28 July 2011

Debt and Scary Americans

The thing that scares me about the current American debt ceiling crisis is Americans!

A bit of background:
- If American politicans do not agree to a raised government debt ceiling by 2nd August then world financial markets are likely to be upset (quite apart from the American public sector)

- Early in the 20th century, every issue of debt (including its purpose) needed to be approved by politicians, but this has gradually been eased, so that now only the overall debt ceiling is set

- The debt ceiling has been rising massively over the years, and one day will have to come home to roost (but politicians only have short term interests, of course)

- Debt issues are basically Treasury Bonds which investors buy (the equivalent of UK Government Gilts), effectively giving a loan to the Government which must be repaid at some point. Issuing even more debt at that point to the next investor is one way of repaying it. (A giant Ponzi scheme?)

The trouble is that Americans can be an insular lot. Only 37% have passports (State Dept, Jan 2011). And most would not be aware of the impact of their politics on their financial world, let alone on the global financial world.

And while there are certainly people in the US who know what they are doing with the national finances, because the political masters have to listen to the public, that does tend to limit their room for action.

Continually increasing the debt ceiling is not sustainable. But there has to be a better way of dealing with it than holding the world to ransom at the 11th hour.

On the other hand, perhaps Americans are better placed to hold the global financial world to ransom than the Chinese. Only 1.7% of them have a passport. Then again, the Chinese government doesn't need to listen to its people, so perhaps that's irrelevant!

22 July 2011


As I've said before, my advice to clients who don't like seeing their investments going up and down in value is "don't look!". But the fact remains that volatility in investment values has been very much present over the last six months or so, even though cumulatively there has been little movement up or down.

Fidelity (fund managers) produce some useful information on investment markets, and they have just released a "volatility tool" which is very helpful in understanding the impact of what is happening. In investment terms, when we talk about "risk" we generally mean "volatility". But by holding an investment for a longer time, the volatility evens out and, in effect, the investment becomes less risky.

Here's some key numbers which are rather interesting. Limiting ourselves to UK equities, the highest growth in one year over the last twenty was over 50%. And the biggest loss in one year was 34%. That's pretty volatile (= risky)!

But if you extend the window to five years, the highest rate of return is down to 20% per annum, and the biggest loss is also down - at less than 7%. Much less risky.

So my advice not to look at your investments is not so silly after all. The fact is, values go up and down, but provided you are invested in the right place (now there's a big proviso), volatility will even out and give you the right results in time.

14 July 2011

The Euro Future

We are all now experts on global finances! Perhaps not ... but we are at least aware that there are problems with some countries in the Euro zone. Ireland was "bailed out" not long ago, Greece was before that and is in the spotlight once again. Portugal, Spain and Italy are all wobbly as well it seems.

I do find it amazing (as a non-global finance expert) that anyone ever thought the Euro could work. What it has done is to remove the single major control that every country has on its economy - the value of its currency. It's like taking the gear lever out of your car!

That's all very well if the economies of all countries in the Euro zone are roughly in line. But Germany is light years away from Greece, for example, in terms of productivity, exports, tax receipts, etc..

The main country-specific indicator which remains is the interest rate available on its bonds (the equivalent of "Gilts" in the UK, or "Treasury Bonds" in the US). The riskier these are perceived to be the higher the interest rate they have to pay to encourage people to buy them. Irish bonds (2 year) are now over 16%, Portuguese are over 18%, and Greek bonds will pay you 29% !!

That means that the market is pretty much expecting a default - in other words, investors will get a good interest rate for a while, but may not get their capital back at the end.

Fortunately, that doesn't directly affect most UK individual investors. But there's no doubt that the ongoing uncertainty is one of the factors holding the stockmarket back - and that does affect most of us one way or another.

8 July 2011

Don't Use Your Pension Money...

...without thinking about it!

I have been looking in more detail at the various options available to take a pension income in retirement from a "money purchase" (or "defined contribution") pension. Although the majority of people buy a lifetime annuity there are certainly other options to consider.

The option I have been revisiting is known as "temporary annuities" (or "fixed term annuities"). Instead of paying an income for life these products pay an income for a fixed term - perhaps 5 years. At the end of the term you will get back a sum of money (normally a guaranteed amount) which can be used to buy a further annuity, for instance.

Apart from any other benefits of flexibility it means that if your health has deteriorated you may be entitled to an "impaired life" annuity which will give you a higher income.

Given the time that we are all likely to spend in retirement, it is well worth keeping as flexible as you can be to take account of changing circumstances.

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