So, what's this Blog all about then? Well, I've been thinking of writing a book for a while now, and the more I research, the more I realise that it needs to be very up to date. Hence, a Blog.
Over the course of the next few months I plan to post outline chapters here. Over time I will build-up the content I need. With your help and comments, I will shape the content and style.
And, finally, when all is done, I'll print it.
Easy eh!
Wednesday, 31 December 2008
Your Pension Plan
Now, a while ago we were talking about long run equity returns. Lets see how that effects you, your pension, and come to think about it, most of the personal finance industry. You see, you've been sold a lie. Eh?
The FSA mandate projected returns of 5%, 7% and 9% on non-taxed (Pension) assets. Now I say long run returns are 5-6%, before fees. Fees amount to around 1%, so lets call that 4.5% return. Hmm, thats lower than the lowest FSA projection, and they assum a mix of assets to include bonds, which would bring my number down to say 4% pa.
But even that's not the whole story, what about inflation. Well, inflation erodes the purchasing power of your investments. The FSA allow projections in nominal terms, so a £xxx fund becomes £xxx after n years and looks big, whereas infact you dont even care about that, you care what these numbers look like in todays equivalent money. Thats fiat money combined with an expansionary money policy for you (we'd better leave that debate for another time, otherwise we'll be here all day!). So, my 4% return pa after inflation of, say 2% (BOE's mandate) now becomes 2% (ooops, we need to have an inflation discussion as well. Did you know that the US currently has published cnsumer price inflation of 2%, but if it were using the definition of CPI from President Clintons era it would be more like 8%(check)!!! Holy xxx).
So, there we have it, I get 2%, while the FSA gets 5-9%. So, what does this mean to you. Lets say you want a pension of £20,000 in 20-years time, well they say you need £26,000 in your fund, while I say you need £67,000 ... gulp.
So, next time you are with your financial adviser ask him about this.
The FSA mandate projected returns of 5%, 7% and 9% on non-taxed (Pension) assets. Now I say long run returns are 5-6%, before fees. Fees amount to around 1%, so lets call that 4.5% return. Hmm, thats lower than the lowest FSA projection, and they assum a mix of assets to include bonds, which would bring my number down to say 4% pa.
But even that's not the whole story, what about inflation. Well, inflation erodes the purchasing power of your investments. The FSA allow projections in nominal terms, so a £xxx fund becomes £xxx after n years and looks big, whereas infact you dont even care about that, you care what these numbers look like in todays equivalent money. Thats fiat money combined with an expansionary money policy for you (we'd better leave that debate for another time, otherwise we'll be here all day!). So, my 4% return pa after inflation of, say 2% (BOE's mandate) now becomes 2% (ooops, we need to have an inflation discussion as well. Did you know that the US currently has published cnsumer price inflation of 2%, but if it were using the definition of CPI from President Clintons era it would be more like 8%(check)!!! Holy xxx).
So, there we have it, I get 2%, while the FSA gets 5-9%. So, what does this mean to you. Lets say you want a pension of £20,000 in 20-years time, well they say you need £26,000 in your fund, while I say you need £67,000 ... gulp.
So, next time you are with your financial adviser ask him about this.
Equity Long Run Returns
Did you know that you should expect equity investments in the UK or US to return only about 5-6% each year. Surely not you say, what about the recent very high returns from the early eighties until recently. Well, I'm afraid they were mostly an illusion. Sure, they happened, but my point is don't expect them to be repeated anytime soon.
Over time, equity investments can only deliver returns based on increases in a countries Nominal GDP, for if they returned more, then they would be making more and more profit. Fine you say, what's the problem with that, but let me tell you the profit they make is at your expense. Yes, that's right. You see, it's like a pie, and each 'thing' that produces gets a share of that pie. Now, GDP is the pie, while companies, people and resources like raw materials and land are the slices.
So, what about those recent high returning years? Well, as I said, it is an illusion to think they are repeatable anytime soon. Since the early 80's, a number of elements combined together which re-rated investors perceptions of value. For example, interest rates fell. And as investors received lower and lower yields on cash and bonds, so they switched into equities and boosted their price. Of course, here in January 2009, interest rates and yields are very low; you don't need me to tell you which way they go next. There were other effects as well, but we will leave those for time.
So, if equity investments really do produce such low returns in the long-run, what does this mean for you retirement portfolio? There is very little good news I'm afraid. Firstly, I suspect that a return of 5-6% over the next few years is optimistic. Excesses of the past ten years or so need to be unwound, and some of the 'secular' elements I described above will reverse. Investors need to reappraise their portfolio and retirement planning in the light of a less rosy future.
Over time, equity investments can only deliver returns based on increases in a countries Nominal GDP, for if they returned more, then they would be making more and more profit. Fine you say, what's the problem with that, but let me tell you the profit they make is at your expense. Yes, that's right. You see, it's like a pie, and each 'thing' that produces gets a share of that pie. Now, GDP is the pie, while companies, people and resources like raw materials and land are the slices.
So, what about those recent high returning years? Well, as I said, it is an illusion to think they are repeatable anytime soon. Since the early 80's, a number of elements combined together which re-rated investors perceptions of value. For example, interest rates fell. And as investors received lower and lower yields on cash and bonds, so they switched into equities and boosted their price. Of course, here in January 2009, interest rates and yields are very low; you don't need me to tell you which way they go next. There were other effects as well, but we will leave those for time.
So, if equity investments really do produce such low returns in the long-run, what does this mean for you retirement portfolio? There is very little good news I'm afraid. Firstly, I suspect that a return of 5-6% over the next few years is optimistic. Excesses of the past ten years or so need to be unwound, and some of the 'secular' elements I described above will reverse. Investors need to reappraise their portfolio and retirement planning in the light of a less rosy future.
Does Money Really Exist?
Not really! It's it's mostly imagination.
You see, apart from the cash in your pocket it's almost all fake. What do I mean?
Well, broadly speaking, for every £ or $ you have in your bank account, someone, somewhere, has an overdraft. Normally everyone is happy, but if you spend your money and that someone wants to pay-off their overdraft, then via the magic of banking, when you spend your money his overdraft declines as he pays money in. Fine, so everyone can still be happy, but what if the bank decides to reduce its overdraft book, then when you spend, someone gets their overdraft reduced or cancelled. And, that makes them unhappy.
You see, money only works if we all believe in it, and that includes the banks. And, right now there are a lot of unhappy people around.
You see, apart from the cash in your pocket it's almost all fake. What do I mean?
Well, broadly speaking, for every £ or $ you have in your bank account, someone, somewhere, has an overdraft. Normally everyone is happy, but if you spend your money and that someone wants to pay-off their overdraft, then via the magic of banking, when you spend your money his overdraft declines as he pays money in. Fine, so everyone can still be happy, but what if the bank decides to reduce its overdraft book, then when you spend, someone gets their overdraft reduced or cancelled. And, that makes them unhappy.
You see, money only works if we all believe in it, and that includes the banks. And, right now there are a lot of unhappy people around.
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