Our content this month are as follows:-

• Market News Roundup
• Is There Really a Pensions Crisis
• Books we have read
• Quotes of the month

One of the things that you, our clients, indicated in our recent client survey is that you would like more comment and education on markets and investments, so here goes.

First of all it is appropriate that we remind ourselves of our core beliefs and these are as follows:-
• Markets work
• Risk and return are related
• Diversification is your friend
• We should all be long-term investors

These beliefs (which are the result of studying all the available research, much of it Nobel prize-winning) lead logically to portfolios which are constructed to accept the returns available from markets, to diversify across asset classes and sub asset classes, to rebalance on a systematic basis and to keep costs (including transaction costs) as low as possible. By scientifically testing clients’ appetite for risk among other things it is possible to construct portfolios that allow clients to "sleep at night" and ignore the noise generated by the investment industry and the financial press.

We accept, however, that in the current climate the noise is unrelenting and takes the form of bad news. Financial institutions, investment houses, analysts and market pundits are never backward in coming forward with their predictions despite the fact that they are largely useless and usually wrong. The purpose of these announcements is generally to advise investors to switch in and out of various investment sectors, geographical locations, investment products and funds; if investors have succumbed to this type of persuasion they are simply incurring transaction costs in the hope of chasing returns as a result of market timing - study after study has concluded that this is bound to be a losing strategy, not least because of the costs incurred and because this strategy necessarily means investors will be selling low out of their current position.

Over the course of the past month several interesting articles have appeared in the Financial Times that give comfort to investors whose approach is "diversified, long-term and low-cost". The first appeared in the 31st May edition in an article by John Authers; in the article he revealed that he constantly receives communications from individuals claiming to have found the secret of predicting markets. He points out that markets are generally efficient and tend towards equilibrium and quotes Burton Malkiel from his excellent book "A Random Walk down Wall Street" as follows, "short run changes in stock prices cannot be predicted. Investment advisory services, earnings predictions and complicated chart patterns are useless".

In his column of 7th June, Matthew Vincent points out that in rising markets analysts simply ride the tide and effectively cannot go wrong, but in falling or sideways markets are exposed as having nothing of value to say. He sums it up by commenting "It seems that the advice is invaluable, as long as investors do not need it. Brilliant". Thousands upon thousands of analysts are employed by investment institutions all scrutinising publicly available information in the hope that they can find something nobody else can; they end up making predictions based largely on earnings growth which they have no way of knowing will continue or not. Many investment bank analysts have been criticised in the past for being bullish about the bank's own client companies, which takes the form of recommending the shares of these companies come what may. The message is that you can safely ignore announcements made by analysts. In the same edition Merryn Somerset Webb points out that the housing analysts at UBS have just produced a report downgrading most of the UK’s listed house builders to "sell". She comments " The extraordinary thing about this is not that UBS thinks that housebuilders should be chucked out of all rational portfolios…….. It is that the bank did not start thinking it ages ago". Her point of course is that the analysts, very late in the day, are pointing out the blindingly obvious.

In June's Wealth Management supplement Dido Sandler, on the subject of costs, points out that the wealth management services provided by the private banks will have the following pitfalls "Wealth managers can be incentivised to recommend certain types of investments, and it may be in their interest to sell in-house products…… institutions can insist they source a percentage of products themselves, which can also be detrimental to the client". In her column of 28th June Merryn Somerset Webb comments about the banks "keep too much money in an ordinary bank account and a twenty-something manager from its wealth department will find your phone number and promise you 7% a year for ever". She advises staying away from them and points out "the bigger the institution you choose, the more likely you are to have your portfolio managed sausage factory style, the more expensive "structured products" you will find you own and the more likely it is that your money will find its way into an in-house fund….".

We are fortunate that the Financial Times is blessed with independent experts who understand modern portfolio theory, the importance of asset allocation and that markets are efficient. It is certainly not perfect but the quality of its coverage is streets ahead of other newspapers and magazines and in general is a source of intelligent comment on investment.

Tim Harford, who writes the "Undercover Economist" column in the Financial Times is one of our favourite economists and came up with something interesting on what has been called the pensions crisis in this country. He concludes that those people who have a pension shortfall in retirement are those who were never going to have any provision anyway, such as those who have spent a great deal of time on social security and those who are unfortunate enough to be struck down by illness or injury in their 50s, so curtailing their careers.

He makes what seems like a sensible observation to us that insurance is probably necessary for most people up until they have built their capital base and that, in reality, whilst it would be good to encourage lower earners to save for the future, it is probably impractical given the calls upon their income.

We do advocate the use of pension funds as a useful tax wrapper and they can provide very high levels of return on capital, but overall financial planning is more important than the use of one wrapper.

We have not been so excited about a book for as long as we can remember as we have for this month's selection. The book is "The Science of Happiness" by the German neuroscientist, Stefan Klein.

This book is absolutely packed with interesting examples, case studies and experiments regarding the human brain and the human experience of happiness. There are fascinating insights as to why we behave in the way we do, why the incidence of depression is rising, particularly in the developed world, why money is important only up to a certain point and why we are hardwired to remember bad experiences more clearly than good.

The good news is that we can change, that there are techniques to help us remember more of our happy experiences and that many of the things we value, such as family, friendship and a sense of community are far more important to our sense of happiness than we might have previously believed. The practice of writing down and counting our blessings has been shown to have a more beneficial effect on depression than any form of counselling.

Along the way there is much about Greek philosophy, Buddhism and the importance of our reaction to events rather than the events themselves having the biggest effect on our happiness. You should buy this book - it truly does contain the secret of happiness.

"Life has taught us that love does not consist in gazing at each other but in looking together in the same direction."
Antoine de Saint Exupery

"We have no more right to consume happiness without producing it than to consume wealth without producing it."
George Bernard Shaw