How Five Wealth and LGT begin to build portfolio and what are the underlying investment ideas used? Hear Sanjay Rijhsinghani, CIO of LGT, being interviewed by Five Wealth Director Steve Jordan.
How Five Wealth and LGT begin to build portfolio and what are the underlying investment ideas used? Hear Sanjay Rijhsinghani, CIO of LGT, being interviewed by Five Wealth Director Steve Jordan.
On a practical basis, how is our investment proposition managed and how does the partnership with Five Wealth work? Hear Henry Wilson, Partner at LGT, being interviewed by Five Wealth Director Liz Colfer.
How is a focus on sustainability built into our range of portfolios, and what does sustainable investing really look like? Hear Ben Palmer, Senior Portfolio Manager from LGT, being interviewed by Five Wealth Director Steve Hughes.
An introduction to who LGT are, why we chose to partner with them and how our values align. Hear Ben Snee, CEO of LGT, being interviewed by Five Wealth Director Steve Jordan.
Inspiring the next generation: Five Wealth on financial education
“Waiting until you’re rich to learn about money is like waiting until you’re married to start dating.” – Fagan and Ver Hage*
Sally Bowles wasn’t wrong when she sang “money makes the world go round” all those years ago in hit musical ‘Cabaret’. Yet we see so many young people grow into adults with little knowledge of how to manage simple finances, let alone create investments or set up mortgages. In fact, research from the Money and Pensions Service’s Financial Wellbeing Survey found that 45 per cent of UK adults don’t feel confident in managing their money day to day. Especially in a cost-of-living crisis, it’s more important than ever to make sure that everyone knows how to manage their money most effectively.
We believe that like any education, finance is best learned young. Whilst it can be thought of as being too complicated or boring, it can be broken down into manageable chunks, typically not taught in schools. A GoHenry study into the effect of financial education from a young age on adulthood adds to a growing amount of evidence to highlight the importance of financial literacy. It found that prioritising financial education could add nearly £7 billion to the UK economy each year.
It’s not just about boosting the economy. It’s about providing education that empowers young people to make informed financial decisions, enabling them to plan wisely and create a stable financial future. It’s also about introducing them to career opportunities they may not have otherwise been exposed to.
Unlocking career potential
Our work experience programme gives young people the opportunity to enter the workplace and learn about the industry by being immersed in the practical environment. Our aim here is to educate the next generation on the range of career options which are available to them.
Approximately 85 per cent of financial planners are male, with only 6 per cent aged under 30. Our work experience programme actively works to try and change this, to encourage people into the industry from more diverse demographics, to protect the longevity and accessibility of the sector.
Sowing the seeds early
Steve Hughes, one of our founding directors, recently visited Davyhulme Primary School during Primary Futures Week. He delivered talks on finances and shared his journey to becoming a financial adviser, with the aim of inspiring the next generation on how to get into the profession.
Steve is also an ‘Education Champion’ for the Personal Finance Society and delivers personal finance workshops in schools to children aged 12-18 as part of a pro-bono initiative. This all forms part of our belief in creating the building blocks of a financial education.
Giving back
Unique to Five Wealth, we also hold ‘Next Gen’ conferences where our clients bring in their children to the office to meet with our team to learn about a range of topics from budgeting, inflation, buying a house, workplace pensions, investing.
We’re passionate about financial education and continuously working on more opportunities to educate the next generation in learning the fundamentals of managing their money. After all, waiting until you’re rich to learn about money is like waiting until you’re married to start dating. It doesn’t pave the way for long term success!
Watch this space for more information about what we’re doing to help educate the next generation.
* Chelsea Fagan and Lauren Ver Hage in ‘The Financial Diet: A Total Beginner’s Guide to Getting Good with Money, 2018.
Top 9 Mistakes When DIY Investing
With investments more accessible than ever and reams of information available online, the idea of ‘doing it yourself’ can seem an attractive prospect to save on advice fees. Part of the value offered by advisers is navigating the potential pitfalls when making a financial plan and managing investments. Below are some of the most common mistakes we see in ‘DIY’ financial planning.
When planning for the future, assumptions need to be made around investment growth, and in most cases, it makes sense to look back historically over various time periods when creating those assumptions. Individuals can be swayed by recent events and after a particularly good period for markets, this can lead to heightened expectations of returns going forward. This can be dangerous for the financial plan if the actual performance falls short of those assumptions.
Most people have a reasonable understanding of the concept of investment risk. Markets can go up and down and it’s all about the long term. However, where things get tricky is understanding how we would expect different types of assets to react in certain economic scenarios, and how much investments could fall. Perhaps more importantly, individuals sometimes fail to marry up their investment risk with the amount of risk they can reasonably afford to take given their own circumstances.
It’s natural to want to sell investments and limit losses when markets have tumbled, but it’s important to continue to take a long-term view and ride out period of volatility – the recovery will come, and you want to be invested when it does!
A little bit of information can be a dangerous thing. One example here would be a high earner making large pension contributions. A perfectly reasonable and prudent action to take on the face of it, but it can occasionally saddle the individual with an ‘Annual Allowance Excess Charge’ if their earnings and contributions breach certain thresholds.
Burying your head in the sand is extremely common. Whether it’s planning for retirement, putting insurance in place or simply just sitting down and mapping everything out, the sooner you start, the better. Another regret we occasionally hear is around failing to get family members involved in financial planning early enough, whether it’s children or a spouse.
People can be influenced by what they see on social media and especially around unregulated investments with promises of ‘safe’ 10% + returns. The old adage of ‘if it looks too good to be true, it usually is’ is one to remember here.
When you compare long term returns of stock markets versus cash, there would appear to be only one winner. However, that completely overlooks the main reason for holding cash – liquidity. Holding too little cash can mean that investments have to be sold, often at inopportune times, should unforeseen expenditure arise.
The more exciting part of creating a financial plan is usually the investments. People can become focused on the returns they can generate and the early retirement they might be able to afford. Less glamorous, but equally important, is putting in place protection to cover the unfortunate circumstances where an individual becomes ill or passes away. This can have huge implications for a family, or even fellow business owners.
It can be easy to assume that things will continue as they are currently, however change is inevitable. In 2020 and 2021, few people were predicting that interest rates would shoot up as much as they have done over the subsequent years, and that will have caught out those who borrowed large amounts with short term fixes or tracker rates. When designing a financial plan, it needs to be flexible enough to navigate changes in the economic outlook, legislation and personal circumstances.
A good adviser should help you avoid making these mistakes, which at worst can be catastrophic to achieving your goals. Even setting aside the financial impact, it’s hard to put a value on the peace of mind that an adviser can deliver.
Investing can be a highly rewarding endeavour, but it’s also full of risks and challenges. A significant factor that can impact decisions is the behavioural traits that investors can be swayed by. As such, the decision making process is not always led by rational considerations. Hence, biases can significantly impact outcomes. With input from our investment partners, LGT, below are some common behavioural biases that affect investors, along with real-life examples of these biases, and how to be more aware of them to limit their impact.
Confirmation bias
Confirmation bias occurs when individuals seek out information that confirms their pre-existing beliefs while ignoring contradictory evidence. When investing, this bias can lead to a skewed perspective and poor decision-making, influenced by emotions. For example, an investor who believes that a certain stock is undervalued may actively seek news or research that supports this belief, ignoring any negative signals that may suggest otherwise.
To overcome confirmation bias, it’s important to actively seek out diverse perspectives and information that challenges your existing beliefs. Engage with different sources of information, consider alternative viewpoints and maintain a healthy scepticism towards your own assumptions.
Loss aversion
Loss aversion refers to the tendency of individuals to strongly prefer avoiding losses over acquiring equivalent gains. This bias can result in overly conservative investment decisions, as investors focus more on preserving their capital than on pursuing potential gains. For instance, an investor may hold onto a losing stock for too long, hoping to avoid realising the loss, instead of cutting their losses and reallocating their capital elsewhere.
To prevent this, we must recognise that losses are a natural part of investing and embrace the concept of risk. You must establish a well-diversified portfolio that aligns with your risk tolerance and investment goals. Then regularly review and rebalance your portfolio to ensure it remains aligned with your long-term strategy.
Herd mentality
Herd mentality occurs when individuals follow the crowd and make investment decisions based on the actions and opinions of others, rather than conducting their own independent analysis. This bias can lead to overvalued or undervalued assets as investors pile into or flee from certain investments without a thorough understanding of the underlying fundamentals. A famous example is the dot-com bubble of the late 1990s when investors followed the hype and poured money into technology stocks that were fundamentally overvalued. A more recent example would be the GameStop bubble of 2021 fuelled by retail investors on Reddit.
To correct this, one must take the time to conduct their own research and analysis before making investment decisions. Avoid making impulsive choices based solely on market trends or popular opinions. Be patient and rely on your own judgment to identify sound investment opportunities.
Overconfidence bias
Behavioural finance has its roots in psychology and Kahneman’s book Thinking fast and slow (2011) believes humans make decisions using two ‘systems’ that operate for different purposes and at different speeds. System one is thoughtless and acts instantaneously based on human emotions. Whereas system two is more rational and analytical, used for reading poetry, for example. Humans mostly use system one, with system two ‘monitoring’ in the background. The psychological bias, overconfidence, originates from the unconscious actions of system one and is possible to control, but not eradicate.
Overconfidence bias refers to an individual’s tendency to overestimate their own abilities and knowledge. This bias can lead to excessive risk-taking and overtrading, as investors may believe they possess superior skills or insights that will consistently generate above-average returns. For instance, an inexperienced investor may have initial success with a few trades and become overconfident, leading them to make riskier and less researched investment decisions.
Practicing disciplined investing strategies, such as diversification and long-term investing, is a sure-fire way to control the risks associated with overconfidence, along with continuing to learn and develop your knowledge.
Other common heuristics, or rules of thumb, include:
Behavioural biases can significantly impact investment decisions and hinder investors from achieving their financial goals. The key to overcoming these natural behaviours is to remain objective, conduct thorough research and develop disciplined investing strategies.
By investing with Five Wealth, you have the benefit of an Investment Committee that self-monitors and has diversity of thought. It is important to invest for the long-term and not letting the herd, short-term news or underperformance, drive decisions and detrimentally influence investment decisions.
If you would like further information on anything covered in this article, please get in touch via the contact page.
* Investments carry risks. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
As investors, it’s natural to feel slightly nervous when markets are volatile and in such times the ability to converse with an adviser really does reap rewards. In this blog we share an insight on the issues when trying to ‘time the market’, with input from our investment partners, LGT Wealth Management.
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch, Mutual Fund Manager
During periods of heightened financial market volatility, and increased levels of uncertainty, it can be tempting to try and time the market by selling assets and then buying them back at a later stage. However, timing the market is virtually impossible, even for the most experienced investors. This is why it’s often said that time in the market is more important than timing the market.
Emotions and investing
Human nature can lead investors to be emotional about financial decisions. When markets dive, too many investors panic and sell; when stocks have had a good spell, too many investors go on a buying spree.
Past experience can lead to panic selling
People tend to ‘panic sell’ based on their past experiences. There have been six major crashes in the past 30 years, so psychology plays its part.
Source: LGT Wealth Management
It is never an easy ride on the way up in a bull market. Investors seem perpetually concerned, worried about the valuation levels, forever peering around the next corner and ever watching for the canaries in the coal mine that might signal the onset of the next market downturn. Prospect theory from behavioural finance suggests that investors are more likely to focus on gains rather than the perceived risk of loss when the outcome of an investment is uncertain. This ties into regret aversion and the fear of loss outweighing the joy of winning – hence many investors panic sell when the going gets tough. This is a large reason why investors are always encouraged not to look at their investments every day.
The issue with trying to time your entry/exit
The pace at which markets react to news means stock prices have already absorbed the impact of new developments and when markets turn, they turn quickly. Those trying to time their entry and exit may actually miss the market bounce. Attempting to predict the future may mean you could end up being out of the market when it unexpectedly surges upward, potentially missing some of the best performing days. Missing one or two big days, compounded over time, can greatly impact your portfolio.
The graph below illustrates how a hypothetical $100,000 investment in the S&P 500 Index would have been affected by missing the market’s top performing days over the 20-year period from 1 January 2002 to 31 December 2021. For example, an individual who remained invested for the entire time-period would have accumulated $616,317, while an investor who missed just five of the top performing days during that period would have accumulated only $389,263.
It’s important to note, most of the best days happen around the worst days. Over the last 20 years, 70% of the best 10 days happened within two weeks of the worst 10 days (Source: Factset). If you were to incessantly go in, and out, of the market it would erode returns, alongside having tax implications and transaction costs.
It is true that a broken clock is right twice a day and hindsight is wonderful, but we are not soothsayers. If it was easy to time the market, lots of investors would be doing it and retiring early in the Bahamas, but this is not the case. We must remember that short-term volatility is the price you must pay for the chance of higher long-term returns and let the power of compounding take effect rather than potentially crystallising losses.
If you would like further information on anything covered in this article, please get in touch via the contact page.
*Investments carry risks. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Types of Savings Accounts
As interest rates continue to rise, so does the importance of ensuring your savings are in the right place. The savings market is flooded with various types of accounts, which makes it difficult to decide which is best for you.
Factors such as interest rates, access, tax and timing of payments will all influence your decision when selecting the best deals. Below I have covered the various types of accounts and key points to consider when finding the best deal for you.
Easy-access
Notice accounts
Regular savings accounts
Fixed-rate bonds (term accounts)
Cash ISAs
Conclusion
There are many types of savings accounts available on the market. There is not one correct answer to which account you should use, and often people will use a combination of accounts to suit different needs. In the current environment it is especially important to keep an eye on the interest rates on offer, to ensure you are on the best deals. It is also, important to understand the terms of your accounts, to avoid being penalised.
At Five Wealth we offer a cash management service, which allows clients with large cash balances to sign up to one platform and seemly move their cash between various accounts without the need to undergo the application process each time. Saving clients time and effort, whilst ensuring they have the best deals available. If this is of interest please contact one of our advisers to discuss in more detail.
Please note our cash management service, comes with a fee and is only suitable for those that have cash balances in excess of £50,000.
If you would like further information on anything covered in this article, please get in touch via the contact page.
Consumer Duty – What does it mean for clients?
In the ever-changing world of Financial Regulation, the Consumer Duty is a new standard introduced by the Financial Conduct Authority (FCA). The new standard has been brought in to build upon existing regulations to ensure that financial firms are delivering on products and services they are providing to their clients.
The duty has outlined three rules, which the FCA wants firms to follow, to deliver good outcomes for clients:
To coincide with the rules the following outcomes are expected to be achieved for clients:
In summary the Consumer Duty aims to place a clear onus on firms to show that they are providing a service that matches the needs and objectives of the client. Firms must be able to clearly demonstrate that the service they provide is in line with the fees that a client pays and that they are ultimately providing value for money. No one can ensure that investments will always grow, that’s just not possible, but the intentions should be positive and clear. Clients should be kept well informed and have appropriate levels of communication available to them as per their individual needs.
The points raised in the Consumer Duty Regulation are important but hopefully nothing new to the service we already, and continually strive to, deliver to all clients new or old.