What Midlife Crisis ?

Is a midlife crisis now a thing of the past ? Do we all now accept changes in our appearance and ability to do things with less resilience ? And, if not, will having a mild makeover provide that extra re-assurance and confidence ?

Scientists say increased life expectancy and good job prospects are taking the sting out of ageing.

They claim that the sudden awareness of mortality that has led many men to exchange their wives and cars for newer models no longer has such a potent effect : take note if you are a divorce lawyer !

Instead, an increasingly confident and hardy generation is embarking on a productive second life as it approaches the age of 50.

This generation is aware that at 50 it still has at least 30 good years of life.

The myth of a midlife crisis as represented in Hollywood films such as 2003s Lost In Translation, in which Bill Murray plays a bored husband tempted by a younger woman, has been put to the sword by Carlo Strenger, a psychoanalyst and associate professor of psychology at Tel Aviv University in Israel.

He says in a paper published in the Harvard Business Review that while some Midlife Change is inevitable, traumatic raptures are increasingly rare.

In his paper, based on interviews with business people aged in their 40s, 50s and 60s, he argues that middle aged workers are less fretful, hurried and self critical than their younger counterparts.

By middle age, most executives have gone through protracted crises that seemed insurmountable at the time; through these crises they have discovered their strengths, he says.

No longer riddled by the anxiety that they may not be good at anything, or by the need to prove that they are good at everything, they have the freedom that only self knowledge can impart.

He advises middle age people seeking a new challenge to take time studying their options and not take drastic steps.

Changes in the work market in the past few decades have increased the opportunity for midlife career moves, he writes.

The trend for big companies to rely on outside consultants was particularly good news for mature, independent professionals.

He says The baby boom generation is getting older but its work is far from finished. Many people can anticipate and enjoy a second life if not a second career.

The professor says the best way to avoid suffering a crisis is to appreciate how many adult years someone has to live and make imaginative plans for using them.

To ensure these imaginative and creative plans can be fulfilled, one not only has to make a lifestyle plan but also a financial plan : with the two being inextricably linked.

Knowing that you can do all that you seek and desire in later life without any fear of ever running out of money ensures a financial peace of mind and allows for greater certainty that all you want to do you can do.

You can have the most inspired and original of ideas and plans for later life but without the resource to fulfil these dreams and ambitions, they will simply fall apart.

So, the midlife crisis may well be over and planning for an active life all the way into your 80s is much more of a reality these days, but what you do not want to do is let your plan fail simply because you have neglected to dovetail a financial plan in with your life goals.

Market Commentary January 2010

In many respects the recession is, to a great extent, behind us. But, as one door opens another one shuts. With consumer price indices creeping upwards, inflation looks to be the factor most likely to concern investors later in 2010. Some commentators believe inflation is set to return in a 1970s style, others do not think inflation is going to be as big an issue as the inflation scaremongers might suggest (but nevertheless, want to keep their options open). As always, only time will tell.

In response to the economic slowdown and financial crisis, world governments have facilitated an explosion in the money supply through quantitative easing measures. Their aim was to reinvigorate credit markets (unfortunately also providing bankers with an open goal for bonus earning). These measures are however, untested and experimental on this scale. While these monetary injections may have had the hoped for effect of avoiding a 1930s style depression, the risk now is that this aggressive monetary policy risks over-stimulating the economy, causing a return to much higher levels of inflation.

Governments are caught between a rock and a hard place as they have relevant, and recent, case history with the Great Depression, and Japan in the 1990s, where governments moved too quickly to withdraw liquidity and the economic recovery faltered before it had a chance to build a strong foundation. The political pressure not to repeat that mistake today is enormous. Inflation has not taken off yet because banks are still reluctant to lend and much of the new money is just sitting around on bank balance sheets.

There are other factors which influence inflation, for example, energy and food costs, the two largest components of CPI calculations. But other factors should also be kept in mind. For example, as the oil price rises, this tends to be passed on to consumers in the form of higher electricity and gas prices. Through 2009, the oil price more than doubled. With inflation measures comparing prices today to those twelve months ago, such large swings have an enormous bearing on inflation levels. Workers seeing that the cost of living is increasing may be encouraged to push for higher wages, adding yet more inflationary pressure. With the economy as weak as it is, and unemployment as high as it is, wage pressures are currently fairly muted. But, as the recovery takes hold increased wage demands will inevitably reappear.

Paying too much attention to whats going on at home risks missing the pressures from abroad. For example, the UKs large fiscal deficit puts sterling under pressure in international currency markets. That influences not just Britains competitiveness abroad but also increases the cost of imports. Likewise, China has been accused of exporting deflation in the form of cheap goods. With its own economic pressures growing, China may have to re-evaluate their currencys real value, in particular against the dollar, with ramifications for inflation rates right across the globe.

Controlled inflation at, say 1.5% to 2% in 2010 might be no bad thing, but if the price of oil and other raw materials continue rising, there is the risk of higher inflation. The worst case scenario sees inflation pushing over 2.5%, anything higher will mean that the Bank of Englands policymakers will only have the blunt instrument of increasing base interest rates in their toolbox, and blunt instruments can do a lot of damage. One thing is for sure - inflation is an issue that is not going to go away any time soon.

EQUITY MARKETS

United Kingdom - Revised numbers from the Office for National Statistics showed GDP had contracted by 0.2% in the third quarter, up marginally from the previous estimate of 0.3%. The upward revision was mainly prompted by a better-than-estimated recovery in construction, although this was undermined by downward revisions in industrial and services output. However, the annual inflation rate accelerated more than economists forecast in November, to 1.9%, the fastest pace in six months. This was driven primarily by fuel and transport costs. Elsewhere, unemployment fell for the first time since February 2008. The Bank of England’s policymakers voted unanimously to keep interest rates on hold at a record low of 0.5% and to maintain its £200 billion quantitative easing programme.

UK equities advanced for a second consecutive month in December as investors grew increasingly optimistic about the global economic recovery, and a bright outlook for demand helped lift commodity prices. The benchmark FTSE All Share Index returned 4.3% over the month. Mid-sized companies, with a monthly return of 4.6%, outperformed their large and small sized peers, who recorded 4.4% and 2.4%, respectively. Most sectors ended positively, indicating broad-based support.

USA - Economic data continued to be mixed in December. The Federal Reserve Chairman warned that the US economy faces "formidable headwinds", a weak labour market and tight credit. However, the unemployment rate fell to 10% from 10.2%, with employers cutting the lowest number of jobs since the recession began. Although the car industry remains on its knees, there were signs that the manufacturing sector was returning to health, as inventories at factories increased for the first time in more than a year, while factory orders also rose by an unexpected 0.6%. In the housing sector, existing home sales rose in November at the fastest pace since February 2007.

The S&P 500 rose in December, ending 2009 with significant gains. Technology stocks fared particularly well and health care stocks moved higher after a less damaging reform bill passed in the Senate. The materials sector also benefited on the back of the general upturn. Industrials stocks gained ground despite General Electric issuing a cautious outlook for 2010. In contrast, financials ended the month lower, Citigroups stock and bond offering attracted weak demand, while earnings estimates for Goldman Sachs Group and Morgan Stanley were lower (though not at the expense of their controversial bonus structures).

Europe - European economic indicators were encouraging in December. The Bundesbank raised growth forecasts for Germany, Germanys GDP is expected to rise 1.6% in 2010, as against the banks earlier prediction of 0% in 2010 and growth of 1.2% in 2011. The European Central Bank revised its GDP forecasts for the eurozone upwards for 2010 and expects economic activity to recover even further in 2011. Data showed that Europes service and manufacturing industries expanded at the fastest pace for two years in November on the back of a recovering global economy. German business confidence increased to the highest level in 17 months in December, sparked by a revival in exports and manufacturing growth. Greece, Spain and Portugal may well have a different story to tell in 2010.

European equities had a solid end to the year, stocks rising significantly in December. Positive data strengthened confidence, materials stocks gained due to rising metal prices, stemming from encouraging growth in industrial production in China. Oil prices were up and energy shares advanced in line, unlike in the 70s OPEC are playing the game. Investors also invested in defensive consumer stocks and utilities firms amid occasional volatility, although telecommunications companies declined in response to broker downgrades. Despite the upward trend, financials performed poorly owing to concerns about new regulations and credit downgrades of some European countries. Greek debt has been particularly downgraded and Standard & Poors warned about the nation’s expanding government deficit. S&P indicated that Spain is only 12 to 24 months behind Greece if the government does not take tough action.

Japan - In December, indicators were mixed, but pointed towards generally robust economic activity in the fourth quarter. Japanese exports to Asia increased for the first time in 14 months. The decline in total export volumes narrowed to -1.5% year-on-year, compared to -13% in October. Industrial production increased for a ninth consecutive month, with forecasts pointing towards a sustained uptrend into the new year. Strangely, confidence among major manufacturers improved for a third consecutive quarter, whilst confidence among retailers, smaller companies and consumers deteriorated. The Bank of Japan implemented further monetary easing measures in a bid to combat deflation and, the Japanese government compiled a ¥7.2 trillion economic stimulus package.

After three consecutive months of decline, Japanese equities staged a sharp bounce back in December, outperforming other developed markets, the broad-based Topix returning 8.1%. Factors that had previously precluded a turnaround in share prices, notably the appreciation of the yen, began to recede and the Bank of Japans announcement of additional monetary easing measures bolstered investor sentiment. Large-cap cyclical stocks and major exporters were the top performers, reflecting a weakening of the yen and signs that US unemployment was close to peaking. In common with other markets, banks and other domestic-oriented names lagged behind.
Far East Ex Japan - In China, economic data confirmed that the upbeat momentum in industrial activity is continuing. The government indicated that it planned to renew its stimulus policy for consumer durables, including cars, to support the domestic economy. Chinese demand for durables boosted exports in Korea, which rose by 33.7% year-on-year in December, compared to 18.1% in the previous month. Manufacturing output again expanded in Korea and Singapore with labour market conditions improving in Australia and Hong Kong. Singapores GDP is estimated to have contracted by 2.1% in 2009, below expectations.

Stock markets in the Asia Pacific region advanced in December, ending 2009 positively. Investors favoured Korean and Taiwanese technology stocks following encouraging growth in overseas exports. Improvement in the global growth outlook for 2010 supported metal prices which, in turn, benefited materials shares. Consumer discretionary stocks surged as more jobs were created, while financials lagged in all major markets in the region (spot the trend ?). Foreign investment inflows drove Indian stocks higher.

Emerging Markets - Many emerging markets are recovering from the recession quickly, and policymakers may soon have to contend with the onset of rising inflation in 2010. South Korean manufacturers confidence is on the rise, as the countrys central bank raised its growth forecast for 2010. Meanwhile, Chinas exports fell by the lowest amount in 13 months and imports surged in November due to resurgent trade with Asian nations (is China really still an “emerging market” ? – discuss). Brazils economic growth in the third quarter was less-than expected, owing to a decline in agricultural output.

Emerging market equities continued to gain ground and, in a reversal of recent trends, emerging Asia and EMEA (Eastern Europe, Middle East and Africa) outperformed their Latin American rivals. Turkish, Chilean, Taiwanese and South Korean equities led returns amid an improvement in industrial activity, boosting investors optimism. In contrast, markets in the BRIC countries (Brazil, Russia, India and China) underperformed the broader index (though still performed positively) . Technology and consumer discretionary stocks were favoured, energy companies, financials and materials were laggards.

Bonds - UK government bonds (gilts) ended December in negative territory as rising equity markets dampened demand for relatively safe fixed income assets. Gilt performance was impacted by a rise in house prices and mortgage approvals and increasing inflationary pressures. After being the best performing fixed income asset class in 2008, gilts ended 2009 in negative territory as unconventional measures and improving economic indicators prompted investors to favour riskier assets.

For similar reasons, European government bonds ended lower in December. Despite the increased appetite for risk and the unconventional measures available from the European Central Bank, government bonds ended the year as a whole on a positive note.

US government debt declined in December and ended the year in negative territory. US Treasuries weakened over the month amid signs that the economic recovery had gathered momentum. US treasuries were the worst performing sovereign debt market in 2009 as the US sold record amounts of debt to fund efforts to bolster the economy and financial markets.

Japanese government bonds continued to advance in December (!) although at a slower pace than last month, as signs of economic recovery in Asia spurred demand for more risk. The Bank of Japan held interest rates near zero while policy makers watch the effect of their lending programme. Elsewhere, the Japanese government proposed exempting overseas investors from paying 15% tax on interest income from corporate bonds, starting 1 June 2010, in a bid to boost inward investment. Form an orderly queue.

Commercial Property - The UK commercial property market continued its recovery, the sector rising by 16.5% over the last six months of 2009, as the combination of an oversold sector and a weak pound made for some attractive deals for overseas investors.

The UK housing market trends continued to show improvement in December. House prices rose by 5.9% in 2009, according to Nationwide, who also said that the rise in prices during 2009 was driven by significant pent-up demand and record-low interest rates. Don’t forget though that residential property fell by 15.9% in 2008, commercial property by 30.1%.

The outlook for residential property in 2010 remains unclear. Although interest rates are likely to remain low, at least in the first half of the year, and generally supportive of the housing market and borrowers, there is still uncertainty over unemployment and whether cash-rich buyers will continue to fuel demand.


CONCLUSION

Things look better now than six months ago, significantly better than twelve months ago, and a world away from the Armageddon scenario of eighteen months ago. But, as always, in the same way that investors should not be tempted to sell what they wish they had sold a year ago, they should not be looking to buy now what they wish they had bought a year ago.

At the risk of being repetitive, for investors who suspect that inflation may be a risk but are not sure of the timing of that risk or of its extent, a well-diversified portfolio still makes sense. Asset allocation flexibility is a key consideration in any investment strategy.

Stick To Your Guns

The final years of the last decade were a real rollercoaster ride for investment markets as the following figures will illustrate:


In 2009, the FTSE 100 Index returned a very credible positive return of 27.3% against a previous years fall of 28.3%.

We saw the MSCI World Equity Index generate a positive return of 30%, compared to a fall of 40.7% in 2008.

UK commercial property also turned in positive results last year with a return of 8.5%. This is against an index fall of 30.1% in 2008.

Finally, UK Gilts showed a small loss in 2009 of 1.2%, compared to a 12.8% positive return in 2008.
Information source: http://www.ishares.co.uk/

During, the recent turmoil, we held firm to our principles of taking a medium to long term view, offering investment diversity across a broad asset base, all in line with an investors personal risk profile.

With much of the losses of 2007 & 2008 being recouped by investors in 2009, we do feel our approach has been the right one and we will very much maintain a similar approach going forward.

From the above figures it is easy to see why The IMA's latest Investor Confidence Index stands at 99, when a year ago it stood at only 71. Yet, it is a little way of its high of May 2009 when it stood at 106.

Whilst 2009 has proved to be good year for the markets, the outlook for 2010 does seem mixed.

There will be a general election between now and June, with the likely battleground being how best to deal with our record budget deficit. The Government, whatever colour they may be, has to implement a strategy to deal with our huge debt, that looks and is, both convincing and plausible to world markets. Otherwise, there is a real risk that our “AAA” financial strength could be downgraded.

Interest rates are expected to rise to 1% - 1.5% by the end of year and markets have already priced this in.

So, many analysts are predicting a moderate first six months for 2010, with this to be followed by a more demanding six months and end to the year.

During this continued period of uncertainty, we remain firm to our core beliefs that individuals with investment and pension portfolios should continue to align the way their money is invested to match their investment risk profile and their aims and objectives – with this being reviewed at a frequency appropriate to an investors personal situation ( at least annually).

Quite regularly, when we start to work with new clients, we come across investments and pension plans that are either wholly or partly invested in With Profits or Managed funds ( these could be Cautious, Balanced or Adventurous and may also be called Mixed or Distribution funds).

These packaged funds, for some, may well be just the type of investment approach they are looking for, as effectively investment management and asset allocation is out sourced to the insurance company running the fund.

But for many, it is wholly inappropriate as these funds fall short of the mark in being able to control risk, offer diversity and bespoke investment solutions to the personal risk profile of an investor.

Our key message to investors for 2010 is to remain firm to basic investment principles, which we have already alluded to, to re-asses and re- position your portfolio (if deemed appropriate) to match your attitude to investing money and maintain a portfolio that is balanced in line with this, with coverage across a broad variety of asset classes.

For those who have "packaged" funds, do review where your money is invested, think carefully if such an approach is right for you and take advice if you deem it necessary.

FSCS New Limits

On 1 January 2010, the compensation limits for investment, insurance and home finance intermediation claims changed.

The new limits will apply to claims against firms declared in default on or after 1 January 2010 following a rule change announced by the FSA earlier this year.

Compensation limits for investment and home finance advice and arranging claims will increase to £50,000, bringing the compensation limit for these classes in line with the limits for deposit claims.

Compensation for non-compulsory insurance will be paid at 90%, with no upper limit. Cover for compulsory insurance will remain at 100% protection with no upper limit.

The new limits will make it easier for consumers to understand the cover the FSCS provides.

Here is an overview of the new limits applying to eligible claims

Investments:
Provision and mediation of investments: protection for 100% of 50,000

Home finance mediation: Advising on or arranging house purchase finance: protection for 100% of 50,000

Insurance Business: Non-compulsory insurance provision (both general and life insurance): protection for 90% of the claim, with no upper limit.

General Insurance intermediation: Non-compulsory general insurance and pure protection contracts (e.g. term, critical illness and income protection insurance): protection for 90% of the claim, with no upper limit.

The With Profits Minefield

It is quite amazing that the regulator, the Financial Services Authority, has allowed one of the biggest single sectors of the UK investment market to end up in such a mess. With-Profits, both as a concept and in reality, is often completely opaque. Despite the obligation for With-Profits providers to publish a PPFM - Principles and Practices of Financial Management- it is still often impossible to uncover all the relevant facts and figures.

The PPFM documents themselves are often crammed with impenetrable jargon and detail and, like With-Profits in general, appear designed to make things as unclear as possible. The attitude of many With-Profits companies with regard to transparency is often nothing short of abysmal, and is in direct conflict with the FSA Treating Customers Fairly initiative.

It is hard to believe that in the modern investment world With-Profits still plays such a large part. It is clear that the concept of With-Profits has been mis-sold, allowing Insurance Companies and their sales people to present With-Profits as something it is not - not all IFA’s are wholly innocent either. With-Profits has undoubtedly regularly been sold as a direct alternative to deposit accounts.

There remains somewhere in the region of £300 billion invested in With-Profits, many are trapped by redemption penalties (often called, MVR, MVA etc.) but the funds themselves continue to deliver appalling results.

However, a small minority - Step forward: Prudential, Aviva, LV= and Wesleyan - have achieved positive and very acceptable results for their plan holders. These companies aren’t rocket scientists, they simply applied the original principles and benefits of with-profits, not chasing market trends and fashions, and investors with these companies are likely to be pleased with the results. Although there are another few companies who have achieved, at best, reasonable returns, somewhere in the region of 40% of all With-Profits investors are in funds that are doomed to underperform substantially in the future.

One of the many contradictions for With-Profit investors is that those in good plans with good companies, achieving good results, are likely to be in a position where redemption penalties (MVR, MVA, or some other element of the With-Profiits alphabet soup) do not apply, and they can move out of the fund quite easily. Sadly, this is another opportunity for the unscrupulous sales person to lump all With-profits funds under the same umbrella. In a nutshell, the poor funds usually have the highest penalties, the good funds often have no (or very low) penalties.

Yet another contradiction is that the good funds, with the best results, are usually those that have the highest asset allocations in shares and property which, ironically, makes them more vulnerable to market downturns and less suitable for the cautious investor that they are aimed at. Help !

If you have a With-Profits based investment, or are considering investing in one, do look to take advice now.