Lamb & Associates Independent Financial Planning Ltd

01661 860438           enquiries@lambandassociates.co.uk

Unit 1 Meadowfield Court, Ponteland, Newcastle-upon-Tyne NE20 9SD

Lamb and Associates Independent Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority. FCA number 782092. Financial Services Register number 624597.

  • Instagram Social Icon
  • Facebook Social Icon
  • LinkedIn App Icon
  • Wix Twitter page
  • Google+ Social Icon
Please reload

Recent Posts

FROM ROI TO ROL : Return on Investment to Return on Life

December 10, 2018

1/3
Please reload

Featured Posts

Is The Investment Industry A Wealth Creator Or A Wealth Drainer? The Smoke Screen Of Inflation

Part 2: The Smoke Screen of Inflation

 

In Part 1: What’s the Problem? I highlighted the effects of deductions on investment returns. 

 

In this blog, we’ll look at the effects of inflation, identify the real returns on your investments and answer the above question.

 

Prepare to be horrified…

 

The investment industry likes inflation because the higher it is, the higher the returns (although not necessarily higher real returns) which makes the charges relatively lower and to be fair to the industry, their charges are a lot lower than they were in the 1980’s and early 1990’s, when inflation was much higher. Having said that, I don’t think it can be given credit for making these reductions voluntarily…

 

In their publication Rates of Return for FCA Prescribed Projections, September 2017, the Financial Conduct Authority (FCA) estimates that, inflation (the Consumer Price Index) will be 2.5% over the next 10 to 15 years

 

This means that if you have £100 this year, you can buy 100 items from Poundland. Next year, you may still have £100, but your items will be reduced to 97.5.

 

Let’s add the effects of inflation to the calculations in last week’s blog

 

Effective Growth Rates:        

 

 

                                                                                     Traditional Charges               Professional Fees

 

Average Annual Growth Rate %                                                6                                             6

 

Deductions

 

Product charge %                                                                   0.38                                         0.38

 

Annual management charge                                                  0.78                                           0.3

 

Adviser charge                                                                        1.0                                            0.5

 

Total deductions                                                                     2.16                                          1.18

 

Less inflation                                                                           2.5                                            2.5

 

Effective growth rate                                                               1.34                                         2.32

 

 

Maturity Values:         

 

(A financial calculator is invaluable for these calculations!)

 

 

                                                                                  Managed Fund Portfolio             Passive Portfolio

 

Initial investment                                                                     £100,000                                £100,000

 

Term of investment (N)                                                            20 years                                  20 years

 

Investment after charges (PMT)                                              £97,000                                   £98,830

 

Maturity value (FV)                                                                  £126,587                                £156,350

 

Interest (1/yr)                                                                              1.34                                         2.32

 

Gain (less the initial £100,000)                                                £26,587                                   £56,350

 

 

Once inflation is factored in, the traditional charges provide real returns of less 47% of the professional fees! 

 

Ouch!!!

 

Why pay the higher charges? Many advisers and product providers will say because they are worth it! Really?  Consider my earlier blogs and remember; charges are guaranteed, returns are not.

 

You may ask yourself why you would bother investing money, why not just save it in the bank? Let’s look at those potential returns.

 

 

                                                                                   Deposit Account

 

Initial investment                                                               £100,000

 

Term of investment (N)                                                       20 years

 

Investment after charges (PMT)                                       £100,000

 

Interest (1/yr)                                                                         1.5%

 

Inflation                                                                                  2.5%

 

Real Value                                                                          £81,790

 

After the original £100,000 is deducted                            -£18,210

 

 

Money invested in deposit accounts, over the longer term, is almost certain to be eroded by inflation.

 

Over the longer term, inflation is probably the biggest threat to your wealth. It is probably sensible to invest it, but do not allow the investment industry to use it as a smoke screen to drain your wealth.

 

If you would like to talk to a truly independent financial planner please get in touch on 01661 860438 or email David at david.lamb@lambandassociates.co.uk

And finally, if you found this blog interesting and useful please ‘like’ and ‘share’ it wider.

#LambAndAssociates #CreateYourFuture #FinancialPlanning #IFA

 

 

 

 

 

 

Please reload

Follow Us
Please reload

Search By Tags