‘Back to the future’ Dynamic Retirement Planning

back to the future ii header


Great Scott!! – It’s the week of ‘Back To The Future Day’, the date in the second movie that they travel to in the Doc’s DeLorean – which, incidentally, doubles as the perfect retirement planning tool as he spends much of the 3-movie franchise trying to determine his own longevity.

This is also the week that I can finally introduce my own ‘dynamic’ retirement planning software, which isn’t quite as sexy or effective as a time-travelling DeLorean, but can draw on the practical and theoretical lessons in risk that I have learned and developed since first being introduced to them by a real doctor of mathematics soon after the original Back to the Future was made in 1985!

Since starting this company, I’ve never been entirely happy with the financial planning tools available to me – I will still be using the excellent CashCalc, but I wanted to be able to use the techniques that I’ve learned to illustrate with simple charts better answers for clients to questions like, ‘what is the chance that my money lasts my lifetime?’. And that can only help discussions about ‘risk’ and ‘loss’.

I had hoped to do this using some readily available dedicated software, but the few on offer weren’t versatile enough and I wanted to eventually apply more than one type of forecasting model. So, I decided to go ‘back to the future’ and write my own – and over 2000 lines of code later the first edition is finished and as it aims to look at a retirement plan and to sum it all up, that’s what I called it – SumItAllUp.

 

Over 1000 ‘What-if?’ calculations per month for each of five case studies


For a more thorough comparison with Dr Emmit Brown’s DeLorean take a look below, but SumItAllUp is no slouch. It can calculate over 1,000 ‘What-If?’ changes each month of a forecast and that can amount to over 1 million formulas in just 1.73 seconds on a standard laptop.  And it also rebuilds itself for every individual case study – hence the ‘dynamic’ in the description.

But the biggest requirement was that I wanted not one ‘flux capacitor’ in the application, but five.


sumitapp example 2

back to the future dashboardDashboard Envy

Even I have to admit that the DeLorean dashboard has a bit more going for it than the ones I designed for SumItApp – but, I reckon it has more features.

And there’s only ever been one model of DeLorean – I’ll be adding another two models once I’ve added even more ‘number crunching’ power. Why shouldn’t you have access to the same pricing techniques as a fund manager?


And being able to crunch five case studies at once means that I can choose to either compare different investment strategies and tax wrappers, for example a pension versus an ISA. Or, if more detail is needed, break an investment’s projected performance into different asset classes. But, it can also be used to combine the results of different case studies together, like the drawdown pensions of a couple.

The individual factors affecting your future pension income don’t all move in straight lines either and nor should your planner.  So input changes like contributions or withdrawals can be made monthly, whereas some programs only update annually – that’s a big difference.

If you’d like to know more about this additional service please contact me.

SumItAllUp is exclusive to Pearce Wealth Management and I am offering it as an add-on to our normal planning service for no extra fee.

 


 

Time-Travelling Delorean

Designer – Dr Emmit ‘Doc’ Brown. With the help of plutonium stolen  from Libyan rebels

Hardware/Software – One singe engine DeLorean fitted with a ‘flux capacitor’.

Energy Use – 1.21 gigawatts. According to a Buzzfeed article, that’s equivalent to 484 wind turbines, a nuclear power plant or 8 billion spinning hamster wheels.

Forecasting ability – perfect!

Price – You can find a variety of second hand and refurbished DeLoreans here. Unfortunately, they come without the ‘flux capacitor’ optional extra….and they’re in Texas.

SumItAllUp

Designer – my good self, using approximately 2000 lines of code and drawing on a variety of data sources including longevity data from the Office of National Statistics.

Hardware/Software – Standard laptop fitted with SumItAllUp

Energy Use – Approx 60 watts

Forecasting ability – However, sophisticated I make it, it remains a really useful forecasting tool – it can never be a guarantee of investment performance.

Price – There is no additional cost for using our SumItApp dynamic retirement planning service on top of our already comprehensive proposition.

Please remember:

  • ‘Pension Theft’ is unfortunately a reality. If you are cold-called by unknown companies or advisers offering you something that seems too good to be true, then it probably is – all qualified advisers are listed in the FCA Register;
  • Past performance is no guide or guarantee of future returns;
  • Investment risks apply to all kinds of pensions. Values can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing;
  • This blog does not constitute financial advice and is provided for general information purposes only.

Sheikh, Blatter and Mole

Updated 3rd June as events have unfolded regarding the scandal at FIFA.


How game theory, dollars and the efforts of one investigative journalist have brought accountability to FIFA.


As certain individuals, associations and European banks have found out recently, if the money you are handling happens to be in dollars or relates to a US registered entity (or exchange) you fall under the jurisdiction of US law – which potentially extends to any country with an extradition treaty with the States.

Why that is the case is, in part, explained in this article in the Washington Post. Simply put, if you want to do business in the States you accept you can be sued from the States. And ‘business’ may mean just one meeting or transaction.

The implications are quite far reaching, as the scandal revolving around recent World Cup bids and FIFA has demonstrated.

What began with the sole efforts of investigative journalist Andrew Jennings to uncover wrongdoing within FIFA, snowballed after he was contacted by the FBI. You can read a fascinating account of his efforts  here to give the Washington Post their second plug of the day.

The story of how Jennings went fishing for and landed a ‘mole’ within FIFA, is a lesson for any errant organisation who thinks their information is contained.

sheikh blatter and mole
From left – Sheikh Hamad, president of the Qatar FA; Sepp Blatter acting president of FIFA; Andrew Jennings – the man who established the ‘mole’ within FIFA.

 

 The FBI’s own efforts eventually led the US Department of Justice on the 27th May, to ask the Swiss authorities to arrest seven senior FIFA officials, as well as others, as they continue to investigate ‘bribery, racketeering, money laundering, fraud and other related crimes’. The Swiss launched their own enquiries into the 2018 and 2022 bidding processes at the same time.

In the aftermath, Sheikh Hamad Bin Khalifa Bin Ahmed al Thani, the president of the Qatar Football Association has been forced to defend the integrity of their winning bid to host the 2022 World Cup. He had hoped on the support of the re-elected President of FIFA, Sepp Blatter, but yesterday Blatter resigned for reasons that were not convincing given his euphoria at his re-election the previous Friday.

The speculation is that there is a ‘smoking gun’ – that Blatter himself may be implicated in some way. And the US Department of Justice have made it clear that their investigations are just beginning and they will seek to bolster their pile of evidence through the use of ‘plea bargaining’.

The DoJ hope that those already under suspicion will accept the first-mover immunity, or a lesser charge, that can be given to those who plead guilty and implicate others. So, they are looking for one or more of those already charged to essentially become an informant.

They have already agreed a deal with Chuck Blazer, the former FIFA executive and Mr Blazer has already begun making revelations. A Sky news article has a quote that, among other defendants, there will be, ‘a race to see who will flip on (Blatter) first’.

Whether someone under suspicion would choose to do so relates to an area of decision-making known as ‘game-theory’, to which the late John Nash, the subject of the film ‘A Beautiful Mind’, contributed so much. There comes a tipping point in the plea bargaining process, where an individual finds the benefits to themselves of revealing all, overwhelms the benefits to the group of remaining silent.

What these events will ultimately mean for the Shiekh Hamad’s World Cup in Qatar is not certain – they would, no doubt, pursue significant reparation costs, even if some wrongdoing was found and the event relocated.

As for Blatter, he plans to continue his duties until a replacement is found. Whether that will include travelling to the Women’s World Cup in Canada, given the extradition treaty that exists between Canada and their southern neighbour remains to be seen.

Post his resignation, Blatter was apparently given a ten minute standing ovation by staff at FIFA – I wonder if Andrew Jennings’ mole was among them.


Legal over-reach?


While many of us might be celebrating Blatter’s resignation, the whole process does raise some serious concerns about the reach of US legal jurisdiction.

Hedge fund manager John Hempton writes an excellent blog and here you can read how he views the DoJs actions as undemocratic. I’d point out that Mr Hempton is no apologist for the crimes FIFA is accused of. He spends a lot of his time discovering fraudulent corporate activity and outing those behind it.

And then we have the US extradition request being fought by Navinder Singh Sarao, a futures trader from Hounslow, who is charged with ‘spoofing’ and prompting the so-called US stock index ‘flash-crash’ in November 2010. Bail has been set at £5 million, but in a classic legal ‘catch-22’ he can’t meet it as he is the subject of a US freezing order over all his assets.

I don’t know him at all, but I do know something about the structure of stock index futures markets in the States and Asia and there isn’t the room here to explain everything technical relating to this case. I find the accusation that his activity was especially egregious and that he pushed the first domino that toppled a knowable chain of other dominoes hard to prove – he wasn’t trading at the time and crashes did not occur on other days he was. Regulators would do well to look at those flash trading firms behind the other dominos stacked in the chain – you can read about them here.

And Sarao’s treatment is somewhat harsh, given the lack of success in the States in bringing any sort of accountability against certain high profile individuals.

Large corporations, like some European banks have received enormous fines that I am not arguing against – but when I see Dick Fuld, the former head of Lehman Bros, arguing again this week that he was running a prudent organisation and that what happened was all the government’s fault, with only an grilling in front of a House Oversight Committee as a chastisement, it does not seem fair.


Anyone for 500 euro notes?


Of course, the other implication of all this is that if you do want to earn some illicit income from the bidding process for a worldwide sporting event, don’t do it in the States and don’t do it in dollars.

Europe would seem far better as it has two advantages. Firstly, one wonders if the Eurozone would ever have looked this closely at FIFA. Andrew Jennings certainly doesn’t seem to think so.

And, secondly, rather than dollars there is the 500 euro note – there are apparently 609,908,558 in circulation as at the end of April, according to the European Central Bank’s own website. But, I’ll discuss the impact of these so-called ‘Bin Ladens’ (a nickname given when we knew he existed, but not where) in another post.

 

Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing;
  • this blog does not constitute financial advice and is provided for general information purposes only.

Pensions Freedoms

pension nest


Since the start of the new financial year, the new pension ‘freedoms’ have come into effect and we have a clear guide to all the ‘major changes’ that I will be happy to send to you if you contact me.


I emphasise ‘major changes’ because there is a lot of additional information, not in the guide, that may be relevant to clients with different amounts and types of pension provision as they seek to benefit from the valuable new rules. And not all of it is that straightforward or easy to assess.

For example, although these changes have arrived in law, they haven’t yet been put into practice with all pension providers – some will choose not provide the full suite of options that are now possible and others are still in transition between the old rules and the new ones.

There are also new types of investments that are now eligible for your pension such as peer-2-peer (p2p) funds – I have blogged about p2p here and here.   And fund management groups are falling over themselves to emphasise ways of managing the risk of different types of assets in your pension. And, while these might look attractive, I have strong reservations about some of them.

There are also some questions about different types of cost.  We still don’t know how the charges for the new flexibility in withdrawing money from your pension will be levied in all instances. Or the extent to which the price and design of annuities will be affected as fewer choose this route for income from their pension.

There are also some important legal issues relating to the new rules and trust law and how that may be affected by current lawsuits relating to divorce and bankruptcy.

And then there are the acronyms!

The pension industry loves an acronym, whether they relate to funds going into a pension, funds coming out or just general regulation. The industry seems to follow a mantra of ‘Always Value Ideas for New And Laudable Acronyms to Use Generously and Habitually’ – or as I prefer to call it ‘’AVIN’ A LAUGH’.

I’ve just had a brief look at the growing database that I maintain to monitor all things pension related, from press articles and conference notes to announcements by HMRC and other relevant bodies – and there are well over 50 different acronyms…so far.  Nor are any of them especially memorable, unlike the new think-tank set up by the governments of Pakistan and China known as ‘Research and Development International’ or RANDI for short.

So, while it is true that for many people with straightforward situations that generic guidance will be sufficient, others will benefit greatly from a full appraisal of their pension provision. And tailored advice can ensure that basic mistakes are avoided and that full advantage is taken of the new rules.

 

This list is definitely not intended to be exhaustive, but here are a few examples of circumstances where good bespoke advice can make a real difference.

 

  • The most obvious question that is fundamental to all the others is, ‘when can I afford to retire?’ The answer to this depends on each clients capacity for risk, appropriate investments and creating a plan using methods that I can readily explain to you.
  • Which investments are the most suitable? There are new investment products that are based on matching your risk profile, but great care needs to be taken here. Where investment funds measure risk solely by targeting how volatile an asset is, I have concerns that the funds themselves have little understanding of the important limitations of that approach. A conversation I had with a salesman at a leading fund recently, confirmed that can be the case.
  • Is inheritance important? The new rules have reduced the cost of passing on your pension pot, if you have a defined contribution scheme. There are also ‘family SIPPs’, which offer greater flexibility in growing funds within the scheme, but also how they are allocated between members.
  • Do you have more than one pension scheme, including a final salary scheme? The way in which final salary and defined contribution schemes interact is very important. Care needs to be taken when making and maintaining contributions between the two and working out the lifetime allowance, which restricts the tax free size of your combined funds.
  • Are you thinking of transferring from a guaranteed salary pension to a private plan to access the new freedoms? Leading company pension schemes have seen a dramatic rise in requests for ‘transfer values’ of final salary pension pots. Given the generational lows in interest rates these values can look extremely enticing and have risen recently as trustees of those company schemes seek to manage the rising cost of provision. As yet, these requests haven’t translated into significant switching into private schemes, but I cannot emphasis enough how much care needs to be taken here before such a transfer is made so that the monetary value of what is being foregone is completely understood – particularly if the company scheme is very well funded. In any event, transfers over £30k must be accompanied by independent financial advice. Some company plans will let you ignore that advice if it’s against switching, others won’t. There are specific scenarios where a switch may be justifiable, but only after very careful consideration. I can’t cover everything here, so the best option is to call is you have any concerns.

 

Please remember:

  • ‘Pension Theft’ is unfortunately a reality. If you are cold-called by unknown companies or advisers offering you something that seems too good to be true, then it probably is – all qualified advisers are listed in the FCA Register;
  • Past performance is no guide or guarantee of future returns;
  • Investment risks apply to all kinds of pensions. Values can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing
  • This blog does not constitute financial advice and is provided for general information purposes only.

Blowing More Bubbles


This is my first blog of 2015. My father passed away in early March after a short illness that began before Christmas. Naturally, my family has been the most important consideration during this difficult time and some, less essential, parts of my workload have taken a back seat – and, unfortunately, this blog was one of them. But, it returns now and with renewed gusto – Dad intuitively knew a thing or two about financial decision making and I’m sure he’d approve.


In my last blog I wrote about central banks, asset prices and West Ham. After a three month break, I am still going to write about central banks, asset prices and West Ham.

Then I talked about central banks ‘blowing bubbles’ and noted that :

‘By historical measures both government bonds and equities are very expensive and although in the leading economies they are relatively stable there are signs of fissures elsewhere – especially in certain currencies and commodities.

I see the message repeated often in the world of financial advice that stability, as measured by volatility, means low risk – but that can change and change abruptly. And a general lack of understanding of the limitations of this methodology is partly why banks got in such a mess in the first place.’

Within a couple of weeks we had example of what can go wrong. And it specifically related to a financial dam bursting due to the actions of central banks.

The dam in this case was a commitment by the Swiss National Bank to peg the Swiss franc to the euro almost three years earlier. This was done to protect Swiss exporters from a rising Swiss franc that made their exports more expensive. But, in order to maintain such a peg, especially in the face of rising demand for the Swiss franc from within the Eurozone, the Swiss central bank had to do the opposite and sell their currency to buy euros.

And buy euros they did…and amassed a record pile of 495 billion Swiss francs worth of foreign currencies – almost 80% of Swiss national production. Which is simply enormous and when it became clear that the Eurozone was about to embark on its own program of quantitative easing, which would likely lead to another bout of demand for francs from Europe, the Swiss central bank decided they could not maintain the peg and removed it.

Following the announcement, the franc appreciated by 40% against the euro at one point, before settling at the end of the day with a 25% gain. What had been a stable relationship had shifted to a new plane in a move that traditional risk management implies is impossible.

While a central bank may temporarily ‘peg’ exchange rates, over the long term this is extremely difficult– especially if you are also attempting to fix interest rates with quatitative easing as many now are. It also explains how one country’s policies can be exported to other nations whether those nations want it or not.

Alpari lose their shirts.
Alpari lose their shirts.

Some of the fall out from the Swiss change of heart did not occur for a couple of days, when it then became clear that a couple of retail currency trading firms would fail – including West Ham’s shirt sponsor, Alpari.  They simply did not require of themselves or their clients enough of a financial buffer to cover such a move. They might argue that it was unprecedented, but in a world where governments are seeking to fix the rates at which they can borrow by printing money, one place where economic strain can show is in foreign exchange (fx) rates.

And these retail fx trading firms and their customers were highly leveraged. Lehman Bros, the epicentre of the financial crisis failed with leverage finally revealed as 30 times capital. These firms offered their clients leverage ratios over 100 – which is barely enough to handle daily trading noise and shines a very poor light on their business model.

So, my position remains the same – we need to be especially careful when managing risk at the moment. And I’ll keep a wary eye out for more signs of strain. I mentioned ‘fissures’ in currencies and commodities in my last blog and that remains my focus.

I also hope that I’ve given you an appreciation of how hard it is to trade currencies as a retail investor.

In the world of financial advice there is hardly any focus on currencies or commodities, but I mention both in our ‘product guide’. And I wrote the following regarding currencies –

‘please beware the glut of adverts out there from companies suggesting you can get rich quick trading currencies on a very short term basis. It’s very unlikely you’ll master the vagaries of short term foreign exchange movements, however seductive the marketing material may be.’

I can’t predict imminent movements in markets, but I can note elevated levels of risk that others either don’t see or choose to ignore. And part of that is discussing what is reasonable, and it is simply not likely that you’ll make a regular income from trading foreign exchange. I should know, I managed currency risk as part of other strategies for a long time and was paid in Yen for eight years.

If you are tempted by the hype, just ask the company seeking your business what percentage of their customers make money over a year? That should focus your mind a bit.

Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing;
  • this blog does not constitute financial advice and is provided for general information purposes only.