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Delaying Savings

By Peter Brooke - Topics: Assurance Vie, France, Investments, Uncategorised, Yachting
This article is published on: 12th April 2014

12.04.14

No one wakes up in the morning and thinks, “I must start my pension planning today.”a “I must start my pension planning today.” I’ve not even done that, and it’s my job! Perhaps if someone had pointed out to me 15 years ago what the impact this thought process may have had on my own financial future, I may have listened and (may have) done something about it.

Let’s consider the rather simple examples of two people who joined the yachting industry at the same time, with similar careers, but different saving scenarios.

Scenario 1: James took his first job as a deckhand at the age of 23, earning €2,000 per month. His income went up by a healthy five percent each year, every year until he left yachting at 45 with a final salary of €7,300 per month.

From the very start of his career, James invested 25 percent of his salary every year. This means that by the end of his yachting career, he had earned a total income of €1.25 million and had put aside €310,000. He had managed to achieve an average annual growth rate of five percent on his invested money, which meant his savings pot was now worth €495,000. If he leaves this to grow for another 15 years before using it as a pension scheme, he will retire at 60 with a fund of just over €1 million — a very healthy fund.

Scenario 2: John had a very similar career, but only started saving 25 percent of his salary after being in the industry for 10 years. Even though he still had earned €1.25 million over his career, he only had put away €225,000, which, with the same growth as James, was now worth €290,000 due to the lesser amount of time to compound the growth. Leaving this amount to grow for another 15 years would give John a pension fund of €600,000 — quite a bit shy of James’s healthy fund.

In the real world, yachting salaries rarely grow in a straight line, but this simple example shows how delaying the start of a long-term savings program has a massive effect on your long term wealth and control. In order to retire with the same fund as James, John would have to save approximately €1,500 per month, every month from when he leaves yachting. If he is now working on shore, this could be difficult to achieve as costs normally not associated while aboard will now be added, such as rent, food and every day expenses.

It’s interesting to note that James still actually spent more than €930,000 over his 23 years in yachting, which is an average of €3,400 per month for that period. Are there many yacht crew who actually spend this much on living costs, and if not, could he have saved even more for his long-term future? The answer is obvious.

Should I use a Financial Adviser?

By Peter Brooke - Topics: France, Investments, Spectrum-IFA Group, Uncategorised, wealth management, Yachting
This article is published on: 10th April 2014

10.04.14

Creating a financial plan is not complicated; it’s an audit of where you are today, financially, and where you want to be at different life stages. This requires creating a list of what you have, earn, own and owe and deciding to put something aside to cover different goals for the future.

I have met yacht crew who have worked for 20 years without implementing a financial plan, and when they want to leave yachting, they have no pensions and minimal savings or investments, leaving them with a simple choice: live on very little or keep on working.

We can agree that having a financial plan, however simple, is important, but why have (and pay) someone to help you bring this together?

The process: Although creating a plan is quite simple, a financial adviser will ensure that all areas are discussed and re-examined so nothing is left out. All of the horrible “what if” questions should be covered.

Implementation: A good adviser will have access to thousands of products for different clients with different needs. The more choice available, the more assistance you will need in choosing the best ones, but also, the more independent the advice will be. A small advisory firm is likely to have only a few products to choose from and will display less independence.

Professionalism: If we are ill, we go to a doctor — financial advisers have qualifications to diagnose our financial problems and help put together a plan to make us better. And as with a doctor, a financial adviser should have qualifications in his or her trade, even specializing in certain areas.

Regulation: A financial adviser will be regulated by a government body and will have to display a certain competency and have insurance in order to practice.

Knowledge: Qualifications don’t guarantee knowledge; good advisers should continually improve their knowledge and should be able to prove this through their ability to explain complex issues.

Humanity and perspective: Most importantly, you need to trust your adviser. This person or firm should be your trusted adviser for most of your life; they need to be able to empathize with the different situations in which you’ll find yourself over the years. They should be able to draw on experience from other clients to help solve issues you face; they should be able to offer perspective on the decisions you make.

This last point is the hardest to prove and is probably best achieved through a combination of your own gut instinct and referrals from friends and colleagues. Do your own research on all of the above factors, ask around, and keep asking around until you have a short list of advisers to meet. Then follow your own feelings about whether you can trust them; the relationship should be a long-term one, and you will end up telling them a lot of very personal information over time.

Take these steps now to live abroad after retiring

By Peter Brooke - Topics: France, Pensions, QROPS, Retirement, Spectrum-IFA Group, Uncategorised
This article is published on: 9th April 2014

09.04.14

Senior man with dog on beach

Retiring abroad requires research, planning, and a desire to integrate culturally — particularly if you’re headed to a place where you don’t speak the language.

“Even though there are some areas of Europe which are very ‘expatriate,’ it is still a very good idea to have an open attitude and outlook and some sense of adventure,” said Peter Brooke, a financial adviser for the Spectrum IFA Group in Cote d’Azur, France.

Click here to read the full article on BBC.com

Looking at financial stability throughout your yachting career

By Peter Brooke - Topics: Currencies, France, Investments, Uncategorised, Yachting
This article is published on: 5th February 2014

05.02.14

polaroid_frame_satbilityWhile I have discussed strategies for individual investments, banking and insurance, I wanted to present what I believe to be the “Basic Rules,” which, if followed throughout your yachting career, will maximize your chances of financial success.

    1. Have a bank account in the same currency as your income.
    2. Have other currency bank accounts if you spend considerable time in other currency jurisdictions.
    3. Use a currency broker account to move money between accounts; this gives you control and saves money on the exchange rate and commissions.
    4. Clear debts as soon as you can, especially those with high interest rates.
    5. Check the medical cover available to you from the yacht; offer to pay a small supplement if it doesn’t cover you during holidays or when not on board.
    6. Conceptually plan out different financial “pots:”
    7. * Emergency: at least three months’ salary in a bank account (preferably six months)
      * Education: when and how much (is it for the next course?)
      * Spending money: limit yourself to a set amount each month
      * Property purchase money: how much will you need for a deposit, and when
      * Long-term money: 25 percent of your salary

    8. Understand your tax residency status: Keep an accurate diary of where you spend your time. The places where you are most likely to be considered resident are:
    9. * Your country of citizenship
      * Where you own real estate
      * Where you spend the most time
      * Where your “dependent family” is based (your home)

    10. Save at least 25 percent of your income for the long term; you don’t pay any social security. If you worked on shore, your salary would be at least 25 percent less due to this.
    11. Invest time in your own financial education. Read my column in Dockwalk every month, look at investment websites, learn about inflation, property leverage, risk and compound returns.
    12. If in doubt, take advice. Understand your limitations and build a team of trusted advisers in different fields; speak to other crew about what they do with their money (but don’t follow just one).

    When you get to the time when you want to leave yachting (be it after 5 years or 25) it is great to be able to do so because of the way you have managed your own resources… many people cannot leave the industry at the time they want to because they have not taken control of their futures.

    Follow every one of these simple rules and you I am certain that you will get the most out of your yachting career…and will leave it feeling that it not only gave you great memories and friends but helped you look forward to a long and fruitful second career or retirement.

     

    This article is for information only and should not be considered as advice.

A smart strategy borrowed from the Chinese – BBC.com

By Peter Brooke - Topics: France, Investments, Uncategorised
This article is published on: 29th July 2013

29.07.13

Smart investment strategies borrowed from the Chinese. An article from BBC.com with comments from The Spectrum IFA Group

Peter Brook comments on an article from BBC.com

To read the full article please click here

What is risk? – Precious Metals…

By Peter Brooke - Topics: Investments, Uncategorised
This article is published on: 16th July 2013

16.07.13

In this series of articles we are considering the different TYPES of RISK we take when investing in different assets. This should help to build a portfolio in which we fully understand what risks each part of the portfolio expose us to.

All that shines. There are many very attractive metals and jewels and most of them are pretty good investments. There are also many different ways to invest in these sorts of assets and each of these has their own risk factors. When buying into metals it is very important to decide whether you are buying as a pure investment or as a useable investment as this will affect performance and risk.

The main ways to buy into metal and jewel prices are:

Direct – bullion, coins, jewellery etc. Even within this sector there is a huge range of choice. If you want pure investment then buy as close to the raw materials as you can… there are many different mints of coins but some are as collectables and some as investment.

Indirect – this is an exposure to the price of the underlying metal. Many people buy into precious metals via Exchange Traded Funds (ETFs) but these are not ALL what they seem to be.

So what risks are you taking by investing in the shiny stuff?

Asset risk – as with all investable assets; if they are out of favour with the general market, then the price will fall and the value of your holding will too. Sometimes these movements are not based on the fundamentals of supply and demand and can be due to the global political or economic background (or normally both).

Theft/security risk – if you decide to buy directly then you must consider the security of your coins or bullion. This will normally come at a cost which must be taken into account from a cash flow and overall performance point of view. You probably don’t want to have $3000 worth of gold coins under your mattress (especially if you are living on a yacht).

Liquidity Risk – selling directly held coins can take time, normally if they are highly traded newly minted then liquidity should be good but collectable coins could take time to find a buyer, or suffer a price fall.

Fashion risk – collectable coins and jewelry come in out of fashion, which is not directly linked to the price of the material they are made from – be careful when selecting these sorts of investments, as they normally trade at a big discount or premium to the underlying material. #

ETF – real or synthetic – some ETFs actually buy the underlying commodity and hold it in trust for the investors in the ETF. If you sell your holding, generally, the ETF will sell the actual metal. Other ETFs use rolling forward contracts or other derivatives on the underlying commodity via an investment bank. This means that most of the time the price will move with the underlying metal price but not always and can over react big movements in the price. This was seen recently with the ‘paper’ gold price falling dramatically but the real gold price continued to trade above the paper price.

Counterparty risk – synthetic ETFs are collateralized by an investment bank, if this collateral is of low quality (and as we have seen this is very possible) then you may be taking risk that the bank cannot return your money if something goes wrong.

On the whole precious metals either directly held or indirectly (through a real ETF) are excellent additions to a portfolio for a small proportion. We have seen huge volatility in prices in the last couple of years and so it is important not to be over exposed to metals and to be aware of the above risks. Also, like all investments,  have a strict profit taking discipline when the values look good.

 

This article is for information only and should not be considered as advice.

What is risk? – Equities

By Peter Brooke - Topics: Investments, Uncategorised
This article is published on: 12th June 2013

12.06.13

In this series of articles we are considering the different TYPES of RISK we take when investing in different assets. This should help to build a portfolio in which we fully understand what risks each part of the portfolio expose us to.

 

What are equities? – known  as stocks or shares they are a ‘share’ in a company. As a part owner of that company we must therefore SHARE in its profits (and losses). If the company goes bust we cannot expect not to share in this and lose (normally) everything we put in! Likewise if it is very profitable then we would hope to be rewarded as owners should be (by dividend or share price growth… or both); the performance of shares is well documented and on average they outperform most other assets over the long term but do we really understand all of the different types of RISK we take as investors in shares?

 

Asset risk – if equities themselves, as an asset class, are out of favour then they tend to all fall together if concerns about future growth (and therefore profits) are prevalent, this can be irrelevant of the market or sector you are looking at, which may have robust fundamental reasons to invest in it but is still knocked by the market selling off all equities.

 

Market or Correlation risk – many major stock markets are very highly correlated, so even if you have a diverse portfolio of European, US and UK stocks, for example, you can lose on all of them if they are highly correlated.

 

Sector Risk – companies all do different things, provide different services and make different goods, but sometimes a whole sector will be out of favour so losing value in what is a good company may still happen if the sector it is in is not loved.

 

Company specific risk – this is primarily down to the quality of the board of the company and the vast majority of company directors want their companies to do well; but their share price can also be affected by regulatory changes, legal actions, competitors, patents etc. no matter how good a company may be it is not bullet proof and so different companies will perform better in different parts of the market cycle.

 

Liquidity Risk – if you decide to buy smaller companies which aren’t very well known then there may be a minimal ‘market’ for them… this means that if you can’t find a buyer then you either can’t sell them at all, or you accept a lower price. Most shares are traded on regulated stock exchanges and so liquidity of all but the smallest companies tends to be good.

 

‘Shares are the only things we don’t buy on sale’ so all of the above risks, like with most assets, can create buying opportunities. It is often best to access shares via funds as the daily choices and control are managed by a professional manager, you can then also access many different sectors and markets with relatively small portfolios.

 

It is vital to understand the different types of risk so your overall asset base is not over exposed to one type of risk. For example someone with a large property portfolio (liquidity risk) shouldn’t then invest in small companies but should have more money in cash (inflation risk), high quality bonds (interest rate risk) and ‘blue chip’ shares (market risk).

 

 

This article is for information only and should not be considered as advice.

What is risk? – Property

By Peter Brooke - Topics: Investments, Uncategorised, wealth management
This article is published on: 20th May 2013

20.05.13

In this series of articles we are considering the different TYPES of RISK we take when investing in different assets. This should help to build a portfolio in which we fully understand what risks each part of the portfolio expose us to.

 

We, as Anglo Saxon and Northern European types tend to have a bit of an obsession with owning property; it is an important part of our culture and we feel secure in the knowledge we own real estate.

 

It  is very understandable, especially for an Englishman, why owning your own home is a very good idea (control of what it looks and feels like, feeling of “home”, long term outlook etc) but I believe that many people will tend not to look at ALL of the basic investment factors when selecting a property to buy (to live in or as a pure investment)… including risk.

 

Of course, location (location, location), price, quality, taxes and running maintenance costs are normally considered to some extent but for some reason many investors tend to believe that property is in some way risk free; . Like all investments we should “buy with our heads” and “sell with our hearts”, too many of us get this the wrong way round and ignore some of the issues that can really cost us dearly. Let’s look more closely at the property specific risks.

 

Liquidity Risk – the biggest single risk when buying property! Can you get your money out if you need it (or if something better comes along)? On the whole the answer is no – or at least not quickly. If you find a buyer tomorrow you are unlikely to have your money back within 3 months; if you are looking for a quick sale then you can seriously damage your return by taking a low offer.

 

Interest rate risk – if you are borrowing to buy, as most people do (and probably should) then there is a risk that your cash flow will be affected and the total cost of your property over its life could go up dramatically, if interest rates move.

 

Market/Investment risk – as we saw in 2008 the price of property can fall as well as increase…. Again many investors feel that property is in some way a sure fire investment guaranteed to make money like all other forms of investment asset this is only true if you buy the right property, in the right place at the right price. When property markets crash they tend to do so heavily and take a longer time to recover than more liquid markets.

 

Tax/Governmental Risk – one of the easiest assets to tax more in times of economic strife are properties, especially those owned by investors (as they tend to be easy political targets). Increases in local rates and taxes on property are easy to push through and raise a significant sum for government.

 

 

This article is for information only and should not be considered as advice. This article is written by Peter Brooke The Spectrum IFA Group

More on risk and investing in different assets

What is risk? – Bonds

By Peter Brooke - Topics: Investments, Uncategorised
This article is published on: 23rd April 2013

23.04.13

In this series of articles we are considering the different TYPES of RISK we take when investing in different assets. This should help to build a portfolio in which we fully understand what risks each part of the portfolio expose us to.

 

The term bond is broadly used in the financial industry; here we concentrate on the “investment asset” often known as fixed interest, fixed income or debt securities. Government Bonds have their own specific names too; e.g. UK GILTS, US T-Bills & German BUNDS.

 

If a company or government needs to raise money and doesn’t want to (or can’t) issue new shares or borrow from a bank they may issue a bond. It promises to repay the bond holder its face value on a set date in the future and until then will pay interest for the loan (the coupon). Bonds are issued on the ‘issue date’ but can be freely traded on the bond market so their price can fluctuate with normal market conditions. The fluctuation in price means that the ‘yield’ changes too – this is the fixed coupon but if bought at a different price gives a different actual yield.

 

When a company is wound up (e.g. on bankruptcy) the bond holders, as creditors, are repaid from the assets of the company before shareholders; this means that bonds are considered safer to hold than shares. The coupon must also be paid before any dividends. So what risks should we consider before buying bonds:

 

Default Risk – can the bond issuer repay me my coupon every year AND can they pay me back at the end of the term?

 

Interest rate risk – as rates go up, bond values fall (and vice versa). In a low interest rate environment are we exposing the value of our capital to risk if interest rates are increased?

 

Market risk – these are investments, and though considered safe a flow of money out of the bond markets because of lack of confidence can affect prices.

 

Issuer specific risk – a lack of confidence in the future of the company can, like shares, create a selling of the bonds too.

 

Liquidity risk – if buying smaller company or peripheral government bonds, it can be tricky to sell them should you need to quickly.

 

SAFETY vs RISK – at the moment developed government and many ‘blue chip’ company bonds are trading at record low yields, and though they are considered SAFE (as they are unlikely to default) this doesn’t mean they are without RISK. If a bond has a yield of 1.5% and interest rates go up by 1% it is possible to lose 10% of the capital value… this is now not LOW RISK.

 

Buying bonds through a fund can often help reduce many risks; the manager can choose which sectors to invest in or not and can manage the specific risks appropriately. We favour global strategic bond funds as they have a very broad remit and a very large bond universe to invest into.

 

This article is for information only and should not be considered as advice.

What is risk? – Bank accounts and Cash

By Peter Brooke - Topics: Investments, Uncategorised
This article is published on: 12th March 2013

12.03.13

RISK:  The dictionary definition: exposure to the chance of injury or loss; a hazard or dangerous chance.

We all think the concept of LOSS as being the principle financial risk, but there are different types of risk which can affect the value of our capital and the return we get from it;

The safest form of investment asset is considered to be CASH, but what are the risks (OF LOSS) if I hold €100 000 in my French bank account?

  1. 1.    Counterparty & Jurisdictional Risk – If my bank (my counterparty) goes bust the French (my jurisdiction) government will currently underwrite the first €80 000 of all individual deposits –  a potential 20% counterparty risk in having this much money on my account. If I bank with a big name in a well protected jurisdiction I should be ok, but should I move the excess to another bank to reduce risk?
  2. 2.    Inflation Risk – with time the COSTs of goods and services tend to increase; this eats away at the real value of money or ‘it’s buying power’. Today global inflation is approximately 2.5%p.a.

But that’s not the whole story as inflation is based on an average ’basket of goods and services’. At different stages of our lives the inflation of different elements within the ‘basket’ can vary: The cost of living might drop for a family with a mortgage when interest rates fall, but an elderly couple with food and fuel bills, and no mortgage feels the pinch as oil, coal and food prices rise.

  1. 3.    Interest rate risk – the bank pays me interest on my money and lends it out at a higher rate and pockets the difference as profit. If interest rates are high I am taking risk that my return may  fall; can I get a similar return for similar risk elsewhere?

If interest rates are low, like today, then I am swapping interest rate risk for  inflation risk by having my money on account. It is therefore the amount of my return OVER INFLATION which should be my only concern when looking at the amount of risk I am willing to take.

Today if I am lucky enough to earn 0.5% interest it means I am losing 2% per year…. guaranteed.

  1. 4.    Default risk – the bank should continue to pay me the interest as it receives it from its lenders. There is a small risk here if I choose a weaker bank.

But by banking my money I am NOT taking the following risks:

  1. Liquidity risk – I can get to my money anytime.
  2. Investment risk (volatility of returns) – my money is just in a bank account, the interest may change a tiny amount but the capital value remains stable (except for inflation).
  3. Opportunity risk – as my money is not tied up I can use it to buy any sudden opportunities that come along (once I understand the risk/return swap).

 

This article is for information only and should not be considered as advice.