

But global car manufacturing changed. Overseas production and design came in to its own, particularly in Japan, and the likes of General Motors quickly became out-dated, inefficient and ultimately loss-making. GM went bankrupt in 2009. Thankfully, the American government stepped in to help them out and the company returned to the stock market in 2010 but with big challenges ahead in order to restructure and build a competitive framework for the future.

Lehman Brothers

The Lehman bankruptcy in 2008 remains the largest in US history. At the time, Lehmans was the fourth largest investment bank in the States but its billions in assets had been mis-managed to astonishing lengths. Clients deserted on mass and the incident was so big that it seriously shook stock markets and economies the world over. A total credit market collapse was feared – and with good reason.

Lehman Brothers Put Their Artworks Up For Auction

Hedging your bets

There is no such thing as a guarantee or even a safe bet as far individual stock picking is concerned. Spreading your cash across an index of big companies, like the FTSE 100 or the S&P 500, can dramatically help reduce the risk on your investment.