Benefiting from volatility

Pound cost averaging is a fancy term which describes how you can build up a capital sum by investing a fixed amount of money in a particular investment vehicle (shares or fund) on a regular, usually monthly, basis. It is most often used with equity-based investments rather than bonds or fixed income assets that tend to be less volatile.

The key point about pound cost averaging is that you invest small amounts on a regular basis. This means that when prices are high your monthly contribution may buy fewer shares or fund units but that when prices are low your investment buys more shares or fund units. This continuous drip-feed method of purchasing your investment means that the average purchase price paid over any given period is going to be lower than the arithmetical average of the market price. It also instills a useful discipline in the investor, creating the saving habit. Pound cost averaging takes the worry out of investment decision-making - you do not need to panic when the price falls because you will merely be buying more of your chosen investment and because you are committing funds on a regular basis you need not worry about investing all your savings at the top of the market either.

While pound cost averaging can reduce your risk, it is a strategy that does benefit from volatile markets. The more the market swings the greater the benefit to somebody using pound cost averaging. For example, if the market swings down every other month then on each downturn you would buy more shares or units, which would be worth yet more on each upturn. In a bear market, pound cost averaging allows you to build up an investment poised to benefit from a recovery without having to worry about trying to work out when the bottom of the market will occur. However, the strategy will mean you would lose out on the best of the growth in a rising market, although this is a small price to pay for the added security that pound cost averaging brings to investment decision-making.

The diagram above shows how the share price of a theoretical investment (represented by the dots) can fluctuate over time. As can be seen from the bars, an investment of £100 per month buys a lower number of shares when the share price rises but a higher number of shares when the share price falls.

Something for a wet weekend

With the government looking for 1,000 extra intelligence officers have you ever wondered if you have what it takes to be a real life James Bond?

The Psychological Research Foundation studied MI5's websites and recruitment advertisements to try to identify what personality traits and behaviours are associated with success in the Security Service. They then related those traits and behaviours to The Big Five Personality Model and created a short psychometric test to measure them.

Do you think you've got what it takes? Find out ... take the test. Plus, get a free in-depth personality assessment - delivered confidentially and immediately - for your eyes only!

Take the test now

Do I need a private pension

It's an interesting question. Pensions have come in for a lot of flak in recent years: company schemes going bust or not having sufficient assets; mis-selling of private pensions; Gordon Brown’s tax on dividends; lousy returns from with profit funds; insurance companies closing funds to new business and selling them off to ‘asset strippers’; rafts of legislation that most people don’t understand; excessive charges; poor investment returns – to name but a few!

Not surprisingly, pensions is a dirty word to many people and indeed evidence suggests that many of us don’t bother, or make alternative arrangements to plan for their retirement – relying on the value of their home or business, investing in buy-to-lets, for example.So, do you really need a private pension?

Let’s look at the basics. Retirement planning is all about making sure you have enough to live on when you decide to stop working; either because you are too worn out to go to the coal face every day or because work is getting in the way of other things you want to do with your life. If you don’t plan ahead, you will largely be relying on any assets you have built up during your lifetime – these might include property, the sale of a business, savings, inheritances and, if you are lucky, a decent company pension scheme (although these are an endangered species). In the absence of these, you will probably have to rely on state benefits. These are fine as far as they go but, for most of us, they don’t go far enough. In addition, successive Governments have cut state benefits in real terms (adjusted for inflation) because they are proving to be unaffordable.

Where do private pensions come in? Well, they are certainly a tax efficient way of building up funds which can be used to provide income in retirement.The main benefits are:

· Contributions qualify for tax relief at the highest rate you pay;
· Investment returns are tax-free, except for tax deducted from dividends on shares, which are not reclaimable
· When you draw benefits, you can take up to 25% of the accumulated fund as a tax-free cash sum;
· After taking the cash, the residual fund can be used to provide an income, either by purchasing an annuity, which basically means you select a fixed or increasing income for your lifetime, or
· Alternatively, you can leave the fund invested and draw an income to suit your circumstances. For many people this is preferable because you have much more flexibility and control. It’s worth noting that any income drawn is taxed as earned income, but this doesn’t detract from the fact that you will have had decent tax breaks along the way;

Of course, choosing a suitable vehicle for your hard earned savings is crucial.You basically have three choices:

· A ‘packaged’ product offered by an insurance company; these are often simple products with low charges but limited investment choices;
· A ‘wrap’ arrangement, which may be more expensive to administer, but gives you a great deal of control over where to invest your pension fund. This means that you can build a well balanced portfolio based on your financial objectives and appetite for risk;
· A Self Invested Personal Pension Plan (SIPP); a bit like a wrap really, but useful for investing in assets such as commercial property, land, specialist shares etc. Watch the charges and the quality of administration though.

Despite all the misgivings, I reckon a private pension is worthwhile as part of an overall retirement program because you get some valuable tax breaks plus a high degree of flexibility in terms of investment choices and the amount you can invest.

Business Practice Assessment

The Management of Health and Safety Regulations 1992 and the Health and Safety at Work Act 1974 state: 'All employers are required to have a health and safety policy, carry out risk assessments, and provide health and safety training for their employees. Where employers have five or more employees they must record the significant findings of their risk assessment'.

All work situations expose individuals to electrical, toxic and mechanical hazards which are present in business premises. It is important therefore that the business has a full understanding of health & safety issues and complies with its legal obligations.

HOW CAN WE HELP
Ferguson Oliver through our network partner, Broker Network, has designed a simple in-house questionnaire to help you assess your attitude towards health & safety and employment law.

HOW BUSINESS PRACTICE ASSESSMENT WORKS
This questionnaire allows you to quickly assess your awareness of, and complance with, health & safety and employment law. It is particularly useful for small businesses, where there is no site visit and is especially beneficial at quotation stage. These can result in more competitive terms for your insurances. To view the questionnaire please follow this link: -

https://secure.brokernetwork.co.uk/Members/insurers/RiskInnovations/docs/BusPracAssessQuest.pdf

Economic climate updates

Cost of Fixed-rate deals rises.....

Three major lenders have put up their mortgage rates as the cost of fixed-rate deals continued to rise. The move by Bradford & Bingley, which is its second increase in just under three weeks, sees the cost of its residential fixed rate loans rise by between 0.5 per cent and 0.7 per cent, while its lifetime variable mortgage rate has risen by 0.1 per cent. It also increased its buy-to-let deals by 0.3 per cent and its fixed rate self-certification mortgage rates have soared by 0.95 per cent.

More of us choosing to improve, not move.....

The struggling property market is fuelling a huge rise in home improvements as householders opt to make more of what they have rather than move. Homeowners who need more space but cannot sell their homes are extending them instead. And those who couldn't wait to move out and see the back of that old kitchen or those draughty windows are replacing them. With house prices predicted to fall by up to 35 per cent over the next two years, the instinct to sit tight is growing by the day. Instead of browsing the property pages and websites, restless owners are turning to builders and decorators.

Fed holds interest rate at 2%.........

The US Federal Reserve held its key interest rate at 2% last night as its concern about rising inflationary pressures outweighed worries about sluggishness in the American economy.

The central bank last cut the federal funds rate in late April, having lowered it from 5.25% since last September in an attempt to prevent the credit crunch and housing slump tipping the world's biggest economy into recession. The Fed said: "The committee expects inflation to moderate later this year and next year".

How much do I need to retire on?

This is likely to be one of the most important questions any of us have to consider and one which is taxing the thoughts of thousands of post war ‘baby boomers’ at or approaching retirement. To answer ‘as much as possible’ is of little help. Some fairly detailed planning and number crunching is likely to be necessary with numerous variables needing to be factored in the mix. The starting point is really ‘How much annual income do you require each year to at least maintain the standard of living you desire?’ So, how much do you spend on the essentials - food, clothes, utilities and then consider all other items such including holidays, transport, entertainment, hobbies, books, gifts and so on. It all adds up!

Now to consider how long you will need the income for – the rest of your life basically which few of us (thankfully) know. The good news is most of us in reasonable health will live to a fairly old age. The bad news, however , is also that most of us will live to an old age as it all has to be paid for! For example: a couple reaching age 65 has a 50% chance that one of them will live beyond 92 and a 25% chance that will make it past 97! That’s potentially over 30 years of living to fund for from somewhere.

The other crucial element to consider is the effect of inflation – a relatively low rate of inflation (by historical standards) of 4% will almost halve your purchasing power over 15 years. Most retirees actually have a personal inflation rate well above that figure as they spend more on items such as utilities and healthcare which tend to increase faster than many other commodities.

Those who retire from generous index linked final salary pension schemes (especially from the public sector) are likely to feel most secure; for the rest of us however, serious thought needs to be given to what assets and resources we have or hope to have to ensure that we can enjoy our twilight years in comfort and dignity. Selecting the correct blend of investments using the main asset classes of shares, bonds, property and cash together with the most effective tax wrappers (including approved pensions and ISAs) to minimise exposure to tax where possible will be vital in ensuring that we don’t run out of money before we run out of life!

The idea of many of using their property as their pension is seriously flawed as last time I checked Tesco didn’t accept bricks or mortar as payment for groceries. Yes you can downsize to a smaller house if you had to but for many the equity released is unlikely to produce anything like the desired level of inflation adjusted income needed. It is difficult to be precise but if you needed an annual inflation proofed income of say £20,000, had a life expectancy of 25 years and were prepared to effectively exhaust the capital you would need a capital sum (excluding property) of around £600,000 – probably more.

Most western economies are facing a demographic time bomb as people live longer and longer. It is therefore essential that we don’t ignore it and hope the problem will go away.

Surviving a business disaster

According to the Home Office nearly 1 in 5 businesses suffer a major disruption every 5 years. Your business could be next and with no Business Continuity Plan your chances of survival are considerably reduced.

A recent Department of Trade and Industry survey suggests that 7 outof 10 small businesses would go out of business within a year if they experienced a major disaster. The same survey adds that if computer systems were unavailable for 10 days or more, 50 per cent of businesses would cease trading immediately with 93 per cent going bankrupt within 1 year.

The unthinkable disaster can happen and will cause healthy businesses to fail. Disasters create missed opportunities, cash flow problems and can often result in bad publicity. All this can lead to a loss of client confidence and yourcompetitors will take advantage.

For a free helpful fact-sheet from Norwich Union on setting up a Business Continuity plan click here: -

http://www.nurs.co.uk/document-library/files/10/10003_an_introduction_to_business_continuity_planning_v3.pdf

What to do following a road accident

Almost a third of drivers don't know what to do if their vehicle is involved in a road accident, with many feeling pressured by other motorists to "take the blame".

A survey of over 1,500 drivers by Norwich Union also showed that 40% had suffered symptoms of "post-traumatic stress" following a crash. Of these, 15% had recurring memories and 17% felt distressed when recounting what had happened to them. With one in three (32%) drivers unsure of what to do following a crash, Norwich Union urged motorists to "be prepared" - not only to avoid taking the blame unnecessarily, but to help cope with the stress of such situations.

Driving behaviour expert Dr Cris Burgess, who helped with the research, said: "It's normal to react differently to how you would usually in a high stress situation like a car crash, because when you're in shock your sense of logic and reason can be impaired. "That's why it's so important to be as prepared as possible for a crash - the more you know, the better you'll be able to deal with the situation, whatever your feelings at the time.

To read more follow this link: http://www.nurs.co.uk/news/articles/cms/1211377919212694732197_1.htm

Stability in uncertain times

For clients who believe the FTSE 100 Index is reasonably cheap at present, following all the recent market upheaval, and would consider directing some free capital towards it, but don't wish to expose the capital to any downside risk, then perhaps this is for you.

The Norwich Union Capital Protected Plan is a 3 or 6 year fixed term plan. It offers 100% capital protection if held to maturity and is available until 5th August 2008. Investments can take the form of direct investment, ISA's or SIPP funds. Direct investments are subject to income tax on the gain on encashment. Investors will get back a return linked to the FTSE 100 index with every 1% growth the FTSE 100 achieves over the term of the plan, growing at 2.5 times that rate, up to a maximum of 24% growth for the 3 year plan and 60% growth for the 6 year plan.

It is a way of investing in the stockmarket indirectly without the risk. Money will be pooled together with the money of other investors to purchase a medium term note from a AA rated institution. A medium term note is a promise to provide the return outlined in the agreement between Norwich Union and the Note's issuer.

Investors have to be aged 18 or over and the minimum invest is £1,000. If this is of interest to you please contact us for further details

Searching for growth in difficult times

For those investors still keen to search out growth generating funds; and if you are not adverse to taking a degree of investment risk in an effort to try and secure greater growth, here is a fund worthy of consideration.

We believe the Eclectica Agriculture GBP Acc Fund is well positioned to maintain it's forward momentum despite the difficult economic climate. The funds objective is to achieve long-term capital growth through investment in a diversified portfolio of global quoted equity investments that are involved in, related to, concerned with or affected by agriculture and farming relating issues. With so much pressure on world-wide food stocks and agriculture related issues we believe the fund offers good growth prospects in the short, medium and long term. Managed by Hugh Hendry, since June 2007, the fund sits in the specialist sector and should only be considered by those investors willing to accept higher levels of investment risk.

As you can see from the graph the fund has performed exceptionally well when compared to the FTSE-100 producing 38.41% growth over the past year of which 20.60% has been achieved in the last 3 months alone. When you consider the extreme market volatility over this period the fund's perfomance is even more impressive. Furthermore being a fairly new fund we beleive it has a long way to go before it reaches it's true potential.

For further details please feel free to contact us.

Why this might be a good tome to retire

You may not realise it, but if you have been saving in a personal pension policy, or you are in a money-purchase scheme run by your employer, then now is a relatively good time to retire. The reason is that two trends are running in your direction - annuity rates have been rising, and pension fund values have been going up too.

It is these two factors which will determine how much income you will get from your personal pension fund.

This means that if you retire at a time when annuity rates are low and the value of your pension fund is lower than expected, you will end up with a lower pension than if you retire at a time when annuity rates are higher and the value of your pension fund is high.

Timing: Unfortunately it is difficult to get the timing of your annuity decision right. Take for example the situation earlier this year. In February 2008, pension funds that were invested in equities had fallen by about 6% since August 2007 and annuity rates were down by about 1%.

However, by June 2008 the stock market was only 3% down compared with August 2007 and annuity rates had risen by more than 5% since last August. This means that somebody retiring today would get nearly 9% more pension compared with someone retiring in February 2008 if they had remained invested in equities throughout the period.

In conclusion, purchasing an annuity can be a complex exercise because it is important not only to select the right options but it is also important to get the timing right. Unfortunately many people have little control over the timing of their annuity purchase because when they retire they need a pension. But most people can maximise their income at retirement by following a few simple rules. The first is to consider investing in safer investments such as fixed interest in the run up to retirement. This safeguards against a sudden fall in equity prices as happened in early 2008.

Do not fall into the trap of putting off an annuity purchase in the hope that rates will improve. There is an "opportunity cost" in deferring an annuity purchase as income forgone in the deferral period is rarely made up by higher payments in the future.

And if you have a large enough pension fund consider purchasing your annuities in stages. Phasing your annuity purchase may improve your overall annuity income and provides more flexibility.

Meanwhile, do not ignore the effects of inflation: it will not go away.

Sun shines at the Angus Show

Saturday witnessed our return to the Angus Show after a break of more than 5 years. Everything was set for a great day. The sun came out, the stand looked great and we had a super pitch.

Thankfully we weren't disappointed with a great turnout and the stand was busy all day. Many clients old and new visited the stand for a wee refreshment and something to nibble on. Thanks go to Lorna & Karen for their invaluable assistance they hardly had a moment to themselves all day. Thanks also go to Neil & Steve.

By all accounts the show was a great success and congratulations should go to the show committee for all their hard work.

The spin the wheel prize draw was won by Lloyd Garvie who is looking forward to a 4-ball at Dalmahoy.

Looks like we will be heading back again next year.