Are Crypto-Currencies worth the Risk?

Unregulated investments can take diverse forms in the UK, from burial plots near Birmingham to storage pods in Blackburn.  In more exotic locations such as the Caribbean, property is popular, while so-called exotic crops have lured investors to Africa.  While these types of investment have been on advisers’ radars for many years, the Financial Conduct Authority (FCA ) is expressing concerns about another form of unregulated investments, namely crypto-currencies.

During the FCA’s annual public meeting in September, chief executive Andrew Bailey said there was a balance to be struck between good and bad innovation across the investment world.  He said: “A good example of this is crypto-assets. We are keen to see the potential of their underlying technology and do not rule out roles for crypto-assets themselves. But the risks are evident too: not least in the question of whether the consumers who use them understand the asset and price volatility they involve.  We are working closely with the Treasury and Bank of England to assess these issues and come up with appropriate responses.”

Leading financial publication, Money Marketing, recently spoke to two financial advisers about how they have managed to get their concerns across to potential investors.

The first adviser told MM  that a client surprised him during their annual review last year when he admitted he invested £15,000 in Bitcoin against the wishes of his family.  The investment in Bitcoin emerged in the context of £30,000 of tax-free cash the client took from his workplace pension scheme to pay for a wedding. The Adviser recommended the client take the tax-free cash as he was in drawdown and would have suffered a large tax penalty if money was taken from taxable assets.  Although the Bitcoin investment represented less than 1 per cent of the client’s assets, the Adviser was still shocked by the investment and said, “The £15,000 [investment in Bitcoin] did go up to £31,000 but then dived to £9,000. Even though the client admitted he was ashamed of what he did, my understanding is he is still invested.  To me this is a classic case where the moment you invest for greed it goes wrong, and I am not interested in anything if it falls outside what you might term ‘normal’ investments.”

For many advisers, this likens the intense obsession with Bitcoin and other crypto-currencies to the tech bubble at the turn of the millennium.  With Bitcoin it could be even worse as you are in uncharted territory.

The adviser said,  “If people want to achieve a goal then invest in normal things which there should be compensation for. Why should anyone be compensated for making a bet? Fortunately, none of my other clients have bothered with these gambles and the FCA should ban these investments.”

So, should advisers try to dissuade their clients from investing in crypto-currencies?

Another Adviser has had half a dozen clients express interest in crypto-currency but has used the digital banking application Revolut to show them how volatile the asset is. He installed Revolut on his phone in February and put £10 into three different crypto-currencies – Ether, Litecoin and Bitcoin – to see how they would perform.  He says: “I use Revolut to warn clients about crypto-currencies and when I checked their performance recently one had a level of £6.82, another of £2.12 and another was £2.29.  All this shows crypto-currency is a volatile investment and consequently we do not like crypto-currency at our firm and offer plain vanilla investments.”

Larger firms like Sipp provider Curtis Banks and fund shop Hargreaves Lansdown also take a sceptical view of crypto-currencies.

Curtis Banks pension technical manager, Jessica List says, “The Curtis Banks Group is aware that crypto-currencies themselves are unregulated and that the FCA has previously warned about the high risks of crypto-currency related investments. As such, we do not currently view them as a suitable pension investment.”

And Hargreaves Lansdown head of communications, Danny Cox, has warned that people who want to speculate on crypto-currencies should be very careful.  He says they should be very aware  of and understand the considerable risks.  They should not commit anything other than what they can afford to lose.

 

The Art of Diversification

I have been looking after clients money now for nigh on 30 years and the three words that I  think are the most important words when discussing investments are’ Diversification, Diversification and Diversification.  Harry Markowitz, the American economist, is probably known as the daddy of the concept of Diversification.  In the 1950s he developed a formula for the “best” portfolio mix, or in other words, for the “optimum” diversification.  His mantra was to diversify investments  by avoiding putting all their eggs into one basket.  Instead he advocated splitting their funds across different asset classes e.g. stocks, bonds and commodities and this strategy won him the Nobel Memorial Prize in Economic Sciences.

He tried to understand the correlation between different asset classes.  We all know that markets rise and fall but the shares investors deal in do not all behave in the same way and at the same time.  For example, shares in oil companies might fall when oil prices drop, but shares in airline companies might take off (excuse the pun) as they take advantage of cheaper oil prices.

By and large, poorly performing investments can be protected by profitable investments, which in turn reduces risks across the portfolio. Hence diversification reduces risk without reducing expected returns. Alternatively, expected returns may improve without increasing risk.

Individual investors however face the difficult task of selecting the right assets for their portfolio and allocating the right proportions accordingly.  What makes it more difficult is that a portfolio should be optimised and adjusted on a regular basis as the risks of different investments change over the course of time.

Therefore, it would appear to be a good idea to get professional help. At ABFM, we advise on globally-diversified portfolios and our partners in the Investment Houses we use monitor the portfolios and ensure that the risk appetite of each client is met. They don’t necessarily rebalance a portfolio after every short-term market correction, but will adjust portfolios according to the market conditions if there has been a change to the risk environment.  Also they may well rebalance the portfolio automatically every quarter.

You should of course be aware that with every investment comes risk. The value of  an investment can go down as well as up and you may get back less than you invest. Past performance or future projections are not indicative of future performance.

Diversify, Diversify, Diversify

One of the main safety features of any investment, be it Pension Funds, ISAs or OEICS (Unit Trusts to us oldies) is the ability of the fund manager to diversify his or her portfolio.  Most Multi Asset Portfolios have this facility but that may not be the case with older style Funds where they were maybe, for example, all UK companies or all Japanese Companies or even With Profits in which case nobody knew.

A diversified portfolio should be able to invest in UK Equities,US Equities, European Equities, Asian ex Japan Equities, Japan Equities, Smaller Companies, Emerging Market Equities, Hedge Funds, Income Funds, UK Property, European Property, Fixed Interest (Gilts and Corporate Bonds), Convertibles, and the like etc.

Almost certainly however, in the case of Ethical Funds, the fund manager will probably give Gilts a miss, due to Government (the issuer of Gilts) raising money for defence projects.  Armaments is one of the things treated as non-ethical.

The mix of the above will also depend on how much risk the manager is aiming to take.  That’s why we carry out a risk profiling assessment to ensure your views are in line with the selected Portfolio.

If you think your funds are not well diversified, why not contact us and we can have a look and let you know a) is it’s diversified and b) if it matches your risk profile.  Our telephone number and our email address are well published on the website.

Call to abolish the lifetime ISA (LISA)

It has been reported in the Financial Press that The Treasury Committee has called upon the government to abolish the Lifetime ISA (LISA) just 16 months after it was first made available, after receiving persistently negative feedback on the product.

In its latest report, Household finances: income, saving and debt, the Treasury Committee recommended the government abolish the savings product.

Published on Wednesday, the report said: “This inquiry has received strong criticism of the LISA over its complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers. The government should abolish it.”

Former pensions minister Ros Altmann was a witness to the inquiry. She said: “I would urge the Committee to recommend abolishing the LISA; just scrap it. It is, in my view – and I have seen this for so many decades – another mis-selling scandal waiting to happen.”

The LISA allows those aged between 18 and 50 to save up to £4,000 a year towards a pension or a first home tax free, with the promise of a 25% government bonus capped at £1,000 a year. However, withdrawal for any other purpose will trigger a 25% exit penalty levied by the government.

The Committee said the 25% bonus and 25% withdrawal charge system is problematic, as many savers don’t realise the withdrawal charge applies to the entire investment, and as such, will lose more than the government bonus should they choose to withdraw money early.

The LISA was announced in the 2016 Budget, but the take up among providers has been low it is reported

 

Advisers need to teach clients patience

We deal with a mixture of  different demographics of clients. Some are in their late twenties and thirties. Some are in their sixties and beyond.  Some are in the middle.  I guess I fall into the middle group!  In all cases, we get to share experiences with one another, both good and bad.

But one of the real difficulties in working with the younger group is the immediacy in which they expect everything.  They are used to it all being done there and then.  If they want to buy something, they can do so in one click on Amazon, and have it arrive the same day. If they want to transfer money to a friend, they can do so instantly via a text message.

It’s probably the case that the younger generation do not appreciate the time things used to take and the shift that has occurred.

Financial services has not quite embraced the speedy world we live in. You want some information from Legal & General? You must email them (they thought it would be a good idea to dispense with phones) and wait for a response in three days’ time. What about Zurich? Well, you can speak to them, but expect a response in 10 working days. It really is hard to comprehend what takes them so long.  These companies are so at odds with how fast the world is moving.  And they are not alone.

And the issue with investors is the same. The major problem here is patience. I can often be heard saying “This is a long term solution”.

But what is meant by long term.  5 years, 10 years, 20 years, or longer?  Another of my favourite saying is “Tell me, John. You want to save for your retirement over the next 30 years.  How long do you think you are investing for if you put a sum of money away every month?” 30 years is invariably the answer.

But is it?  Only the very first contribution is invested for 30 years.  The last is invested for 1 month!  So the investment term is really only 15 years.

One of lifes’ truisms I have learned is that wealth is created over decades.

But back to the subject.  Everyone wants to know what is happening now, now, now. How something has performed over one year, two years and so on. It is counter-productive for an investor to be so focused on investments when they cannot control the outcome.

Have you heard of the Christmas turkey example. If you are cooking a turkey for the family and it is supposed to be cooked over eight hours, you would not open the oven after half an hour and ask whether it is ready, would you?

I don’t know all the answers but what I do know is that I try to keep my clients focused on making the most of their life, their income and their assets because, in the long term, we all end up in the same place.  Clients need to enjoy the time they have while they have it, but balanced with patience and perspective.