Journal

Reflecting on 2016…

January is the time many of us commit to plans and goals for the coming year (I’m not making any resolutions, there’s nothing wrong in carrying a little extra ‘holiday weight’!), but it’s also a good time for reflection…and what a year to reflect on. To say 2016 was eventful is an understatement.

As uncertain and as topsy-turvy as it felt at times, last year provided more key reminders and lessons about money than many others in my 16 years as an adviser.

These are my top 5 takeaways from 2016….

 

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 1. Markets continue to confound and amaze 

Having a view on where shares, property or currency markets might be headed is all good and well, but very few forecasts, if any, are accurate. The world is a complex place, so investing based on what someone thinks will happen is a dangerous game.

Brexit is the perfect case in point. Prior to the referendum in June, the press, fund management and investment community predicted a financial meltdown if Britain unexpectedly voted to leave the EU.

Now I appreciate it’s still early very days in the process but who could’ve foreseen any rise in the stock market following a Leave vote, let alone the FTSE100 reaching an all-time high by the end of the year? I’ll give you a clue – not many!

So unless you’re a market speculator or gambler, 2016 reminded us that true investors should stay seated, remain diversified and retain a long-term view during uncertain times, because no-one can reliably predict how markets will move in the short-term.

 

2. Politicians don’t control stock markets 

I managed to catch the thought-provoking BBC documentary ‘Hypernormalisation’ by Adam Curtis over the festive period, which raises some very interesting questions about major social and political shifts that have affected our lives over the last 40 years.Of the many topics covered, one in particular stayed with me; it centred on the ‘illusion of control’ offered by those in political power. The question was whether governments and leaders truly have as much control over the world we live in – markets included – as they would have us believe.

Each of us will have their own opinion on this but surprisingly positive market responses to the political shocks of 2016 would suggest that politics alone doesn’t determine the direction of markets. Yes, they can affect sentiment in the very short-term, but markets are ultimately shaped by a whole host of complex inter-related factors over time.

So, next time you’re making an investment decision, try not to give politicians too much credit. Put the political landscape into perspective and ask yourself whether an impending election result or government policy will really have a lasting impact on your diversified long-term investment strategy.

 3. Active fund managers continue to disappoint 

Capitalism is the engine that drives markets, which means they generally tend to rise over time. Active fund managers believe they can beat organic market returns through strategic investment decisions based on their research, experience and expectations of what might happen in the future.

Sometimes they get it right, but the majority of active fund managers got it wrong in 2016; as they did in 2015 and will no doubt do in 2017.  It’s important to understand it’s not their fault; they get it wrong so regularly because they’re only human and stock market crystal balls don’t exist yet.

Even Neil Woodford, one of the best-known and most respected UK fund managers massively missed the mark in 2016 due to incorrect assumptions about where markets would go pre and post-Brexit. His fund rose just 2.8% in a year when a simple FTSE100 tracker generated approximately 17%.

Of course, Mr Woodford has beaten the market in previous years but therein lies the problem. Being in the right active funds at the right times is like driving to your destination while looking in the rear-view mirror – you’re forever looking backwards!

If you’re uncomfortable investing based on someone’s past performance, consider a more passive approach that invests in a portfolio of globally diverse tracker funds. It’s not perfect and is unlikely to provide spectacular returns but it works out cheaper and you know roughly what you’re buying.

Alternatively, there are approaches that take the best elements of both active and passive investing. Arkenstone Wealth Management’s core investment service is structured in such a fashion – feel free to get in touch if you’d like further information on this approach.

 4. Delegate power to keep control 

On to more practical planning matters, I advised more clients via Power of Attorneys (POA) in 2016 and gained an even greater appreciation of just how important they are to those they represent.

The attorneys had been appointed for a variety of reasons but their functions were the same: making suitable and sometimes challenging financial decisions for people who aren’t capable of making their own.

POAs are just as important for married couples as they are to those who are single. Many assume that a spouse automatically has the right to manage their wife/husband’s financial affairs in the event of mental incapacity. This is incorrect – if one partner holds assets solely in their own name, the spouse is likely to need a POA to manage these assets. If this isn’t in place, the Court of Protection beckons and that’s a long and not very enjoyable process.

So, if you’re thinking about estate planning and Wills in 2017, give some thought as to whether you or a family member might also benefit from a POA.

 

 5. Taxing times 

Financial products, invesments, markets and tax/pension legislation never stand still. For a professional adviser to best serve and advise their clients, it’s important they keep up to speed with the ever-changing world of financial services and remain open to new ideas and opportunities.

Advisers are required to record their learning and study as part of their Continued Professional Development (CPD) every year. In 2016, I clocked up nearly 200 hours of learning!

Much of this time was attributed to refreshing and building on tax knowledge. The UK tax system and its myriad of regulations is pretty complex so I see the hours as time very well spent. Ultimately, my job is to build effective financial and investment strategies for clients, and the application of up to date tax knowledge is central to this planning.

One needlessly complex tax policy to look out for in 2017 is the introduction of the Main Residence Nil Rate Band for Inheritance Tax. This should benefit those who wish to leave their home to their direct descendants, but having studied the reams of small print, don’t assume anything and seek professional advice.

 What are your financial takeaways from 2016? 

 What will you do differently in 2017? 

As ever, please feel free to get in touch if you need further information or advice.

Happy New Year and thanks for reading.

Simon Ben-Nathan

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