Viewing posts categorised under: Investment Risk

Putting financial concerns in perspective

By John Hayward
This article is published on: 25th February 2019

25.02.19

Perspective ( /pəˈspɛktɪv/)
– To compare something to other things so that it can be accurately and fairly judged

We know that there is much going on with Brexit negotiations; we know that Trump is having issues with the Chinese and the Mexicans; and there are plenty of other things which we don´t yet know about, that could have an effect on our lives. When investing in stockmarkets, either directly or indirectly, there tends to be a focus on performance, whilst ignoring all other financial factors such as interest rates and inflation. It is regularly reported that markets are up, down or flat. It is rarely pointed out that interest rates have been low for a long time and that inflation has been consistently eating into the value of savings. There is also the fact that shares can receive dividends, which is pretty much ignored in reporting.

Another point to consider for those receiving pensions (or other income) from the UK in pounds, but spending in euros, is the GBP/EUR exchange rate. In this case, fluctuations in the exchange rate can seriously affect your disposable income.

In order to clarify my point, the charts below illustrate the behaviour of these factors over the last 15 years. This period includes arguably the worst period for all aspects over the last 15 years: 2008 and 2009.

I have accessed the information that makes up the basis of these charts from a variety of sources(*).

Interest Rates and Inflation

GBP/EUR Exchange Rate

FTSE100 Index Level

Comparison: inflation rate, interest rate and annual percentage changes in the GBP/EUR exchange rate and the FTSE 100

So what do we learn from this exercise? Putting them all together, apart from it being a pretty busy chart, we can see that, in the financial world, things go up and down. Nothing amazingly newsworthy there, but it is appreciating the size and frequency of these movements, in either direction, which is key. Then it is a case of seeing how these movements compare with the other factors. For a British immigrant in Europe who is paid in sterling, there has been a 20% fall in the spending power of his pounds since 2004. Interest rates have been below 1% for 10 years. Inflation, on the other hand, has averaged almost 3% since 2004. Put all of these together and for the cautious investor, finding the right home for savings has been more than tricky.

As much as people may be fearful of investing in stocks and shares, the fact is that over time, especially in the last 15 years, people have seen good returns when a considered and careful managed approach is taken. For those who are nervous about putting their money directly into stocks and shares, but want to, or even need to, have their money grow at least at the rate of inflation, we feel that we have the solution. As you will see from the chart below featuring a fund available to both UK and Spanish residents, keeping on top of inflation has been possible in almost every year in the last 14 and people have seen their funds grow consistently but with only a fraction of the risk of stockmarkets.

A Solution

The Spectrum IFA Group has been operating in Europe for many years; I have been with them since 2004 helping my clients through the volatility described above. With so much uncertainty, why not see if what we have available to us will be of interest to you?

Let us help you to put everything in perspective.

* Sources
Interest rates – Mortgage Strategy
Exchange rates – XE Money Transfer
FTSE100 – Yahoo Finance
Inflation – Iamkate
PruFund – Prudential

No warranty is made as to the accuracy of any information on third party websites and no liability is accepted for any errors and omissions or for any damage or injury to persons or property arising out of the use or operation of any materials, instructions, methods or ideas contained on such websites.

The danger of waiting for Brexit

By John Hayward
This article is published on: 22nd February 2019

22.02.19

There are many questions that we don´t know the answers to regarding Brexit. There are also questions that we don´t yet know. However, some facts are known. One of these is concerning investing, or not, since 20th February 2016.

This was the day that David Cameron, the then Prime Minister, announced that there would be a referendum on the UK´s membership of the EU. People have been fearful due to the uncertainty as to what will happen post-Brexit.

In the last three years, life has continued in the financial world and investment markets have risen significantly. At the same time, inflation hasn´t disappeared just because Brexit is on the menu. Figure 1 below shows how the FTSE100 has performed since 20th February 2016 along with the UK Retail Price Index.

With dividends reinvested, £100,000 would be worth around £136,000 as at 18th February 2019. If we allow for inflation, this would be more like £128,000 but still 28% up. If the £100,000 had been left in a bank account, with no interest which is commonplace these days, the true value would now be more like £91,000. Waiting for Brexit has cost the wait and see person £9,000.

Figure 1. Performance of the FTSE100 since the referendum announcement in February 2016 along with the UK Retail Price Index.

There are people who are not happy taking on investments which carry risk.

If we ignore the risk of inflation for the time-being, we have solutions which can cater for those who are happy taking some investment risk but without the volatility of stocks and shares.

Figure 2 illustrates that an investment with approximately an eighth* of the risk of the FTSE100 has still managed to perform well, certainly when compared to inflation. One must bear in mind costs but, even allowing for these, people who were invested in this type of investment on 20th February 2016 would have seen an increase of around 23%.

Taking inflation into consideration, it would still have produced growth of around 14%; a lot better than “losing” 9% by leaving the money in the bank.

Bottom PruFund vs RPI 20.02.16 to date-1

Figure 2. Performance of a low risk investment along with the UK Retail Price Index

With the exchange rate between GBP and Euros down about 11% over the same period, the need to receive more in income has become even more important. Losing 20% or so in real spending power has proven to be a tough pill to swallow. Get in contact so that the possible “Never Ending Story” of the Brexit can being kicked down the road doesn´t lose you even more over the coming years.

To find out how we can help you with our financial planning in a manner protecting you and your loved ones, contact me at john.hayward@spectrum-ifa.com or call/WhatsApp 0034 618 204 731

* Source: Financial Express

Emotional Challenge

By Chris Webb
This article is published on: 28th February 2018

28.02.18

THE RATIONAL, IRRATIONAL AND EMOTIONAL STRUGGLE
In such challenging times, emotions may play a significant role in investment decisions. Investors feel the variances in their portfolios’ performance much more than the average return over the life of their investments. Rationally, investors know that markets cannot keep going up indefinitely. Irrationally, we are surprised when markets decline.

IN VOLATILE MARKETS STAYING INVESTED MAY BE CHALLENGING
It is a challenge to look beyond the short-term variances and focus on the long-term averages. The greatest challenge may be in deciding to stay invested during a volatile market and a time of low consumer confidence. History has shown us that it is important to stay invested in good and bad market environments. During periods of high consumer confidence stock prices peak and during periods of low consumer confidence stock prices can come under pressure. Historically, returns trended in the opposite direction of past consumer confidence data. When confidence is low it has been the time to buy or hold.
Of course, no one can predict the bottom or guarantee future returns. But as history has shown, the best decision may be to stay invested even during volatile markets.

DECLINES MAY PRESENT OPPORTUNITIES
An emotional roller coaster ride is especially nerve-racking during a decline. However, the best opportunity to make money may be when stock prices are low. Buying low and selling high has always been one of the basic rules of investing and building wealth. Yet during these emotional and challenging times it is easy to be fearful and/or negative so let’s turn to the wise advice of one of the world’s best investors, the late Sir John Templeton:

“Don’t be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark ’70s, many professional money managers—and many individual investors too—made money in stocks, especially those of smaller companies…There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up…and up…and up…Chances are that certain other
indexes will have grown even more. Despite all the current gloom about the economy, and about the future, more people will have more money than ever before in history. And much of it will be invested in stocks. And throughout this wonderful time, the basic rules of building wealth by investing in stocks will hold true. In this century or the next it’s still ‘Buy low, sell high’.”

Watching from the Sidelines May Cost You
When markets become volatile, a lot of people try to guess when stocks will bottom out. In the meantime, they often park their investments in cash. But just as many investors are slow to recognize a retreating stock market, many also fail to see an upward trend in the market until after they have missed opportunities for gains. Missing out on these opportunities can take a big bite out of your returns.

Euro / Dollar Cost Averaging Makes It Easier to Cope with Volatility
Most people are quick to agree that volatile markets present buying opportunities for investors with a long-term horizon. But mustering the discipline to make purchases during a volatile market can be difficult. You can’t help wondering, “Is this really the right time to buy?” Euro / Dollar cost averaging can help reduce anxiety about the investment process. Simply put, Euro / dollar cost averaging is committing a fixed amount of money at regular intervals to an investment. You buy more shares when prices are low and fewer shares when prices are high, and over time, your average cost per share may be less than the average price per share.

Euro / Dollar cost averaging involves a continuous, disciplined investment in fund shares, regardless of fluctuating price levels. Investors should consider their financial ability to continue purchases through periods of low price levels or changing economic conditions. Such a plan does not assure a profit and does not protect against loss in a declining market.

Now May Be a Great Time for a Portfolio Checkup
Is your portfolio as diversified as you think it is? Meet with me to find out. Your portfolio’s weightings in different asset classes may shift over time as one investment performs better or worse than another. Together we can re-examine your portfolio to see if you are properly diversified. You can also determine whether your current portfolio mix is still a suitable match with your goals and risk tolerance.

Tune Out the Noise and Gain a Longer-Term Perspective
Numerous television stations and websites are dedicated to reporting investment news 24 hours a day, seven days a week. What’s more, there are almost too many financial publications and websites to count. While the media provide a valuable service, they typically offer a very short-term outlook. To put your own investment plan in a longer-term perspective and bolster your confidence, you may want to look at how different types of portfolios have performed over time. Interestingly, while stocks may be more volatile, they’ve still outperformed income-oriented investments (such as bonds) over longer time periods.

Believe Your Beliefs and Doubt Your Doubts
There are no real secrets to managing volatility. Most investors already know that the best way to navigate a choppy market is to have a good long-term plan and a well-diversified portfolio. But sticking to these fundamental beliefs is sometimes easier said than done. When put to the test, you sometimes begin doubting your beliefs and believing your doubts, which can lead to short-term moves that divert you from your long-term goals. To keep from falling into this trap, call me before making any changes to your portfolio

Has your bank in Spain paid you over 3% p.a. interest on your savings recently?

By John Hayward
This article is published on: 19th September 2017

The probability is that it hasn´t. However, you could have made more than 3% a year in a low risk savings plan with one of the biggest insurance companies in the world. We have many happy savers who have seen steady growth of over 3% a year for the last few years. How? Read on…

Saving money in a low interest world

Losing spending power to inflation
With special offers currently being offered by banks of 0.10% APR interest and inflation in Spain running at 1.6%, there is a guaranteed loss of the real value of money at the rate of 1.5% a year. There are some who would be disappointed, if not angry, if their money in an investment had lost 7.5% over 5 years yet this is exactly what has been happening to people over the last few years without them really appreciating it. 3% a year is not only an attractive rate of return but it is necessary to cope with inflation and provide real growth.

Spanish compliant insurance bonds
ISAs, Premium Bonds, and some other investments in the UK are tax free for UK residents. They are not tax free for Spanish residents. We are licensed to promote insurance bonds in Spain which are provided by insurance companies outside Spain but still in the EU. In fact, even after Brexit, these companies will still be EU based and so Brexit will not have the impact on these plans that it could have on UK investments. As the bonds are with EU companies, and the companies themselves disclose information to Spain on the amount invested, as well as any tax detail, the bonds are Spanish compliant which makes them extremely tax efficient. We do not deal with companies based outside the EU as we are satisfied that the regulation within the EU is for the benefit of the investor. We do not have the same confidence in some other financial jurisdictions and neither do Spain.

What investment decisions do you have to make?
Although we have the facility to personalise an investment portfolio within the parameters laid down by the EU regulators, offering discretionary fund management with some of the largest and best known investment management companies, we can also use a more simple approach for those who do not require any input into the day to day investment decisions.

So what has happened over the last 5 years?
The chart below illustrates the performance of one of fund’s available to you compared to the FTSE100 and the UK Consumer Price index. The argument to stay invested when markets fall is valid when one looks at the FTSE100 roller coaster line with the increase we have seen over the last year or so since the Brexit vote. However, anyone accessing their money around the time of the vote could have seen a 25% drop in the investment values. Not so with the fund in the insurance bond.

Real cases

Real case 1 – £40,000 invested 24/07/12. £50,770 as at 14/09/17. Up 26.92% in 5 years

Real case 2 – £356,669 invested 10/09/14. £431,177 as at 14/09/17. Up 20.88% in 3 years

Real case 3 – £316,000 invested 05/04/16. £334,422 as at 14/09/17. Up 5.82% in 18 months

Real case 4 – £80,000 invested 13/07/16. £86,160 as at 14/09/17. Up 7.70% in 15 months

Real case 5 – £20,000 invested 27/01/17. £20,712 as at 14/09/17. Up 3.56% in 8 months

These growth rates are not guaranteed but are published to illustrate what has actually happened and that the percentage returns on the fund are irrespective of the amount invested.

How can they produce such consistency?
Each quarter, the insurance company estimates what the growth rate will be for the following 12 months. This rate is reviewed based on the views of the underlying management company with people situated in all parts of the globe specialising in their own particular area. In good times, the company will hold back money that it has made so that, when things are not so good, they are still able to pay a steady rate of growth to their savers.

I don´t want to take any risk
It is difficult to avoid risk. In fact it´s practically impossible. A risky investment is seen by many as something which has a good chance of failure, either in part or completely. Stocks and shares are seen as risky whilst putting money into a bank deposit account is not. It is generally known that stocks and shares can go down as well as up but some people are unaware, or simply ignore, the risk of keeping money in a perceived “safe” bank deposit. Bank accounts have limited protection against the bank going bust. Then, if it came to the situation where a bank had to be bailed out by the government, it could take months, if not years, to access your money. As already mentioned, if the account is making less than inflation, you are losing money in real terms. So a bank account is far from risk free. The fund illustrated above is rated by Financial Express as having a risk rating of 22% of that applicable to FTSE100, much further down the risk scale and in an area that many people feel comfortable with.

What are the charges?
We explain in detail the underlying costs. In my experience, far too many people commit to a contract without understanding what they have, having received little explanation of the terms and conditions. This is where we differ to most. Different companies have different ways of charging and we run through all of the charges so that you are happy with what you have. The real examples above have had charges deducted and so these are the real values. Your bank may not charge you for the 0.10% interest (less tax) they are paying you but they are making money through investment but not passing anything on to you even though you supplied the money they invest.

What do I need to do next?
Contact me and I can review your savings, investments, and pension funds. I can then explain how you could arrange these in a tax efficient way whilst giving you the opportunity to access the growth that is available, for an improved lifestyle and to cope with rising costs.

Is lending money to a government still low risk?

By Peter Brooke
This article is published on: 26th July 2017

26.07.17

If you buy a government bond, sometimes called GILTS (UK), BUNDS (Germany) or T-Bills (US), as an investment, then you are effectively lending that government money. Most portfolio managers say investors should have some bond exposure in their investment portfolios as they diversify away from other assets like shares.

How do Bonds work?
You start by buying a bond on ‘issue’ for a set issue price with a ‘promise’ to pay you back the same amount in a date in the future. In the meantime, the bond pays you a ‘coupon’ or interest in payment for you lending your money. The bonds are also traded on a ‘secondary bond market’ where the price fluctuates according to supply and demand but the coupon remains the same… this means that your interest rate changes depending on what price you pay for the bond.

You can also invest in ‘funds’ of government bonds which are managed by professional managers using new issue and secondary market bonds around the world to build a diversified portfolio… but are they as low risk as they are made out to be?

Traditionally these forms of investment have always been viewed as low risk, as governments, unlike companies or individuals can always ‘print money’ and so can always pay you back. This also means that the interest rate you receive (the coupon) will be lower than company bonds.

If we consider that RISK is the chance of loss then I would argue that these investments are no longer low risk. Right now, we are in an environment where interest rates are at all-time lows around the world, inflation is starting to bite and so the chance of an interest rate increase by central banks is high; even though the rate increases may be low.

If you are holding any bond and interest rates go up, then bond values will drop, therefore I would argue that at some point you are risking a capital loss by holding government bonds. Some analysts believe that a 1% increase in interest rates could lead to a 10% capital loss on most bonds. If this is the case are you now being compensated for this risk of loss? Well, no… interest rates on government bonds are around 1% now and so with inflation higher than 1% in most countries you are losing money on an annual basis too.

So, what can you do about it? The first option is to take a little more risk and swap your government bonds for high quality corporate bonds… the coupon will be greater and as long as the companies are in good health then they should be able to repay you at the end of the term… there are also funds of corporate bonds which diversify risk.

The corporate bond market is segmented by credit rating so be aware of the level of risk this can bring to your savings… “high yield” (Europe) or “junk bonds” (US) tend to behave more like shares.

Another option would be to diversify away from western government bonds into emerging market government bond funds… there is some extra currency risk, though this can help performance too. Finally, you can outsource the choice of the bonds you buy by using a Strategic Bond fund… this will invest in corporate, government and emerging markets bonds on a strategic basis and would be very diversified.

This article is for information only and should not be considered as advice.

Investing in turbulent times – presentation, Costa del Sol

By Spectrum IFA
This article is published on: 15th June 2017

15.06.17

The Spectrum IFA Group and Tilney Investment Management co-sponsored an excellent presentation and lunch on 13th June at the exclusive Finca Cortesin Hotel & Spa on the Costa del Sol. The Spectrum IFA Group was represented by our local adviser, Charles Hutchinson, assisted by his wife Rhona and Jonathan Goodman who attended along with Richard Brown, Lewis Cohen and Harriette Collings from Tilney.

For this event, around 25 attendees were invited and selected for this exclusive venue. They were given a very interesting interactive talk by Richard and Lewis on investing in these turbulent times, followed by a mingling lunch and refreshments in the Moroccan Room where everyone was able to personally discuss their questions with staff from both companies in a glorious and relaxing setting with gardens and fountains close by. The feedback from the attendees has been most impressive.

Spectrum was very proud to be involved with Tilney in this superb event. It is hoped this will be repeated again in the future.

Smoothing out the bumps of market volatility

By Sue Regan
This article is published on: 9th June 2017

09.06.17

In today’s environment of very low interest rates, is it wise to leave more than “your rainy day fund” sitting in the bank, probably earning way less in interest than the current rate of inflation, particularly after the taxman has had his cut…..?

In the above scenario, the real value of your capital is reducing, due to the depreciating effect on your capital of inflation. So, if you are relying on your capital to grow sufficiently to help fund your retirement or meet a specific financial goal, then you should be looking for an alternative home for your cash that will, at the very least, keep pace with inflation and thus protect the real value of your capital.

In order to achieve a better return than a cash deposit, by necessity, there is a need to take some risk. The big question is – how much risk should be taken? In reality, this can only be decided as part of a detailed discussion with the investor, which takes into account their time horizon for investment, their requirement for income and/or capital growth, as well as how comfortable they feel about short-term volatility over the period of investment.

Although inevitable, and perhaps arguably a necessity for successful investment management, it is often the volatility of an investment portfolio that can cause some people the most discomfort. Volatility often creates anxiety particularly for investors who need a regular income from their portfolio, and for this reason some people would choose to leave capital in the bank, depreciating in value, rather than have the worry of market volatility. However, this is very unlikely to meet your needs.

There is an alternative, which is to have a well-diversified investment portfolio that provides a smoothed return by ironing out the peaks and troughs of the short-term market volatility. Many of our clients find that this is a very attractive proposition.

What is a smoothed fund?

A smoothed fund aims to grow your money over the medium to long term, whilst protecting you from the short-term ups and downs of investment markets.

There are a number of funds available with differing risk profiles, to suit all investors. The funds are invested in very diversified multi-asset portfolios made up of international shares, property, fixed interest and other investments.

The smoothed funds are available in different of currencies, including Sterling, Euro and USD. Thus, if exchanging from Sterling to Euros at this time is a concern for you, an investment can be made initially in Sterling and then exchanged to Euros when you are more comfortable with the exchange rate. All of this is done within the investment and so does not create any French tax issues for you.

As a client of the Spectrum IFA Group, this type of fund can be invested within a French compliant international life assurance bond and thus is eligible for the same very attractive personal tax benefits associated with Assurance Vie, as well as French inheritance tax mitigation.

Stop Press!!! Since writing this article the UK Election has taken place resulting in a hung parliament that brings with it more political uncertainty, but also the possibility of a softer Brexit or even a second election. This makes for a testing time for investment managers and the option of a smoothed investment ever more attractive.

Why robots will never replace Investment Advice

By Chris Burke
This article is published on: 7th June 2017

07.06.17

Particularly when markets are/have done well like recently, Stock picking (A situation in which an analyst or investor uses a systematic form of analysis to conclude that a particular stock will make a good investment and, therefore, should be added to his or her portfolio) is somewhat discredited these days, because low-cost passive fund managers argue that their tracker model delivers better value to savers by betting on an index, not individual companies.

And there is good argument to back it up

An article in The Wall Street Journal shows that between 1926 and 2015, just 30 different shares accounted for a remarkable one-third of the cumulative wealth generated by the whole market — from a total of 25,782 companies listed during that period. These statistics demonstrate that “superstocks” are what produce the true profits in the long run.

The research also calls into question the cult of equity, which has been followed by professional investors for more than 50 years. The experts argue that shares decisively outperform bonds and cash over time. But Bessembinder’s research shows that the returns from 96% of American shares would have been matched by fixed-interest instruments, which generally offer more security and liquidity, and suffer from lower volatility than stocks.

Spotting a business that can grow 10 or 20-fold over a period of years is a rare art

Of course, getting stock selection right is very difficult indeed when such a tiny proportion of shares contribute so much to total performance. It requires investors who are truly patient and at times extremely brave.

Amazon is one of the heavy hitters that delivered a quarter of all wealth creation in the stock market during the 90 years to 2015. Yet between 1999 and 2001, the online retailer’s shares fell by 95%. Many investors probably gave up then, and having been burnt once, shunned its 650-fold appreciation over the past 16 years.

While empirically that may appear to be correct, intuitively it feels questionable

Economies grow thanks to new technologies and entrepreneurs, who run a fairly small number of outstanding companies funded through private capital. Half the top 20 wealth creators referred to above are in sectors such as pharmaceuticals and computers. Identifying those sorts of promising industries is not too hard. But I do not believe there is a computer program — or robotic system — that can pinpoint the great achievers of the next 10 or 20 years.

Choosing the special businesses and executives that will create enormous value, and probably large numbers of jobs, is as much a creative undertaking as a scientific one.

Rigorous analysis must include a host of variables that artificial intelligence would struggle to understand — adaptability, trust, motivation, ruthlessness and so forth. I suspect all the best investors emphasise the importance of judging management when backing companies; I am not confident that computers can do that better than humans. In mature economies such as the UK, such sustained compound growth happens all too rarely.

To achieve it, a business should enjoy high returns on capital, strong cash generation, plentiful long-term expansion opportunities and a powerful franchise. And you need to buy the company at a sensible valuation. In a world awash with cash, such attractive businesses command very high prices. But if you believe the model can endure, they might be worth it.

Article written by Luke Johnson, who is chairman of Risk Capital Partners and the Institute of Cancer Research.
Sources: Bessembinder’s research and The Wall Street Journal
To read the article in full, click here:
Why a robot will never pick the superstocks of the tomorrow

Reasons to Wrap

By Sue Regan
This article is published on: 3rd March 2017

03.03.17

It’s no secret that the Assurance Vie (AV) is by far and away the most popular investment vehicle in France……….and for good reason! Most of you will already be familiar with these investments, or at the very least, have heard of them, but it doesn’t harm to be reminded now and again as to why they are so popular.

What are they? – An AV is simply a life assurance wrapper that holds financial assets, often with a wide choice of investments, and there is no limit on the amount that can be invested.

What’s so good about them?…..quite simply, their huge tax advantages, such as:

Tax-free growth – funds remaining within an AV grow free of French Income and Capital Gains tax

Simplified tax return reporting – considerable savings in terms of time and tax adviser fees

Favourable tax treatment on withdrawals – only the gain element of any amount that you withdraw is liable to tax. There is an additional benefit after eight years in the form of an annual Income tax allowance of €4,600 for an individual and €9,200 for a married couple

Succession tax benefits – AV policies fall outside of your estate for Succession tax and the proceeds can be left directly to any number of beneficiaries of your choice (not just the ones Napoleon thought you should leave them to!). There are very generous allowances available to beneficiaries of contracts taken out before the age of 70.

Why invest in an International Assurance Vie?

There are a number of insurance companies that have designed French compliant international AV products, aimed specifically at the expatriate market in France. These companies are typically situated in highly regulated financial centres, such as Dublin and Luxembourg. Some of the advantages of the international AV contracts are:

The possibility to invest in multiple currencies, including Sterling and Euros.

A large range of investment possibilities available.

The majority of international AV policies are portable, which means that should you return to the UK, it will not be necessary to surrender the bond.

The documentation for international bonds is available in English.

At Spectrum, we only recommend products of financially strong institutions and domiciled in highly regulated jurisdictions. If you would like to know more about these extremely tax efficient investments, or would like to have a confidential review of your financial situation, please feel free to contact me.

The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter at spectrum-ifa.com/spectrum-ifa-client-charter

Coveting the shiny stuff – Gold

By Gareth Horsfall
This article is published on: 7th September 2016

07.09.16

Dear Readers, please forgive me for I have sinned. It has been quite some time since my last post and during this time I confess I have been having impure thoughts.

I have been dreaming that the UK did not vote to leave Europe. I have been dreaming that Sterling had not fallen 12% against the Euro since June 23rd and that pasta was not now 10% more expensive in the UK, I have been having impure thoughts about low(ish) inflation in the UK and not rampant price increases after BREXIT. Lastly, I have been dreaming that interest rates would rise and not fall further into negative territory, basically charging customers to hold money with them.

Forgive me for my sins and lead me not into new temptation…………GOLD

There is a lot of talk going around at the moment about gold being the best investment to hold and certainly since BREXIT it has proven its case. However, gold has some signifcant shortcomings alongside other forms of investment. Essentially, it is of pretty much no use and it does not produce any yield. True gold has some decorative and industrial uses but demand is limited and doesn’t really use up all of the production. If you hold a kilo of gold today it will still be a kilo of gold at the end of eternity (taking into account any chance events which may affect the gravitational effects on earth).

THE INVESTMENT CHOICE DILEMMA

PILE A
Today the worlds total gold stores are approximately 170,000 tons. If all this gold was melded together it would form a cube of about 21 metres per side. Thats about as long as a blue whale. At $1750 per ounce, it is worth about $9.6 TRILLION.

PILE B
Warren Buffet, who is not a fan of gold as an investment, is famously quoted as saying that with the same amount of money you could buy ALL US cropland (which produces about $200 billion annually), plus 16 Exxon Mobils (which earns $40 billion annually). After these purchases you would still have $1 trillion left over. (You wouldn’t want to feel strapped for cash after such a big spending spree, so best to leave some spare cash lying around)

So the Investment choice dilemma is who, given the choice, would choose PILE A over PILE B?

In 100 years from now the 400 million acres of farmland would have produced an immense amount of corn, wheat, cotton, and other crops and should continue to do so. Exxon Mobil will probably have delivered back to shareholders, in the form of dividends, trillions of dollars and will hold assets worth a lot more. The 170,000 tons of gold will still be the same and still incapable of producing anything. You can cuddle and hug the cube, and I am sure it would look very nice but I don’t think you will get much response.

So, taking all this into consideration, you would be forgiven for thinking that gold really doesn’t have a place in anyone’s portfolio. I think you would be wrong.

Gold may not produce any yield, but with people in Asia, especially China and India, gold is very popular. In addition, it is also proving very popular for nearly ALL central banks around the world. Are all they all going mad, or do they have specific reasons for holding gold?

Well, despite Warren Buffets’ musings above, gold has to be seen in todays world as another form of money as central governments continue to print more traditional money, uncontrollably, and the paper currencies that we use in everday life become more and more worthless.

We must remember that the history of gold is that it rose, on its own, as a tradeable form of money in the world. No one has been forced into using gold as a form of money, whereas paper money is controlled by the state and has never been adopted voluntarily, at any time.

So this is where Waren Buffets argument falls down, because actual money in itself has exactly the same characteristics as gold. Its value! (Gold has some minor commercial uses, but its true value is in its store of value). Therefore, it should not be considered an investment, but actually another form of money/currency. In its basic form it is a form of barter and exchange.

Unlike paper money which can just be created without limit and at next to no cost, gold is both scarce and expensive to mine. It takes 38 man hours to produce one ounce, about 1400 gallons of water, enough electricity to run a large house for 10 days, upto 565 cubic feet of air under pressure and lots of toxic chemicals, cyanide, acids, lead, borax, and lime. (Just writing this makes me feel sick about the environmental impact of mining gold).

So, in summary the problem with the PILE A and Pile B scenario is that it assumes that gold is a form of investment, whereas in reality it should be considered another form of money.

For 6000 years gold has been an effective store of value.

The correct comparison that should be made is gold versus cash. Imagine a gigantic pile of cash. This pile of cash would be as equally inert and equally unproductive as gold, in itself.

The only way you could earn anything from gold or cash, in this case, is by depositing it with a bank and earning interest, at which point you relinquish your ownership (it becomes the property of the bank) and you then become an unsecured creditor to the bank itself, i.e if the bank fails it has the legal right to take all your gold and cash. Sound familiar? It might be better to hold true gold in a safe at home!

The question is whether you invest directly in gold or the gold mining companies themselves?