MoneyTimes - September 28

Posted by Jill Kerby on September 28 2011 @ 09:00



I recently received a long letter from a reader who had inherited a portfolio of shares from her husband who died a couple of years ago.  I later spoke to her.


Last summer, when the markets fell sharply, she quite sensibly consulted an investment advisor – not her broker - who looked over the portfolio and gave his opinion about her holdings.


Up to last March, the overall portfolio, mainly invested in a mixture of blue chip Irish and European shares, had made a modest c2.5% gross return, about the rate she would have earned had the money been in a good bank deposit.


By late August the share values were down at least 10% she said, though the dividends (about €5,000 a year’s worth) were still being paid.


She was now wondering if she should have taken the advisor’s advice when he gave it: “Is it too late to act now?” she wrote.


It seems the authorised advisor she consulted (who charged her for his time), suggested that this was mostly a good selection of stocks and funds.


He determined that many of the shares had either kept their dividends steady, or had increased them over the last several years. There was a good mixture of bonds and cash funds in the portfolio. A couple of actively managed funds had not done as well and in his opinion, there had been too many trades, but that is the nature of stock broking business.


In essence, he said that while the overall return on this portfolio wasn’t earth shattering, the dividends were steady and none of the companies under investment were likely to disappear.  


“What he did say to me though, was that owning shares requires commitment and nerve.  My husband understood this. If I was going to worry about them, at my age, he said, that maybe I should reconsider holding onto them.  He said he believed the markets would remain very volatile.

“I told the advisor that I would probably need more of this money as I got older. I’m very worried about the cost of nursing home care and my house is not worth as much as it once was. I’d also like to help the children.


“He warned me that if the market keeps falling, the face value of even the best, ‘defensive’ shares would go down, though they kept paying the dividend. He said the problem for me is that there may not be sufficient time for the price of the shares to recover if I really did need to sell them.”


My friend’s mother was quite right to get an objective opinion.  The advisor laid out her options:  either keep the shares for the dividends (assuming the top companies remain profitable) or, liquidate some or all of them – accepting that she would have to pay 25% capital gains tax on any that were worth more than when they were purchased – and then find a ‘safer’ home for the cash.  But he also warned her that nothing is entirely safe these days.


“’A perfect storm’ is how he described it,” she recalled.


Good yielding bank accounts, some bonds, including inflation linked ones, defensive shares with strong yields and even some gold were among the asset options he recommended. He also suggested that she speak to her children about her worries about her future and discuss with them what she would prefer happen in the event that should could no longer live in her own home. 


It sounds to me like this lady was given good advice. An older person, living mostly on a fixed income, part of which (her husband’s private pension) has reduced as a result of his death, is more vulnerable to a collapse in the stock market than a younger, employed person who has many years before retirement in which to make up any losses.


She is also more vulnerable to price rises (the elderly spend proportionately more of their income on food, fuel and healthcare) than younger, employed people and price inflation in these sectors is unlikely to drop dramatically.


Her goal has to be to maximise both income and secure her capital, not an easy thing to do in the best of times, let alone during a great (and deepening) recession. It requires very careful calibration.


There isn’t any great lesson to take away from this story, except that financial reviews should be done sooner, not later and if you trust the advice, act on it.  There are no easy solutions to a global debt and banking solvency problem, not just an Irish one, and to which we have no control anymore.


This lady is going to speak to this advisor again, in light of how the euro-crisis has intensified and her portfolio value has fallen even further.


This time she understands that while it normally usually pays to make haste slowly…there are times when doing nothing at all is the worst thing you could do. 

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