James:
Oh, so this will be streaming live as we speak. Welcome everybody to this impromptu Facebook Live between myself and well-known face on the group, rohit Rohelo. We are here to talk today. Hello, rohit. We’re here to talk today about volatility in the market and what you can do to mitigate that in your investing. How you should adapt your strategy Indeed, even should you adapt your strategy, things that we’re gonna delve into in just a moment. Rohit, how are you?
Rohit:
I’m very well, very busy, as you can imagine, in the volatile, tumultuous times we are in.
James:
Well, absolutely. This is part of the reason why we decided to throw this today, because you were telling me that a good portion of your job these days is reassuring people who have invested, who have portfolios with yourself, having dialogue and saying to them listen, actually this is normal, this is part of the journey, this is part of the experience. Things don’t go up in a straight line. If they did, everybody would be a flipping millionaire. It would be really, really, really simple and also mitigating that emotional response which comes along with investing sometimes.
Rohit:
Exactly that. If I had a crystal ball, then I would be a rich person. Absolutely, wouldn’t we all? Absolutely. But the next thing we can do is plan and stay true to that plan. That’s what we’re gonna touch upon today.
James:
You know, risk is a funny one because there’s actually different types of risk and if you invest in certain ways you can virtually mitigate them all entirely. But it’s having an understanding of how it works. And you know, there’s a quote that I love and it’s by Andy Hart, maven Money Podcast. Everybody jumps in when the market’s going up. But actually an increasing in price market is a decreasing in value market because you’re actually getting less for your money in a weird way. And if we flip that on its head, a decreasing in price market is an increasing in value market because what we have to do is we have to view what we’re purchasing as units. We’re buying them on the premise that they are appreciating units and we’re exchanging those for depreciating units. I wanna say I appreciate and I depreciate, and what I mean is value, and the units I’m talking about are certain stocks, not all stocks. We have to be careful. We have to know what we’re doing versus currency or cash.
Rohit:
Interesting yeah, absolutely, so you hit the nail on the head with a very important point the value of the companies, the inherent value of the companies, can be very different to what the market perceives it to be. So when there is a general euphoria in the markets, when there’s a general positive sentiment, then some of these companies that have very high valuations that may not actually be reflected in its turnover and profitability, and that’s where the danger is. You might buy something at a premium. However, these kinds of times which we are in it instills fear in a lot of so-called uneducated investors. However, investors who educate themselves, who know and who learn from history acknowledge that this is the time to get some really good bargains to buy the successes of the future. This is when wealth is made.
James:
This is when wealth is flipping, made Exactly by buying when everyone else is selling. Think about it like this. Here’s another interesting thing that I throw out there. Now I won’t talk too much, roe, because you’re there. You know you’re here to talk about your experiences in FA and what you say to these people and how you handle it. But here’s what I say to people. I always say to people listen, if there’s 100 people who are investing, most people tend not to be successful. So the clue is right there. If you mimic how most people react when they’re investing, then actually you’re gonna get the same results. Do you know what I mean? The clue is right, flipping there, whereas actually, if you remove yourself from that and you think to yourself, actually, what is it that the people in the know who are doing maybe the 10% you’re more likely to be able to find the right answer. That’s all I’m saying. But yeah, anyway, roe Hitt, tell us a little bit more about conversations that you’d have with clients around about this time. What would you say to someone who picked up the phone? They’re in a flipping frenzy. They’re watching their portfolio going down. They’re panicking. Your job is to reassure them at that point. How does that conversation go?
Rohit:
Yeah, so, as you rightly pointed out, markets around the world have fallen. So the FTSE has been an exception because, of course, there’s more commodities, more energy companies in there. But you look at all other indices around the world the MSCI index, dow Jones all of these have actually taken a 15% to 20% drop and that has scared a lot of investors because, let’s say, if you had started investing out post-2010, 11, then you really didn’t see a crash of this magnitude. And it’s bound to worry you when you saw rising markets on the back of you know the quantity of easy printing of money by central banks which propped up the markets. The current events where inflation is running very hot, interest rates are going up, bonds are not playing their traditional role as a diversifier because bond yields are down as well. Given the rising interest rates. It’s a very, very difficult environment for someone to perceive, but that’s where my role as a financial coach and planner really comes into it. So anybody can say thumbs up, your portfolio is doing well in good markets. But what I remind my clients is that those who do not learn the lessons of history are bound to repeat them. So what I mean by that is investors who do not understand that markets. It’s in the nature of markets to go up and down, but if you look at 130 years of stock market history, the trend is always upwards. You do get short-term noise I call it noise which is the ups and downs, what you see. You know what has happened in the last three to four months. But the important thing I tell my clients is to stay focused, stay true to the plan, certainly not crystallize the losses by getting out at this time. And it’s a real worry, especially for those clients who are very close to drawing the benefits, who are thinking of retiring or who are already retired. For them it’s a real worry. So today we are going to talk a bit further about what kind of strategies, what cushioning strategies, we can use. But the bottom line answer to your question is stay focused, stay disciplined let an expert manage the money for you and you trust that expert to tell you how to keep your emotions in check.
James:
Totally, or at the very least, have a plan before you go into it. Don’t just buy things ad hoc, because if you have a plan, then on that plan accounts for what you should do in moments like this. Then you’ll know. All you have to do is put your emotions to one side and rigidly follow that. But that comes through education. You see, and you know what I’ve just made it sound oh so simple, because it’s the bane of the investor is emotions. I personally think investing is about 10 to 20% practical skills, and then the other 80% is mastering your ability to not be governed by fear or greed. Both can work against you.
Rohit:
It’s an interesting, isn’t it?
James:
I always find that the more you do it and the more exposed you are and the more you understand, the more you become desensitized to those feelings, certainly as time goes on. But you don’t start unless you don’t start that journey. You don’t start progressing in that fashion unless you begin in the first place. But yeah, absolutely right, for some people it’ll be best to get somebody to professionally manage their money and for some people that will be the way because of the things you said. In fact, a lot of FAs will argue that one of the primary drivers of their value is not allowing people to sell when it comes to these sorts of conditions in the market. A lot of people will say that one of the greatest problems with people being able to build wealth is the fact that we now have so much accessibility to our portfolio. That sell button is a flipping finger away, you know and if anybody can, just you can just pick up in a moment of fear and just hit deal, sell right. You know, on and out yeah absolutely.
Rohit:
I can tell you that in the last week I’ve had 10 to 15 calls like that, all clients of mine who were panicking and who were asking me to press that button effectively, and it took me 30 to 45 minutes of educating them, showing them information which I’m going to go through today. I’m going to throw some pictures, some stats at you to actually show what I’m talking about. But that’s the lesson of history, that’s the history of markets that teaches us. The main thing, as you pointed out, james, is a plan. So let me expand on the planning side a little bit further and its importance, especially in times like this. So in one of the earlier podcasts, we said that the typical journey of a dentist or any professional in life is about putting in their human capital, their, you know, 540 to 60 hours a week, getting paid a certain amount and then hopefully putting some of it away regularly to build up an investment or property portfolio, whatever it might be, and then at some stage the aim is to use that investment portfolio you’ve created, converting it from human capital into investment capital. So that is the point of financial freedom and essentially all financial plans are centered around that. So what we help clients do at the very beginning is working out what their vision is. So what do the next 10, 15, 20 years look like of accumulation, of putting in human capital accumulating, and then what does the rest of somebody’s life look like? So either they’re close to using their investment capital and getting control of their time, or they’re 10, 15, 20 years away. So their plans would look very, very different, and that’s where the tailoring comes into the picture. So it’s understanding if you have 10, 15, 20 years to accumulate let’s say you’re a young dentist in your 30s or 40s typically, or even earlier then you haven’t got to worry about this volatility because in the long term it all gets evened out. But if you are close to retirement or you’ve already, retired and you have a portfolio then that needs to be managed very, very differently. You need to address the off the cliff risk. So a portfolio, imagine, that has fallen 15 to 20% and you’re drawing from it at the same time. It’s going to have a hard time growing back up. So what do you do? You use a process called smoothing, which we are going to review later on today.
James:
I’m all ears. Very interesting, very, very, very interesting. So, yeah, absolutely, I mean, you’re totally right. It’s handled completely differently depending on how close you are to your retirement to use that term or how close you are to beginning to subsist off your assets, somebody who’s younger and who’s quite far away from that. You’re more likely to be weighted in equities and you’re in for a flipping roller coaster if that’s the case, but obviously if that’s your psychological makeup permits. But if you want to go for ordinary capital appreciation, that’s where you should be, whereas, just as you’ve hinted at, or just a moment ago, rohit, the further we get down the line, the closer we get to retirement, the more of a weighting there should be in other assets which are not known for appreciating as quickly but certainly better at preserving preserving our wealth.
Rohit:
Yeah, yeah, and if this is the right point to go into it, I can actually show you some illustrations to highlight the differences.
James:
Yes, let’s do it. And you know what, while you’re doing it, let’s bear in mind that some people will be listening to this as a podcast afterwards. So brilliant images, if we can do our best to put them into words as well, but if that is possible, that’d be great.
Rohit:
Definitely possible. So, if you can enable screen sharing at your end, I absolutely can, my friend.
James:
Let me just sort that for you now, there we are, it’s all yours.
Rohit:
Right, so let’s have a look, first of all, in how markets have actually shaped up in the last few years. Okay, so drawing your attention to 2002.
James:
This is by the way, our highest risk portfolio.
Rohit:
It’s risk level 5 out of 5, which is it is invested in all equities. 100% of this is in equities. You’ve got 57% in global shares, you’ve got 28% in UK shares and you’ve got 15% in emerging markets, which you would expect to be high growth but certainly more volatile. So if we look at the history history being our lesson, as I said, in 2002, our portfolio took a hit of about 25%. So if you’d invested just before this crisis say on the 1st of January 2002, if you’d invested a million pounds, it would have come down to 750,000 pounds, and an uneducated investor who doesn’t understand how markets work could press the panic button and get it out Okay. But investors who educated themselves or who had experts telling them to stay put, because the law of the markets is what goes down has to come back up. It’s not really a law, but that’s what history in the markets teaches us. So in the next year, what happened in 2003,? We saw a rebound 24% decline was followed by a 22% increase and in the following four years so 2004 to 2007, the growth was over 10%, with 2005 seeing about 25% growth. So what does that tell you? You take any five year period. Five years the golden number for which you should be looking to invest if you are putting money into any asset backed investing. So if you had invested for a five year period, your investment values would have gone down. Now the reasons are different every time. So in 2002, the reason was the dot com boom and then bust. You had loads of technology companies, very high valuations. Some of them were not worth what they were being valued at what we touched upon just now. But when the market fell, that was the time to get bargains and imagine people who got in this stage, what kind of gains they made over the next five years. So even if you were at the worst point, your gains would be around 55%. But if you were at the best point your gains would be 75 to 80%. What a five year period. That tells you a very interesting story, doesn’t it? Yeah, totally by the fear, yeah. So let’s move ahead in time. 2008 coming closer to our sort of living memory, as it were. 2008, we had the credit crunch, so banks lending recklessly, packaging these loans up, selling it on. That had to blow up. It did a decline of 22% in the markets, but same story repeating itself, increased by 22% the following year, 2009. And the following 13 years from 2010 to 2021, we have had only two years 2011, which was the credit crunch, or the credit crisis, rather in Europe, which resulted in a 6% drop, and 2018 was Brexit probably 6% drop. Other than that, you’ve had a pretty robust run low interest rates, rising markets so we made gains of between 15 to 20% in most years. But fast forward to where we are now, we are seeing a decline. So if you look at this tracking, which is till March this year, we have seen a decline of around 10, 15%, and investors who are just getting at this point haven’t seen 2008, haven’t seen 2001 and 2002, they’re bound to get scared, but it is our duty, then to educate them, to help them look at the data and say markets in the long term, if you give them time, always rise.
James:
Now quick question. Quick question just to jump in that particular fund. Did you say a year to date? You had data all the way up to 2021, end of year data. What is the year to date fall in that particular fund?
Rohit:
The year to date. Fall is about 10, 12%, yeah, in that portfolio, and then we don’t know whether this is the bottom or whether it’s not. No one can say that.
James:
But all I wanted to say was listen, think about it. Right, let’s say this is the bottom, right, it’s still not even as bad as it has been in previous years. But, like I say, we’ve got no idea whether or not it’s the bottom, whether or not it’s going to continue. But if anything, I would actually flip things on its head and I would say listen, if you’re buying the right asset, now is the time to get flipping excited. Yep, if you ever were going to get excited, you shouldn’t really let your emotions determine what you’re going to do. But if you ever were going to stick consistently to your plan to buy then something that is actually more valuable because its prices went down, surely that’s the time to buy it. Why is it when we go to the supermarket and we see something on sale we see some coffee on sale we get excited. Okay, yeah, it’s exactly the same thing If that coffee is. If you paid 10 pounds for that coffee or 5 pounds for that coffee, still the same jar of coffee. If you think about it. Now apply that to the markets. Yeah, why is it that we put the markets in a pedestal? And that’s probably the only thing that actually, when the price goes down, when it’s on sale, so to speak, we get scared, not excited. Just an interesting way of looking at it. Sorry to jump in.
Rohit:
Yeah, no. And there is another very important thing to note Crisis is the mother of innovation. Okay, that’s human nature, going back to the Second World War, most of the innovations that happened in space tech came out of the discoveries made during the war. In the more recent past, imagine the biggest crisis that happened in 2007, 2008,. What came out of it? The iPhone. So that was we use smartphones, and that’s what really came up during that crisis. What’s going to come up now? Europe has been beamed off its dependence on Russian gas, so we are going to see, or we are already seeing, innovations in things like battery technology, renewable energy, nuclear energy, whatever it might be. So the great companies of the future, the success stories of the future, which are going to create wealth for today’s investors, are just being born, and I’m really excited by it. The future is bright. I don’t know if you heard about the head of sustainability at HSBC being in hot water based on what he said. So he made a statement of which a fragment was picked up, and he said something on the lines of who cares if Miami gets underwater in 100 years? But then what he was really trying to say one looks at the whole speech was people blow prices out of proportion. They do not look at the opportunity prices bring. So climate change is affecting climate around the world. It’s increasing the hot spells, storms, all of these things. But that is also spawning things like discoveries in carbon capture technologies, in new sources of energy. We’re talking about nuclear fusion, for example, where there’s no radiation involved. So all of these things electric airplanes all of these things are going to come out of this crisis. So, rather than being pessimistic and having a kind of doomsday scenario which is essentially painted by the news you know my opinion about the news I call them the negative events world service, and that’s for a reason. Everybody’s peddling their wares for the newsmakers or journalists. Apologies if anybody is listening out there being a journalist, but essentially good news don’t sell as well as bad news, gloom and doom news, and that’s what you will see.
James:
Can I just say one tiny thing on that? Lots of people listen to this are dentists. How many times do we see a flipping article about dentistry in the news right, which just portrays dentistry in such a stupid, misinformed light? Okay, it’s all the time, virtually every article. Okay, that’s not unique to dentistry. The only reason we can spot that is because we know something about dentistry. Okay, take that logic and apply it to every single article and you’re probably closer to the mark. I’m not saying there’s some gems there’s not any gems in any articles but what I am saying is, quite often you’ll find it’s these journalists that are just thrust into this situation where they have to write something about why the markets are going down, because you’ve got the people, the consumers, at the gates wanting to know why, and they don’t always know. Sometimes they just assign a reason to it and blow it out of proportion and there’s nothing sells like bad news, rohit. Let’s talk about volatility, because we glanced over it earlier, but there’s more to say on that one.
Rohit:
Yeah, definitely so. As I pointed out to you earlier, the asset class which gives us the best returns over the longer term is equities or shares, which is buying a share in the profits of the great companies of the world. Okay, so, needless to say, some companies will fall by the wayside, but others will become the success stories of the future. In the 1990s, kodak was all over photography. The giant. It fell by the wayside, was replaced by smartphones as cameras.
James:
You had.
Rohit:
Nokia remember that 3310 phone that’s replaced by smartphones. So that’s what intelligent asset managers and portfolio managers do, and our job is to select these portfolio managers. However, they can’t get consistent growth at all times and portfolio construction right now is facing a significant challenge because historically there were other assets like bonds. So we’re talking about government bonds, bonds issued by countries like the UK, us, france, and they pay a fixed rate of interest to the holders of these bonds, so they were considered to be safe investments. You could also have corporate bonds, so bonds issued by companies. Now these are no longer playing the same diversify role, so they moved opposite to equities. So let’s say, if you had a 60% equity, 40% bond portfolio, historically you would have expected some of the downside in equities or the drop in equities being offset or compensated by bonds. That’s not happening now, because when interest rates rise, after the long time they’ve been very low, bond yields are also falling because the coupon or the interest rate the bonds offer is no longer as attractive to investors. So they are asking for a discount on selling these and this brings a huge challenge for your traditional investor, who’s seeing their values drop and doesn’t know what is to be done. So I’m seeing these days a lot of clients who were set up in these traditional portfolios and have either lost access to their advisor or their advisor doesn’t really know of anything better to do. So what we’re doing is looking at the cutting edge of innovation in portfolio management to dampen this risk of volatility. So to explain to you more about that, I’ll go back to the live stage scenario we looked at. So the first scenario is relatively easy to explain. If you are more than 10 years away from actually accessing the money, then you just stay invested in an all equity portfolio. You know that it’s going to go down. Maybe this is the bottom, maybe there’s some further to go. Eventually, whether it’s six months, one year, two years whenever, say, this war ends, companies which have been sitting on loads of cash will start investing again, the supply chain issues will clear and it will be followed by a number of years of growth.
James:
But can I just jump in? I just have a quick question on that. So traditionally the logic would say that if you look at the stock market that it’s never recovered over. It’s never taken longer than five years to recover. So why is it that we should only invest 100% in that? Well, we generally should only invest 100% in equities when it’s 10 years out of our retirement, because surely if it’s five years then it would at least recover. History would have told us that over a five year period it would have recovered, not 10. Can I just ask why that is?
Rohit:
Yes, okay. So a lot of analysts have been studying stock market history and also doing what is called Monte Carlo simulations, so based on various variables and how they’re expected to play out in interest rates, inflation, currency and so on, working out what are the likely scenarios. And most of those scenarios show the likely outcome that equities or shares will far outperform any other asset class. A lot of people ask me about going into things like gold and commodities, and that’s certainly a good idea as a diversifier if you’re worried about volatility. But pound for pound, if you want to look at the portfolio from now to 10 years into the future, the likelihood of equities outperforming everything else is very high. It’s close to 85 to 90%. But in a 5-year period, the range of possibilities is wide.
James:
Thank you for that.
Rohit:
So early jump in, so the degree of conviction is relatively less. So a lot of IFAs who operate traditionally would do something like a risk profiling questionnaire, so, which assesses somebody’s psychometric response to risk and that might lead to an outcome saying, for example, risk level 3 out of 5 or 5 out of 10, 6 out of 10. So put them in a 70, 30, 60, 40 portfolio, but do we know whether that portfolio will actually give them the kind of returns they want to achieve the goals that they have? And that is why, certainly as a planner, as a New Age Financial Planner, my belief on that is the risk should be driven by the return required to achieve your goals, rather than arbitrary measures of what assets you’re investing in. I’ll also touch upon, if it’s okay, other alternative assets which can be used to diversify. So if, let’s say, you’re looking at a 5-year scenario or maybe even less, you can diversify using other assets like commodities. So we know that inflation is leading to prices of things like gas, petrol to rice, diesel, and this is also leading to an increase in the price of things like food, energy, etc. So investing in funds which put money into commodities certainly is a good strategy. Climate change science is a good strategy. Cyber security is another theme because of the threat of cyber warfare and defense in general. So these are sectors or themes which are likely to perform better and be inversely correlated. And herein comes the concept of smoothing. So what does smoothing? When I say smoothing, what does that mean to you? What do you imply that to mean?
James:
So for me, how I would interpret smoothing in this context would be that let’s say you have a portfolio which is weighted purely towards capital appreciation and you want your money to go as much as possible, but it’s over a very long period of time, that’s about 10 years, as you say. Naturally, volatility is the price you pay for gains, as a broad rule of thumb. So stocks are going to be a flipping roller coaster, but they’re going to get you from bottom left to the highest point they possibly can, realistically on top right. What I mean by that is they’re going to grow at the greatest rate, but the ride is going to be really, really crazy up and down. So smoothing is the process of alleviating that volatility. So it’s not as much of a roller coaster ride, but naturally there is a trade-off somewhat in your returns, have I?
Rohit:
absolutely spot on, James. You get my special prize, Top stuff Right. So let’s get to understand how that process works. This is particularly relevant for those people, james, who’ve got five years or less as their horizon. So let’s imagine a dentist who is thinking of retiring in five years and has, let’s say, a personal pension, or I support portfolio, investment portfolio or anything of that nature. So they have taken a drop in their portfolio and they’re worried about what they should be doing. Or it could be that they’re investing at this point and they worry if the market was to fall another 15%, then will we have enough time for it to come back up? And that’s where the concept of smoothed funds comes into the picture. So what I will do now is I will bring up on my screen the concept of smoothing and tell you how it actually works as a diversifier. So there are various smoothed funds available in the market. Prudential offers them, lv offers them, adeva offers them, but just for example, I’m going to use a fund here which is the Profund Causious series fund. So let’s have a look at this diagram which exhibits this funds performance. Now you will see something very unusual here, james, in that, whereas regular funds tend to go up and down like a yo-yo, and actually tends to go up in straight lines, it does have points at which it drops. But those points are very rare. So we’ve only seen one such point real, significant point in the last 5 years. You have two very small corrections and these are what smoothed funds constitute essentially. So how these funds work is that the underlying fund manager works out long-term assumptions on their expectations of growth. So in this case, prudential, based on their asset allocation, would work out what yearly growth rate they expect this portfolio to achieve. So that is what is used to, on a daily basis, increase the value of the portfolio. That’s why you see a straight line. So at the moment it’s about 4.5%. Fora Causious approach and for a growth approach which is, you could say, medium risk, is about 5.5%. So it’s not looking to shoot the lights out. It gives consistent growth over a period of time. But what you also have is the concept of a unit price adjustment. So if there is a downward movement in the general market, which we call the unsmooted price, of 5% to 6% or more, depending on what the threshold is for that particular fund, then you could see a down-wide price adjustment. So the net result you get is if the market falls by, say, 6% plus or say 10%, your portfolio is likely to only drop about 5%. But in the good times, when, let’s say, the unsmooted price grows by 15-20%, you’re only likely to see 7-8% growth. So that is the concept of a smoothed fund. Now let’s see how it relates with a strategy that is essentially what we call a decumulation strategy, so the opposite of accumulation, which means you’re looking to draw down from the portfolio and if you see a significant drop, then you’ve taken money. Let’s say your money was worth a million pounds and it reduced in value to 750,000 and you took 50 out of it. So now there’s only 700 left in it and that has to grow back to a million pounds, very, very difficult to achieve. So the way to manage. It is you blend a growth strategy so a global, well-diversified, managed, all equity or majority equity fund. You balance it with something which is a smoothed fund Now in a smoothed fund, proof, or companies that manage similar funds, like LV or a Viva, etc. Blend in these types of assets so gold, commercial property, which is your out-of-town supermarkets, your office blocks in premium locations like central London, so properties of this nature. We then talk about things like food, your wheat, rice, all of these things. So if you can actually diversify with these assets as opposed to bonds, and you have 3 to 4 years worth of your expenditure in the portfolio like that, then you’ve aced it. You’ve solved the problem, because if the other 70% sees a drop, then you’ve got time for it to grow back up. You’re not drawing from that part. You’re drawing from a different part which is in a smooth type of fund which is very unlikely to see a significant drop on a daily basis. So this type of strategy is often the answer to people who are concerned about volatility and are drawing money for the rest of their life.
James:
That’s cool as heck. You know what bonds are. The traditional logic bonds versus stocks, aren’t they, of course? But yeah, you’re right, I think, basically, we’re making the distinction between the aggressive part of your portfolio and the defensive part of your portfolio. So aggressive, to my knowledge, is almost always equities. I don’t think there is anything more aggressive than that. Maybe you want to go to the crypto world a little bit of that in there, but not too much, of course. And then you’ve got defensive and traditionally that’s bonds. But you’re saying, actually, because bonds aren’t fulfilling the role that we intended them to because of interest rates, then we have to look to other means to constitute a defensive portfolio, which is interesting. And what you’re saying as well is that, should that strategy? It all comes back to the strategy thing, doesn’t it really? Because, if you, the psychological profile thing is something that sat you frustrates me sometimes, because it’s almost like people will do themselves out of better returns because they are risk averse, which what does that even mean? Because there’s layers to risk. You know what I mean? Yeah, but maybe that’s a podcast for another day, but that’s interesting. Thank you for that, rohit. We also wanted to talk about. Yes, how would well, we kind of have touched upon this, didn’t we? If you wanted to, let’s say, different parts of your career, different parts of your investment career as you get more towards the end, really we could be de-risking. And actually this is where this ties in, quite nicely, actually, because really if you’d thought about that to preempt the likelihood that there’s going to be a crash because the crash always comes because it’s cyclical then really we should be. This is where greed can do you over, because really we should be siphoning money out of the equities part of a portfolio and putting it into something defensive Before this has ever flipped and happened in the first place, which means that we have peace of mind and we can rest easy at night. So it’s about preempting it and understanding that it’s cyclical. Anything else you’d like to say on that one? Any advice that you can give to somebody who’s getting close to retirement age? Yeah, absolutely.
Rohit:
And I come back to planning and I will give you real life examples from dentists who I’ve seen recently. So it’s an interesting one, because really I don’t know if I can put dentists in these two categories, but I’ll simplify it that way. So, dentists who are, they’re two categories. So one category is where people want to be dentists and want to sort of own their practices or whatever to create wealth and at some point their strategy is to then get out of that, so set up the practices or whatever, and then use their accumulated value to transition it to an investment which they can draw from. And the other type is where there is a genuine love for the profession. They want to be continuing to do dentistry in later life as well and maybe they want to phase down on it. So some arrangements could be like where they sell the practice to a corporate or whatever, but continue to be an employee of that practice, for example. So there are various ways and planning actually has to take those things into account. What a lot of people forget is tax is also a very important part of it, and while volatility in markets is only temporary, tax is permanent. So if we can actually use clever strategies to get a tax refund or tax rebate or tax exemption on the investments we are making, then that’s also a significant value add. So a couple of simple examples using your pension allowance. So if you have a limited company structure, you’re allowed to put up to 40,000 pounds straight from the limited company into your personal pension or SaaS or whatever. Just by doing that you’re saving 20,000 pounds in cooperation tax and dividend tax potentially. So. Another example if, let’s say, you’ve sold your practices for a few million quid or whatever and you have this lump of money that is now suddenly liable to inheritance tax, so anything over a million of your assets. Broadly speaking, if you are a married couple and you’re passing on your main property to your children, you get a million pounds residence till red band times two, but anything over that, 40% of that is going to disappear in tax. So it doesn’t matter what kind of portfolio it is in. It might grow over the long term, but if you’re not in the tax planning properly, you stand to lose the value. So tax planning is also a very, very important aspect of overall planning and that’s where comes in the aspect of getting growth from tax efficient investments you make. So coming back to equities, so equities a lot of people see it as a monolith. However, there are lots of equities, mid-cap equities and small-cap equities. They all behave very differently. Last-cap equities the risk of those type of companies failing which are worth billions and trillions of pounds very, very small, whereas when you come to mid-cap that risk increases slightly. Small-cap, it’s much, much higher. But then is the growth potential. That’s also massively different. Last-cap companies you would normally expect them to pay much more. A lot more of the return will come via dividends because their share price grows on a much bigger base, whereas if you’ve got a smaller company think of a company turning over 1 to 20 million pounds that fits within the venture capital trust world, vct world Turning 1 million to 5 million to 10 million to 20 million in 5 to 7 years is very doable. So why would you not get exposure for some of your assets to a VCT, for example, where you get 30% income tax refund effectively from the government, so only 70% is at risk and benefit from bigger upside. Crypto comes into that discussion as well, because it is certainly a technology with a lot of promise and a lot of people again journalists in the financial world writing all sorts of articles. It’s finished this and that, but we all know that, like all other asset classes, what goes down probably will come up. No one can guarantee it, but it’s about diversification. It’s about getting the plan right figuring out in your head with your planner or maybe, if you want to do it yourself or with a friend, figuring out what is it that you really want in life? When are you looking to attain financial freedom? What does that look like? Getting control of your time in entirety, or is it your love of dentistry means that you want to keep one foot in it but want to free up more time. That will dictate your choices, and then having a solution which incorporates the right products, the right solutions in the right proportion, is the key really that’s awesome.
James:
It comes back to strategy. I feel like most people’s journey into investing, particularly when they do it on their own, is maybe they read a book, maybe two, or maybe none at all, and then one day they open either a stocks and shares account or an ISA and they just buy something, and hopefully they don’t put too much in, because even if you’re buying the right thing, if you don’t know how to handle it, you’ll almost certainly lose money. And I feel like, really, it’s that point where you’ve ever seen the Matrix. Yes, yeah, you know the red pill. Yes, that’s the red pill moment, if you know what I mean. So for anybody who hasn’t seen the Matrix, that’s the decisive point in the movie where Neo chooses to learn how reality actually works and they find out that the world is controlled by computers of course don’t they and robots. You know what I mean, and it’s at that precise point that the analogy breaks down. But what I’m saying is that that is the point where their eyes are opened. You know, and for me, actually, these are these, probably these sorts of moments in the market really, that do that for many people, and that people either push the eject button, they think invests are stupid. They never come back at all. Yeah, they do one day, or they come back when the market’s hot again. Buy more, rinse and repeat, because eventually flipping crashes again, doesn’t it? You know what I mean. So key thing for me have a plan. Either take the time to educate yourself the books are out there, the knowledge is out there. If you don’t feel like that’s for you, some advice would be helpful, real hit. Anything that you’d like to say just to draw a line under everything today. Anything you’d like to say powerful, punchy things, just to summarize what we touched upon little bits of pearls of wisdom.
Rohit:
Yeah. So my thoughts from what’s happening these days and my knowledge of watching the market for 20 years is keep calm, stay focused, plan and on a continuous basis, re-evaluate, revisit and adjust or tweak your plan accordingly. And it’s always useful to have somebody objective, who is not emotionally connected to your strategy, to have that check in and to just bring you back to the basics, because often that is required for you to stay focused on what you’re trying to achieve overall.
James:
Talk stuff. Thank you, rohit, for your time today. Anybody who’s joined us live on Dentist who Invest a little bit of an impromptu stream, but Rohit and I were just talking beforehand. We thought we could either shoot this podcast or we could just go on the air and do it as well, which is even more fun. So a free gift for everybody who’s a member of Dentist who Invest. We’re going to release this as a podcast later on. Rohit is on the group. Should you have any questions or anything you’d like to know in more detail, rohit, as I’ve been really kind with your time today, we shall catch up very soon. Thank you for having me A real pleasure.