Blog

By David Booth, Executive Chairman and Founder, Dimensional Fund Advisors

We are living in a time of extreme uncertainty and the anxiety that comes along with it. Against the backdrop of war, humanitarian crisis, and economic hardship, it’s natural to wonder what effect these world events will have on our long-term investment performance.

While these challenges certainly warrant our attention and deep concern, they don’t have to be a reason to panic about markets when you’re focused on long-term investing.

Imagine it’s 25 years ago, 1997:

• J.K. Rowling just published the first Harry Potter book.
• General Motors is releasing the EV1, an electric car with a range of 60 miles.
• The internet is in its infancy, Y2K looms, and everyone is worried about the Russian financial crisis.

A stranger offers to tell you what’s going to happen over the course of the next 25 years. Here’s the big question: Would you invest in the stock market knowing the following events were going to happen? And could you stay invested?

• Asian contagion
• Russian default
• Tech collapse
• 9/11
• Stocks’ “lost decade”
• Great Recession
• Global pandemic
• Second Russian default

With everything I just mentioned, what would you have done? Gotten into the market? Gotten out? Increased your equity holdings? Decreased them?

Well, let’s look at what happened.

From January of 1997 to December of 2021, the US stock market returned, on average, 9.8% a year.¹

A dollar invested at the beginning of the period would be worth about $10.25 at the end of the period.²

These returns are very much in line with what returns have been over the history of the stock market. How can that be? The market is doing its job. It’s science.

Investing in markets is uncertain. The role of markets is to price in that uncertainty. There were a lot of negative surprises over the past 25 years, but there were a lot of positive ones as well. The net result was a stock market return that seems very reasonable, even generous. It’s a tribute to human ingenuity that when negative forces pop up, people and companies respond and mobilize to get things back on track.

Human ingenuity created incredible innovations over the past 25 years. Plenty of things went wrong, but plenty of things went right. There’s always opportunity out there. Think about how different life is from the way it was in 1999: the way we work, the way we communicate, the way we live. For example, the gross domestic product of the US in 1997 was $8.6 trillion and grew to $23 trillion in 2021. (Read more about the merits of investing in innovation.)

I am an eternal optimist, because I believe in people. I have an unshakable faith in human beings’ ability to deal with tough times. In 1997, few would have forecast a nearly 10% average return for the stock market. But that remarkable return was available to anyone who could open an investment account, buy a broad-market portfolio, and let the market do its job.

Investing in the stock market is always uncertain. Uncertainty never goes away. If it did, there wouldn’t be a stock market. It’s because of uncertainty that we have a positive premium when investing in stocks vs. relatively riskless assets. In my opinion, reaping the benefits of the stock market requires being a long-term investor.

By investing in a market portfolio, you’re not trying to figure out which stocks are going to thrive, and which aren’t going to be able to recover. You’re betting on human ingenuity to solve problems.

The pandemic was a big blow to the economy. But people, companies and markets adapt. That’s my worldview. Whatever the next blow we face, I have faith that we will meet the challenge in ways we can’t forecast.

I would never try to predict what might happen in the next 25 years. But I do believe the best investment strategy going forward is to keep in mind the lesson learned from that stranger back in 1997: Don’t panic. Invest for the long term.

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FOOTNOTES

1. In US dollars. S&P 500 Index annual returns 1997–2021. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
2. Data presented for the growth of $1 are hypothetical and assume reinvestment of income and no transaction costs or taxes. This value is for educational purposes only and is not indicative of any investment.

The history books are littered with tales of people who have come to a sticky end after inheriting vast fortunes from their parents. Clarissa Dickson Wright, Woolworth heiress Barbara Hutton and the 7th Marquess of Bristol, to name but three.

Various studies show that 70% of family wealth fails to last more than two generations, with 90% of it vanishing after the third.

With these examples, it’s hardly surprising that many extremely rich and financially astute people think long and hard before making their children the sole beneficiaries of their fortune.

Warren Buffett (current net worth: $117 billion) has said, “I want to give my kids enough so that they feel they could do anything, but not so much that they could do nothing.”

Warren’s friend Bill Gates is reportedly leaving his three children a mere $10 million dollars each. I’m sure most of us would take that — but when you consider the Gates fortune is over $130 billion, it’s a drop in the ocean.

It’s understandable. The last thing any of us want is our kids losing the sense of purpose and reason-to-get-up-in-the-morning that working for a living gives us.

You may not be in Gates/Buffett territory, but many homeowners who consider themselves only averagely wealthy are sitting on a sizeable financial asset in the shape of their unmortgaged property. Provided they don’t need the equity to finance their care in old age, some will be turning their children or grandchildren into property millionaires when they die.

If you’re in the fortunate position of knowing you will be handing on a decent chunk of wealth to the next generation, how can you help them avoid the fate of so many ‘poor little rich kids’?

The aim is to encourage them not only to enjoy the fruit of your labours but also use it responsibly, to benefit themselves and others, and conserve and grow it for their own heirs, too.

Five tips to keep wealth in the family

Strangely enough, successful inheritance has very little to do with how much money you leave. It’s more about your children having the character, financial nous and understanding NOT to blow it, but to spend and save it in such a way that they can enjoy it sustainably.

Preparing the next generation for the responsibility of inheritance is one of the most valuable things you can do as a wealthy parent. Don’t wait until they are old enough to lose it all like newly-minted lottery winners.

1.   Start talking about money

You may have been taught that it’s vulgar to discuss money, but that’s one lesson you can ignore. Make your children aware that they will eventually inherit the house, the business and other sources of their family wealth. Stress, in an age-appropriate way, the responsibility that comes with financial good fortune.

If all goes according to plan, they’ll be well into middle age before they need to worry about it. But tragedy can strike at any time, leaving young adults woefully unprepared to handle life changing amounts of money, and without the protection they would be afforded if they were still children.

Make sure your inheritors know how you are planning to pass on your wealth. You may be planning to divide it all up equally, so each of your children receives an equal part of your wealth. Or you may be leaving a chunk of it to a charity, a distant relative or family friend. You don’t want your kids finding that out only when they sit down with the executor after your funeral.

A 20-year study by The Williams Group in the US found that a lack of honest conversations was the main cause of family wealth failing to endure — i.e. dissipating within two or three generations, along with family relationships.

Any fan of the TV series Succession will understand how this can affect the family dynamic.

2.   Embed family values

Your inheritance should be about more than money. Whether you built your wealth yourself or inherited a large part of it from previous generations, you won’t want your heirs using it to finance dodgy ventures or support causes which are totally against your values.

This doesn’t mean laying down a list of rules. Talking to your kids when they’re young about what is important in life — caring for family, kindness, charity, looking after those less fortunate than themselves, working hard — is something that all parents can do, regardless of their net worth.

Hopefully, those values will give them a good foundation for a successful life as an adult, as well as provide a basis for dealing with their inheritance.

3. Help them understand how money works

Financial literacy is woefully inadequate in the younger generation (it’s not so hot with many older people, too).

Unless they’re studying Further Maths at A level, not many teenagers will grasp how compound interest works — yet it’s a vital concept in growing money via investing as well as owing money on credit cards. The vast majority of young people will encounter one or other of these activities as they get older.

Teaching children how to budget and delay spending gives them a valuable skill that can help prevent financial disasters later in life.

Pocket money could be split into three different pots – one to spend now (sweets, comics, small toys, for example); one to save for something later on (perhaps an expensive computer game, a pair of trainers or spending money for holidays); and one for giving (such as buying birthday presents for family and friends, or giving to charity).

When they’re a bit older, perhaps you could add up the money you consider it reasonable to spend on their mobile phone, travel and entertainment, put it in their account and let them manage it themselves.

Encourage them to get a part-time job when they’re old enough and make the connection between working and having money to spend.

4. Ease them into it

It’s a good idea to get your kids into the investing habit before they start their working lives. One way is to start an investment account as a nest egg in their late teens. They can make the investment decisions, and you can match the returns for a few years. This will demonstrate the value of compound interest and also the cost of taking all the money out and spending it.

As your kids get older, you could gradually increase their involvement in the management of the family wealth and the decisions you take. If you envisage them taking over the family business, perhaps let them attend some of the board meetings so they understand how the business is run. When it’s their turn to take over, it won’t be such a shock to the system.

5. Bring in the experts

As soon as your kids are ready to take responsibility for their own money, introduce them to your financial adviser or wealth manager and get them involved in the rudiments of estate planning. Let them sit in on the annual review meetings so they can see the value of the estate and appreciate how it has grown and how your investment decisions have affected the overall value.

Not only will this make them part of the future, it will also back up the advice and education you have been giving them up to now. If a professional agrees with mum and dad, you must be doing something right!

Have you ever been contacted by a business selling an investment ‘opportunity’ guaranteeing returns way above those anyone else can promise?

One such firm, Exmount Construction, has just been wound up by the high court, with over £1 million of hopeful investors’ money missing, unlikely to be seen again.

As the Insolvency Service investigator put it: “In reality, this was a scam and we urge potential investors to carry out due diligence to ensure they use their funds on legitimate investments.”

We can all differentiate between a real investment opportunity and an invitation from a former US ambassador to ‘park’ $2 million from a Nigerian prince in our bank account, can’t we?

(An actual ‘offer’ received by one of the Oak Four team last week. No doubt you’ve had something similar in the past.)

The truth is some of the most sophisticated investing scams are pretty difficult to spot at first glance. Glossy, professionally produced brochures, website addresses that look like the real thing, a legit-looking logo, a reassuring voice on the phone… it’s easy to understand how people fall victim, especially with the torrent of ‘information’ arriving in our inbox daily.

What to look out for

The first thing to remember? If it looks too good to be true, it probably is.

Is it really likely that one company could offer you 5% more per annum than literally everybody else?

Warning bells should start ringing if any of the following applies:

• They contact you out of the blue (e.g., an unsolicited email or phone call)
• They keep contacting you if you don’t respond
• The put pressure on you if you do talk to them – for example telling you the offer only lasts another 24 hours – and don’t give you time to do any due diligence
• They guarantee a return that’s significantly higher than cash deposits. Returns like that may be possible, if unlikely, but certainly cannot be guaranteed.

How to check them out

• Is it regulated by the Financial Conduct Authority (FCA)? If it’s not AND it seems too good to be true, that’s a huge red flag. FCA regulation is a sign that you, the consumer, are protected and can trust the business to look after your money and your financial data, and give you sound financial advice.
• When did the company start trading? Search the Companies House database to see if you can find any details. If the company isn’t listed, stop searching.
• Who owns the company and who are the directors? If the business is listed on Companies House you’ll be able see the list of directors along with any other current or previous directorships they hold. You can do a Google search on the names of the directors to see if they have been involved in any dodgy companies beforehand. If it’s hard to work out who ultimately owns the company, don’t trust it.

These are simple steps to take and should flag up dodgy businesses before you get involved with them.

Just ask

If you’re not sure, ask us!

A few years ago, several Oak Four clients started mentioning an investment they’d come across: a parking scheme at Glasgow Airport. Invest, and you’d own a piece of the car park and would benefit from returns of around 8-10% per annum.

We searched Companies House, googled the company name and the names of the directors, and found out they had been involved in investing scams before. They simply set up new companies with glossy brochures to lure clients in. They would then take the money and, a few months later, the business would disappear along with the investors’ cash.

Luckily we were able to stop a few clients falling for this ‘investment’, along with others promising similar returns along the same lines.

The internet is your friend. Although it’s frequently the means by which investing scams gain traction, it’s also where you can track down the truth.

Check out our recent blog about the power of fake news for more thoughts along these lines.

Oak Four, and other financial advisers who take a similar approach to portfolio management, follow an evidence-based approach to investing our clients’ assets.

It used to be called ‘passive investing’ because the basic principle, once your portfolio had been designed with a view to meeting your personal goals and constructed to match your appetite for risk, was effectively, ‘let the markets do the heavy lifting; relax and capture the rewards.’

Increasingly, for many of our clients – and especially the younger members of their families who will benefit from their investments in the long run – meeting personal goals is not enough.

They are concerned about environmental and social impact issues, like climate change, gender equality, human rights, ethical supply chains and fair treatment of the workforce.

They don’t want to prop up businesses whose record in these areas falls short of acceptable standards. But they still want to take an evidence-based approach to capture the returns of the market and meet their goals.

Is that asking for the impossible?

Evidence-based investing changes when the evidence changes

As much as half the world’s fossil fuel assets could be worthless within 15 years as part of the global shift to green energy. And around 13.5% of the world’s publicly-listed C0₂ emitting companies is owned by BlackRock and Vanguard, the two biggest fund houses, the majority of whose assets are passively managed.

Capturing all the market obviously involves capturing the returns of some businesses whose values you may disagree with, such as fossil fuel companies.

That’s not the full story, though. Evidence-based investors don’t ignore evidence. But we also build portfolios to deliver in the long term, which implies buying assets that are going to perform well over 30 years or more.

But renewables have only been part of the market for a decade or so. So their impact on an evidence-based portfolio is more muted than it would be with an active approach.

But with every sector in every economy set to become greener in the next four decades, and renewables outperforming fossil fuels for more than ten years – which is straying into the territory of ‘long term’ by anyone’s reckoning – their weight in global indexes is only set to increase, along with the space they occupy in your portfolio.

Having your cake and eating it

Can you invest consciously and passively? To a certain extent, yes.

The way we do it at Oak Four is to remain evidence-based – we’ll always use the data to build diversified portfolios that keep costs down. But for clients for whom sustainability is a key consideration, we use funds that tilt their investments towards companies that take Environmental, Social and Governance (ESG) factors into account, and away from companies that don’t.

You can go further, of course, and actively choose only companies who meet stringent ESG criteria – but at present, that would skew away from an evidence-based approach to investing.

The choice isn’t always as easy as it might seem. Some long-standing fossil fuel companies are amongst the biggest investors in renewable energy. BP, for example, is set to spend over $60 billion on renewables in the next 10 years. As an investor in BP, your money could accelerate that progress.

It’s not just a financial return – you own the companies you invest in and can influence the way they are run. And in the long term, they will change the shape and direction of the market itself.

The market is changing

With global ESG assets set to exceed $53 trillion by 2025 – over one-third of total assets under management (AUM), they’re going to make up a bigger proportion of the market every year.

53 of the biggest names in the investment business, with $7 trillion AUM, are funding the Workforce Disclosure Initiative (WDI) – an organisation that questions quoted companies for hard data on 13 themes, from corporate governance to diversity & inclusion and supply chain management, and publishes the results.

It’s not a feel-good, nice-to-know initiative. Investment houses fund it because they want the data to inform where they place their assets, because it’s what their clients are asking for.

We are getting there, as an article late last year in the Mail On Sunday noted:

“The industry is …undergoing dramatic transformation. Companies are getting better at reporting their credentials; fund managers are getting better at asking the right questions; and indices are being honed. In time, the landscape should be much easier for investors to navigate.”

It’s the end of 2021, the year that was supposed to herald the opening up of a brave new post-pandemic world.

That wasn’t quite how things worked out. We approach this festive season with restrictions reimposed and the threat of more to come… just like last year.

Who would put money on 2022 taking over as the year of renewal we expected of 2021?

Here’s what we’ve learned from the year that wasn’t quite what we thought it would be.

Lesson 1: it’s not over until it’s over

Don’t assume you know exactly how things will pan out. Read the evidence, look at the track record, but realise that events happen that can always throw a spanner into the works. Having a Plan B has never seemed a better idea.

Lesson 2: for every winner, there are many losers

There have been staggering wealth gains during the last year or so for those at the very top of the tree, but many millions more were pushed into poverty.

This is capitalism at its rawest – but the majority of evidence-based investors will have had a good year, returns-wise.

Lesson 3: we can’t get enough of experts.

From the scientists whose brilliance brought us the vaccine; to the doctors, nurses, paramedics and healthcare workers who kept the NHS going under almost impossible circumstances; to the teachers who kept our children learning online, in-person and socially distanced.

Any parent who struggled with home learning while trying to work will understand how much easier it is to leave it to the professionals.

Lesson 4: you can’t always believe what you read on social media

In the US, social media platforms have outperformed traditional news outlets as a source of pandemic-related updates, inevitably including conspiracy theories and anti-vax rumours.

Last year, Facebook admitted to putting warning labels on  90 million pieces of misinformation, including that Covid was linked to 5G masts, that the virus was manufactured in a Chinese lab, or that it didn’t even exist.

More about improbable news in our previous blog.

Lesson 5: we’re gradually getting greener

There’s a lot of hot air around when it comes to the environment, but the COP 26 conference in Glasgow helped focus our attention on the urgency of the climate crisis.

Traditional fossil fuel businesses are beginning to adapt to the realities of the green economy, reflected in the growth in renewable assets, which have outperformed their fossil fuel predecessors for over ten years.

Lesson 6: there’s always something new

The growth of bitcoin has spawned an even less intelligible phenomenon: NFTs. Non-fungible tokens are making waves in the world of alternative investments, especially the art and music businesses.

Notably Loȉc Gouzer, former chair of Christies, spent $12.9 million on a Banksy painting that’s now on show in Miami. Gouzer is intending to turn the work into 10,000 NFTs which he will sell to buyers who will not have collective ownership of the painting.

Lesson 7: there’s something more important than all of this

If 2021 has taught us anything, it’s the value of connection – with our families, our friends, our communities and our colleagues.

Being deprived of simple human contact with people we love and value for a large part of 2020 has helped us appreciate even more the time spent this year with family, visiting friends and relatives, helping neighbours, having a night out and, yes, even attending business meetings and events. Let’s hope that isn’t all lost as we gradually return to normal.

Here’s to 2022, and all it will teach us.

Trust, but verify.

Those of a certain age will remember this as one of US President Ronald Reagan’s favourite phrases when he was in office in the 1980s.

‘The Gipper’ used the old Russian proverb to describe his approach to US nuclear disarmament talks with the USSR. This was much to the amusement (or perhaps exasperation) of his opposite number, Mikhail Gorbachev, General Secretary of the Soviet Communist Party, who told him, “You repeat that at every meeting.”

Whatever your politics, ‘trust but verify’ is a good rule of thumb when it comes to believing what you read or see in the media, or when someone is trying to persuade you to do something that carries inherent risk (like choosing a particular investment).

Despite what we’d like to think, we all encounter things on social media and in the press that we want to believe, because they comply with our own values and biases. We have an emotional response to much of what we see, hear and read, especially over the last couple of years.

Let’s face it, it would take a heart of stone or the brain of a robot not to respond emotionally to some topics. Words like ‘climate emergency’, ‘immigration’, ‘guns’, ‘Brexit’, ‘vaccines’ and ‘lockdown’ can generate a visceral reaction.

We respond instinctively; they’re ‘trigger words’ and our own personal values and confirmation biases can mean we perhaps don’t dig deep enough and look at the facts.

When it comes to money, the same rules apply. Words like ‘hot stocks’, ‘unbeatable opportunity’ and ‘market crash’ can make us think about doing things with our portfolio that we probably shouldn’t.

Of course, marketers use this technique all the time. The more emotional we feel about something, the more we like, share and possibly buy.

It’s not all bad, of course: charities rely on triggering our emotions to encourage us to donate or volunteer for a good cause. But so do commercial organisations selling products you wouldn’t really want if you looked a little deeper and engaged your critical faculties.

Jonah Berger, author of Contagious: Why Things Catch On explains in this podcast how getting people to feel emotional about something encourages them to share it, even if it’s not strictly true.

It’s one thing to wonder if a news story about a politician or celebrity is correct. But we’d argue you should pay even more attention if the other party is asking you to part with your money.

How do you sort out the baddies from the goodies?

Do your fact-finding due diligence and check your biases when you see, hear or read something new that makes you feel like sharing or buying.

Unless you can prove it’s right, assume it’s not. Don’t let confirmation bias – the fact that it accords with your views – blind you to the possibility it might be complete rubbish.

Ask: why do they want me to believe this? What’s in it for them? Don’t let familiarity bias get in the way: the tendency to accept something because you know the person who’s selling it, or they’re a big name and you’re used to people talking about them.

Also ask: who is it asking me to do this? Scammers, for example, can be extremely good at making emails and phone calls look and sound genuine, leading otherwise savvy people to transfer the contents of their bank account to that of a plausible trickster. But even legit businesses can persuade you to do something you may regret in hindsight.

Check them out. Comb through their website. Look at independent reviews. Check that what they’re saying stands up to scrutiny. Blind spot bias means we often are well aware of others’ cognitive biases but don’t see the same mistakes in our own behaviour.

If we see something repeated again and again, it can seep into our brain and we believe it, even if we were sceptical the first time we heard it. Hindsight bias leads us to believe what we see now, and perhaps forget the unease we felt when we first encountered the claim.

Herd mentality often leads us in the wrong direction. If it’s a good deal today, it will be tomorrow. Don’t let anyone hurry you into making a financial decision you will live to regret just because ‘everyone else is doing it’.

Three checks anyone can do

Reality check. Is it really true? Fortunately, there are a number of online fact checkers who do the heavy lifting for you. So next time something sounds just a bit too far-fetched, check it out on Snopes or fullfact.org.

Google it. Scroll down through the ads and marketing websites until you come to reputable journalistic, academic, scientific or independent trade websites or publications and see what they say. If the only result that comes up is the link your friend sent you, then you (probably) have your answer.

Find the source. Dive deep into the links until you arrive at the peer-reviewed academic paper, recording of the actual speech or other original (nor reported) source. Get it from the horse’s mouth.

It’s in your interests to make sure the news and information you act on is the truth, the whole truth and nothing but the truth. Emotional reactions may be more exciting but, when it comes to investing, base your decisions on the evidence.

We know that trying to time the market is a bad idea, and taking a long-term view with a portfolio that’s diversified according to asset class, geography and market sector is the key to investing success.

Nevertheless, that doesn’t mean we’re immune to the messages that bombard us from the financial media screaming that this is an ideal time to buy, or a great time to sell.

There is an ideal time to buy and sell, of course.

The best time to buy is when shares are at their lowest point and just before they start to rise.

The right time to sell is when they’ve reached their peak, just before they start to decline again.

Simple!

The trouble is, who knows exactly when those precise moments will be?

They are concentrated into just a few days each year – and a study by academics at the University of Michigan found that, from 1963 to 1993, an average of just three days per year (90 days in total) were responsible for 95% of the market gains over those three decades.

Being uninvested on those key days can have a major effect on the value of your portfolio. If you’d missed them by selling just one day before, for example, your returns would be a mere 5% of what they could have been if you’d just bought and held.

We’d defy anyone to predict three specific dates a year over a 30-year period with any degree of accuracy at all. The only way to be sure you don’t miss out on the golden investing days is to stay invested.

The average return of the stock market, adjusted for inflation, is still a healthy 10% or more per annum for the S&P 500, averaged over the 94-year lifetime of the index. For the FTSE 100 it’s an average of 8.8% per annum since its launch in 1984.

Long term, that’s a healthy return; if you reinvest dividends and, of course, accept the dictum that past performance is no guarantee of future success.

But what about crashes?

Of course, some stock market movements represent more than the usual fluctuations, and are a response to major global events.

Human instinct is to run away from disasters, not sit them out; but, even in the face of some of the most dramatic market falls of recent years, sitting tight is still the right thing to do.

US financial strategist Marcy Keckler, quoted in usnews.com, suggested that it takes up to 70 weeks for markets to recover lost ground after a fall (based on 90 years of research). Bear markets (long-term declines) last around 24 months before recovering. Acting spontaneously in response to the crash is not what’s required.

The S&P 500 fell almost 60% in the financial crisis/credit crunch of 2007-2009. The day before the crash – October 9th, 2007, when the market closed at a record high of 1565 – was officially the worst day to invest in the index since the 1940s.

The S&P took over four years to recover from that drop, and since then it’s weathered two further declines of over 20%, not to mention last year’s Covid crash (down 34%).

You’d imagine, wouldn’t you, that if you’d been unwise enough to have invested everything in the S&P 500 when it was riding high on 9th October 2007, you’d today be looking at a loss or, at best, meagre returns.

But no. The index got back to its pre-credit crunch high by 2013 and, since then, has risen to its current 4471, despite everything. And your returns, with dividends reinvested, would still have been around 10%: the index long-term average.

Time in the market vs timing the market

The past 14 years have seen perhaps more than their fair share of bear markets but, in the grand scheme of things (i.e., a long-term financial plan), they’re not a major factor. Investing is a marathon, not a sprint, with a horizon that’s well beyond the next few years.

In the age of cryptocurrencies, when real and imagined fortunes are won and lost in the space of days or even hours, taking the view that you’re investing for a return you aren’t expecting to realise for 30 or more years can seem positively prehistoric.

Nevertheless, it works. And even though we can’t predict the future, we know what the data shows.

The longer you’re in the market, the more diversified your portfolio is, and the less you listen to the money media, the greater your chance of your money doing what you want it to do. Which isn’t to double, treble or quadruple every year, but to finance the lifestyle you envisaged for yourself when you started to invest.

As the tortoise said to the hare: slow and steady wins the race.

If you Google ‘money can’t buy you happiness but…’ you’ll get many different (and amusing) results. Some of our favourites:

• “Money can’t buy you happiness but I’d rather cry in a Jaguar than on the bus.” (Françoise Sagan)
• “Money can’t buy you happiness but it can buy you a boat.” (song by Chris Janson)
• “Money can’t buy you happiness but it does bring you a more pleasant form of misery.” (Spike Milligan)

Is it true that money makes us happy, though?

There’s a common, perhaps rose-tinted view that we were happier in the 1950s and 60s. In retrospect, that period was a ‘golden age’ – the war was over, there was virtually full employment (a mere 1% unemployment in 1955 – a post-war low – and well under one million throughout the 60s) and, according to Prime Minister Harold Macmillan in 1957,  we’d “never had it so good”.

The average salary in 1965 was around £900-£1000 (around £16,500 in today’s money), whereas today it is over £26,000. We earn more now – so we should feel happier, right?

But if we look at what we have to spend it on, it’s easy to see why many feel poorer (and less happy).

Unless you’re very lucky and inherited a house, buying your home, typically in your mid-20s, was probably your biggest expense. But today, owning even a modest home in some parts of the UK is hard to imagine for many young people. A deposit on a home in London in the 1960s could have cost around 25% of your annual salary, whereas someone looking to buy a similar home today would probably need to put down £40,000 or £50,000 – as much money as they earn in a year, or even two.

Average house prices now are six to seven times average income, and the affordability of buying or renting a home today compared with 50 years ago has almost broken the link between income growth and personal prosperity for many.

There’s another reason we feel less prosperous now than our 1960s counterparts: growing expectations, driven by the availability of more ‘must have’ stuff and – importantly – the visibility of ‘perfect’ lifestyles in the media and social media.

US financial author Morgan Housel, writing about this phenomenon, says:

“If you look at the 1950s and ask what was different that made it feel so great, this is your answer. The gap between you and most of the people around you wasn’t large. It created an era where it was easy to keep your expectations in check because few people lived dramatically better than you.

The lower wages felt great because they’re what everyone else earned.

The smaller homes felt nice because everyone else lived in one too.

The lack of healthcare was acceptable because your neighbours were in the same circumstances.

Hand-me-downs were acceptable clothes because everyone else wore them.

Camping was an adequate vacation because that’s what everyone else did.

It was the one modern era when there wasn’t much social pressure to increase your expectations beyond your income. Economic growth accrued straight to happiness. People weren’t just better off; they felt better off.”

As we moved into the 1980s, Housel continues, “The glorious lifestyles of the few inflated the aspirations of the many.” We were no longer satisfied with what we had, or what was reasonably within our reach.

Is £69,000 enough?

A 2010 study by Nobel Prize-winning economist Daniel Kahneman and Angus Deaton suggested that happiness does rise with income, but only up to a certain level. At the time, this was judged to be $75,000 (£55,000). In 2021 terms this equates to $94,092 (£69,023).

Money doesn’t buy happiness, but the 2010 study suggested that level of income would confer a level of financial security that would make us feel OK about life overall.

£69,000 is approaching three times the average UK income, implying that a lot of people don’t have that level of financial security and wellbeing. But it really depends on who you are, what you need and what stage of life you’re at.

If you earn £69,000 and have paid off your mortgage, you will probably be laughing. But if you earn that, are paying thousands per month in mortgage repayments, putting children through school or university and have other responsibilities besides, you won’t feel very well-off.

Indeed, later research showed that life satisfaction does not peak with a certain level of income, but that we become more satisfied the more money we have.

Satisfaction isn’t quite the same as happiness, of course. It takes more than money to make us happy. But it’s perhaps true to say that financial security is a bedrock on which happiness can be experienced. It’s certainly true, as the same study showed, that low income makes life’s disappointments like divorce, bereavement and ill-health harder to bear.

So what is happiness?

The study of happiness is a science in itself. A number of factors are equally, if not more important to our happiness than money. These include good relationships, spending time with friends, slowing down, being mindful (enjoying the moment), exercise, helping others, and prioritising spending our spare cash on experiences rather than just buying stuff we think we need, but probably don’t.

What’s the point of having a top-of-the-range performance car if you still have to sit in two hours of traffic to get to an office where you earn megabucks? As long as you can cover your financial obligations, you will likely be happier taking a lower-paid job closer to home and freeing up 90 of those 120 minutes to spend with your family.

Our job as financial planners is to work with our clients to help them use their income and wealth to achieve life goals. We say ‘goals’ (such as retiring at a certain age, helping children buy a home, travelling the world – whatever floats our clients’ boats), because those aren’t always determined by income, but by careful planning.

The details may change over the years, of course, but not moving the goalposts – deciding what you want, when you want it, planning for it and sticking with it, within reason – means you’ll be able to score those goals.

Will they make you as content as you want to be? Only you can decide that, but one thing is for sure – continually striving for more money without a goal in mind is unlikely to be the answer to what makes you happy.

I’m not really here as you’re reading this. I’m on holiday. Away from the desk. Away from the office. Away from work.

Thanks to Covid, it’s been a long time since most of us have been able to get away for a break. Almost half of employees surveyed in 2020 said they thought it was pointless to take their holiday entitlement as there was nowhere to go. The survey equates this to over 57 million days of unclaimed annual leave.

Working from home can only have exacerbated the problem. Taking time off to potter around the house or garden can be tricky if you’re in the same space as your laptop and you know you have a tonne of work piling up. And if you were furloughed, taking leave when you weren’t working may have seemed even more futile

But with much of the country and the world opening up again, taking a break in 2021 is something we all deserve.

Why it’s important to take time off

Even before the pandemic hit, it was hard for many people to persuade themselves they needed a break. But there are many health and social benefits to taking a holiday.

Working long hours is a killer

It’s not just a case of feeling more refreshed: working too hard can seriously damage your health. A report from the World Health Organisation reckoned that 745,000 people died in 2016 as a result of long working hours. Working more than 55 hours a week means you’re 35% more likely to have a stroke and 17% more likely to die from heart disease.

Holidays keep you grounded

Just moving away from the desk and changing the scenery for a week or two can have an amazing effect on the brain.

“When we travel, we’re breaking our normal routine,” says Richard Davidson, professor of psychology and psychiatry at the University of Wisconsin–Madison. “That decreased familiarity is an opportunity for most people to be more fully present, to really wake up.”

You’ll sleep better, feel better and be less stressed

It’s hard to deal with work-related stress if you’re having to face it every day. Removing yourself from the activities and environments you associate with increased anxiety can be a great help. Spending just a couple of hours a week in nature has been proven to increase wellbeing. Going on holiday for a week or two is even better.

One of the reasons we lose sleep when we’re overworked is that our minds don’t have the time and space to ‘file away’ all the work-related information it has absorbed during the day before it switches off. Going on holiday helps us break the habits that stop us sleeping well – like working late or checking our emails late into the night.

Holidays make you smarter

This might seem like a long shot, but there’s plenty of evidence that giving your mind space to relax can improve your cognitive ability.

“Neuroscience is so clear, through PET scans and MRIs, that the ‘aha’ moment comes when you’re in a relaxed state of mind,” says Brigid Schulte, author of Overwhelmed: How To Work, Love and Play When No-one Has The Time.

It’s not only adults who benefit. Your kids will too. Professor Jaak Panksepp, a world-leading neuroscientist at Washington State University discovered that family holiday experiences activate systems in your and your children’s brains that trigger well-being neurochemicals including opioids, oxytocin and dopamine. He calls these “nature’s gift to us”: they reduce stress, induce warm and generous feelings and help us ‘emotionally refuel’.

When you take your child on a holiday, you are supporting their explorative urge and their capacity to play. In adulthood, this translates into the ability to play with ideas: vital to success as an entrepreneur.

And if you’re on holiday, don’t work

You may enjoy your work, but you need to take holiday time just as seriously.

Research published in the Harvard Business Review by Laura M. Giurge and Kaitlin Woolley explains why, especially at a time when many of us have more control of when and how we work.

Despite people assuming that greater flexibility in working patterns boosts motivation and increases empowerment, the opposite is often true.

“Spending weekends or holidays working undermines one of the most important factors that determines whether people persist in their work: intrinsic motivation. People feel intrinsically motivated when they engage in activities that they find interesting, enjoyable and meaningful. Our data shows that working during leisure time creates internal conflict between pursuing personal and professional goals, leading people to enjoy their work less.”

In other words, if you are in charge of what time is ‘work’ and what is ‘leisure’, make sure that the ‘work’ portion of that equation doesn’t seep through into ‘leisure’.

So whether you’re flying off to the sunshine or unpacking the family tent in Cornwall, take it seriously.

A few tips that will help:

• Warn clients well in advance that you’ll be away
• Tell colleagues they can only call you in an absolute emergency, if at all
• Leave the laptop at home
• Turn on the Out of Office
• Mute notifications on your phone
• Divert your calls to voicemail
• Temporarily delete your phone’s email app if you’re brave enough – or make a rule that you’ll only check it once a day at a specified time.
• For the truly dedicated: holiday somewhere with no WiFi or mobile signal

…and have a refreshing break!

Photo by Ethan Robertson on Unsplash

 

This blog is being written on Freedom Day – the date all residual Covid restrictions are removed (in England at least) and people can, in theory, go back to living their lives as though the virus never existed.

Whether this will happen is debatable. But it’s an opportune time to consider what the cost of Covid has been to the UK public purse, and how it’s going to be paid back.

One thing’s for sure: even when the pandemic is a distant memory, we’ll still be counting the financial cost.

The Government is expected to have borrowed more than £500 billion to support Covid spending by the end of this tax year, and that’s just the start – higher spending and reduced tax intake is likely to be a pattern for a number of years.

Paying for that is clearly going to take an above-average contribution from the taxpayer, and pension reform is one route the chancellor could take to try and recoup some of the money.

A potential double whammy could be on the cards.

Less in the private pot?

One of the anomalies Rishi Sunak could decide to address is the amount of tax relief given to higher earners on their personal pension contributions.

The Pensions Policy Institute found that those earning less than £50,000 made up 83% of all taxpayers, but they received only 25% of the tax relief paid out on defined contribution pensions.

If the chancellor decides to make the system fairer with flat-rate tax relief, it could be seen as an easy win in terms of public opinion.

Potentially more concerning is the rumour that he could reduce the lifetime allowance from the current £1,073,100 (frozen for the next 5 years) to around £800,000 or £900,000. If your pension pot exceeds the lifetime allowance, you will pay a charge of 25% on the excess if you take it as an income, or 55% if you take it as a lump sum.

It’s not only the super-rich who would be affected if this happens. Anyone in middle management in a public sector organisation who’s worked there for 40 years or so could easily be looking at a £1m-plus pension pot. (Indeed, generous public sector pensions have always been seen as compensation for lower salaries when compared to the private sector.)

Unlocking the triple lock?

Things are looking uncertain, too, for the future of the state pension, still the largest source of income for people over 65, according to 2018 research from The Just Group.

The so-called triple lock, invented by the coalition government in 2010 and one of the cornerstones of the Conservative manifesto ever since, could potentially net taxpayers a huge ‘pay rise’ next year.

The triple lock was brought in to address a long-term slide in the real value of pensions. It’s designed to ensure the state pension keeps pace by adjusting it annually by either the rate of inflation, the increase in the consumer price index or average annual wage growth, whichever is the higher.

Wages are currently rising at a rate of 7.3% (as of May 2021), although this is a ‘blip’, reflecting the fact that they were severely dented by the pandemic and actually fell by 1% in 2020-21. July is the month the government uses to determine annual wage growth, so it’s probable that the state pension will see a massive boost of around 8% next year – at a cost to the public purse of £3 – £4 billion.

This is likely to be further ammunition to those in parliament (reportedly including the chancellor himself) who believe that the triple lock rewards pensioners at the expense of the younger generation, who have been disproportionately affected by Covid lockdowns.

We’ll have to wait until next April’s budget to see what happens with the state pension, but there are steps you can take now to ensure your retirement plans aren’t battered by the Government’s need to shore up the public finances.

Accentuate the positive, mitigate the negative

The first thing to remember is not to let the tax tail wag the investment dog.

To paraphrase Benjamin Franklin, we can change everything except death and taxes. You can dampen some of their effects, but they’ll always be with us and shouldn’t define how you invest for your retirement.

Start with a pre-retirement check. Work out how much income you’ll need to have to finance your ideal lifestyle. Then work out how much extra you’ll need to save to get there. This is something that’s helpful to do every year, as any changes to tax and pension legislation could mean that strategic ‘tweaks’ are required.

Even if the lifetime allowance, annual allowance or tax relief rules do change, additional pension saving could be a good idea. Reducing your pension savings to avoid tax would be a bit like refusing a pay rise because you’d have to pay more tax.

Alternative tax efficient strategies could involve drawing down and recycling income efficiently or using Enterprise Investment Schemes, Venture Capital Trusts, Open Ended Investment Companies, Bonds or ISAs. All of these can add up to provide sources of capital and income when required, and allow you to manage personal taxation more effectively.

Finally, check if you can protect your lifetime allowance.

Caveat: None of the above should be taken as advice and you should seek personalised advice based on your own individual circumstances.