Client Bulletins

As the slow motion Eurozone train wreck chugs inexorably toward the buffers of oblivion the third class carriage that is Greece is first in the line of impact. One way or another, sooner or later, the carriage will have to be de-coupled. 

The current EUphoria in financial markets appears to tell us we shouldn’t care – but we do. Current reasons for wild global optimism include (apparently) improving prospects for the US economy and the taming of global inflation. Yet, unnoticed in the background, and without fresh impetus from Iran, the oil price snuck past $120 this week. Good news for your oil holdings – but we’ll keep the champagne on ice. 

It is the time of year when we turn our minds to the nuts and bolts housekeeping that is end of year tax planning, and to stealing a march on tax planning opportunities as early as possible in the new tax year. Without regard to individual situations (which we are currently reviewing case-by-case) the following applies in general. Yes, this week we focus on ISA and pension allowances, the twin mainstream tax shelters. 

Back to basics. ISAs are regarded with general ambivalence, but the word “pension” has become tainted. But neither view is vaguely relevant. As far as you and we are concerned ISA and pension wrappers are simply empty boxes into which you can place just about any listed asset you wish without cost or operational differentials. The sole difference is that each is governed by distinct tax and legal frameworks. 

In general all those with unused ISA allowances for this year should try to use them (especially if they have funds elsewhere in taxable and/or ineffectual investments) and also plan to take advantage of the increased £11,280 allowance available during tax year 2012/13. The benefits are emphatic for higher rate taxpayers, and worthwhile to most others. Let us re-examine the three main benefits of ISAs. 

Bond and interest income is received gross, worth 20%, 40% and 50% pa to basic, higher and additional rate taxpayers. Dividends bear tax at source so there is no income benefit for basic rate payers, but big 22.5% or 32.5% pa savings for higher payers. Good asset selection can lead to the ISA income shelter being worth 1-3% pa across the tax bands, which can make a huge difference to long term returns.  

ISAs are exempt from capital gains tax, saving 18% of chargeable gains for basic rate taxpayers and 28% for higher rate payers. Those with small portfolios, however, should be able to avoid tax by using the annual exemption (£10,600 of realised chargeable gains per person this year, and next). But small portfolios can grow over time (the general idea, after all) so it makes sense to use the ISA shelter as you go.  

The final advantage of the ISA is that there are no HMRC reporting requirements so all the income and gains generated by the assets you shelter in your ISA Wrapper will never suffer tax (other than inheritance tax) nor need to be entered on tax returns. So in summary near all basic rate taxpayers will benefit from ISAs (if appropriately invested) and higher payers should do all they can to fill their boots. 

Pensions are gold dust to some. While tax relief on the way in is offset by tax on the way out, the equation is swayed toward pensions by the ability to take 25% of funds tax-free. Income tax relief of 20%, 40% or 50% gives effective grossed up returns of 25%, 66.67% or 100% and hefty boosts to tax exempt pension funds. The coalition is muttering about abolishing higher rate relief so “I’ll do it later” may backfire badly. 

Comparison with ISAs is further skewed by the fact that prior to benefits being taken pension funds pass to beneficiaries exempt from both inheritance tax and probate. In allocating resources between the two alignment to personal planning circumstances and requirements is essential. But judgments of Solomon aside, ISAs and pensions remain the predominant mainstream means of painlessly extracting tax advantages. 

Of course we will be reviewing your personal situations and will be in touch where we feel there is leeway for you to benefit from the dynamic duo based on information we have to hand – a timely juncture to remind you to keep us continuously up to date with any changes in your personal circumstances. But the main message of the day is that tax giveaways will become rarer, so don’t look a gift horse in the mouth. 

Which mythical gem takes us full circle back to Greece, which KB has bid to buy for 1p. Yummy – moussaka on demand and a bunch of idiots lend us €130 billion without a hope in hell of us paying them back. Ever heard anything so daft?

A riddle for you this week. When can increased uncertainty beget greater certainty? 

As we repeat ad nauseam no one can predict the future, and with the global economy poised on many knife edges the consensus is that it is now harder than ever. But if you peer through the storm clouds it has in many respects at least seldom been easier to identify what to avoid, which makes the selection of what to own (itself less taxing than we can remember) that much easier. 

Extreme uncertainty can throw up greater certainty – as the riskometer swings into the red future directions of travel can become more one-dimensional. Take interest rates here and the US. They can hover around zero for a long time, but must eventually rise. At that point you do not want to be holding fixed interest assets such as UK Gilts, US Treasuries and German Bunds, the current safe havens du jour. 

The next certainty is there is no certainty, and that there is no such thing as a “safe haven”. Recent experience shows under extreme conditions “risk” becomes near impossible to assess. The key risk metrics are overwhelmingly wipeout and volatility risk; themselves hard to quantify. So after identifying asset types best equipped to profit from the greatest certainties you should diversify widely between them. 

Global growth trends are lower than in the past, so your equity exposure will best be concentrated on securing high and sustainable income yields rather than relying purely on growth. High yields (over 4% is perfectly achievable – double that from gilts or cash) will at least compensate you for diminished growth prospects and the inherent increased volatility risk. Cash in the bank beats the hell out of hope. 

It is hard to envisage food and energy prices coming down over the long run, so own the “hard stuff”. Investing in companies operating in the two sectors might appear a good bet, but suffer from business risk. In the final analysis equities will behave like equities – not like the underlying in which they trade. For example, BP was affected badly by the recent oil spill but the oil price was unaffected. Oil cannot go bust. 

Major currencies will de facto depreciate due to Quantitative Easing (the Bank of England announced a further £50 billion print-fest this week) and other forms of “competitive devaluation”. As more and more monopoly money is pumped into the system existing cash will be worth less. Gold does not increase in value but is one of few assets likely to hold it relative to paper money, so owning some is sensible. 

Inflation may fall this year, and next. But future resurgence appears certain, not least due to the effects of QE. So we hold on to our Index-Linked Gilts regardless. Another reason to own oil and food is that they are major root causes of inflation, and another to own gold is that it usually protects against it. And global Index-Linked Bonds are worth tucking away, since inflation and bogus money are not solely UK diseases. 

Investors running scared of “all-time uncertainty” and/or who frantically shift from one “safe haven” to the next will invariably be getting their asset allocation horribly wrong. Short termism has seldom paid, and is now more dangerous than ever – very much the opposite of the desired effect. A considered patient long term approach to asset planning has always been the most sensible – and is currently also the easiest. 

Piece of cake, eh?

Financial markets were (unaccountably?) chipper in January, turning portfolios that struggled to make headway over the year to end December positive one month later. This underlines the futility of assessing performance over given periods. There is no certainty current euphoria will endure, but neither is there any reason to believe it will not. Asset prices can rise in the bad times, and fall in the good. 

While our investment approach has stood up extremely well we are (naturally) asked from time to time how performance might be improved. The single simple answer to that question is to take more risk – the inescapable consequence of which is that the likelihood of volatility increases in direct proportion. This brings us back to consider the real meaning of risk, which many folk associate solely with volatility. 

Volatility can work for you if properly controlled. If you believe an asset will rise in value over time price volatility might not faze you provided you do not need to cash it in during a downturn. The danger of not having access to the fruits of your planning when needed is more of a risk than volatility itself. Most dangerous is wipeout risk – the prospect of not getting a return of your money – rather than on your money. 

Judiciously blending assets of multiple select types, all of which might be expected to deliver positive returns over the long term, is the most sensible means of controlling most key risks. If we are asked to adjust portfolio risk profiles the best means of achieving this is usually to vary percentage allocations to each asset. A more aggressive approach is to reduce the number of assets. But which would you omit? 

On January 1^st last year there was no way we could have predicted that Index Linked Gilts would be the best performing asset sector of 2011. But we recommend Clients always own some because they complement all our other selected portfolio assets both on technical, and stand-alone, merits. Did we know gold would shine last year? No – we just knew that owning some in the prevailing environment is sensible. 

Neither did we know perfect harvests around the world would hit agricultural commodity prices, or that crude oil prices would rise in the teeth of recession – but we continued to see the wisdom of owning both.  There were few events last year we knew would happen (let alone what their impacts would be) so stuck to methodical knitting rather than rely on our opinions or predictive genius – or anyone else’s. 

Some of you combine our diversified balanced approach with an overlay of personal favourites and opinions (tempered by ours – with risk warnings!) and performance consequently diverges from our stock approach – in either direction. We enjoy these “conviction based” scenarios, since the buzz of “calling it right” beats the heck out of method. This collaborative approach can be very successful – but moderation is key. 

So, drunk on success, we’re off to start a Hedge Fund and get rich shorting the hell out of Euroland and the Euro on the premise that their problems are insoluble, and that sovereign states can print themselves out of oblivion whereas Euroland cannot. But wait – bearing in mind the current outbreak of loathing against fat cats perhaps we had best shelve the idea. Damn. Penury and the day job it is, then.

For our (financial planning) moment of the week we cross not the channel, but the Atlantic. The US this week announced interest rates would be held at the current 0-0.25% until the end of 2014. No big deal, you might think – but the ramifications are profound. 

Since owning the US currency is now (ostensibly) less attractive it lost value against near all others. Stock markets soared. Treasuries (US gilts) and most other sovereign debt prices rose, as did those of gold and other commodities. Even the blighted Euro has gained 2% since the news broke. Good old Uncle Sam – your Accounts have bucked up over the past few days too, so everyone’s a winner, eh? 

On the face of it there were sound economic reasons for the US action; for example providing US companies and public with a more certain financial backdrop against which to plan, thereby stimulating the economy. The cynic, however, might not look so much at the actions as the consequences; a rising stock market, lower borrowing costs, and boost to the competitiveness of US exports – all in an election year. 

Most countries want a weaker currency, and this is just the latest move from the key player. We covered this paper currency “race to the bottom” in a bulletin long ago, and it has intensified since. The US and UK are printing more money to defray their debt problems, which in turn accelerates the devaluation process. The Eurozone has not done so openly, but has achieved similar effects under various guises. 

Global currency fluctuations matter deeply to all of us, as they affect us both directly and indirectly. So, to the extent you must be exposed to any foreign currency, which would you fancy? Anyone want to bet on a rising Euro? The Eurozone needed this week’s surge like a hole in the head, since if it does not weaken substantially against the Dollar it will look more imperilled than it already does. Devalue it must. 

The US Dollar, despite interest rates pegged at zero until 2014; massive US debt, and further money printing pending might perversely be a strong bet. Sterling has many of the same problems, compounded by others we mentioned last week. In a decade the Chinese Remnimbi may be a global reserve currency, but its ascendancy may be horribly erratic and there are few ways (or reasons) to gain exposure. 

Picking any paper currency over any other is to us akin to choosing the best looking horse in the glue factory. The sole currency that makes any sense to us is gold. It may not increase in value, but should hold it. So as major currencies lose value, that of gold should increase in relative terms. We have bored for Britain on this topic for years so leave you with two points – one technical, the other whimsical.  

Gold pays you nothing to own it, so loses appeal when interest rates are high. The price therefore shot up on the US interest rate announcement which was not, in fact, earth shattering news – it is hard to envisage interest rates rising in any developed economy for some time. Second, muse on what might happen if demand for gold ever exceeds available supply. Unlike paper money, you cannot print more. 

So ignore “bubble!” headlines. With luck the price will plummet soon (that is why we limit exposure) heralding the economic crises will be over. That is unlikely, leaving gold to our minds one of the strongest risk: reward propositions there is. We still balk at suggesting your current weightings be increased, but certainly urge you to hold on to every speck of your gold dust – because it could become just that in every sense. 

This time of year our minds turn to holidays. Despite reigning optimism the Eurozone crisis is far from over, so that is seventeen countries we at KB Towers have crossed off our list. Unless it declares independence from the UK and adopts the Euro the Isle of Wight looks good.

We are yet again ignoring economic developments in favour of taking another look under the bonnet of what drives your asset planning. The topic is dry, but lies at the very core of our collective material wellbeing. As usual we will first set the scene, and then focus on how it might affect us all. 

Gilts have been used by Government since 1693 to finance expenditure not covered by tax receipts. The UK debt mountain has soared with excessive public spending, and much of the receipts from sales of new gilts is needed to pay interest on the old. This, and the reckless antics of banks, encapsulates the current economic crises. Levels of Government and bank debt are overwhelming, and the fat lady is singing. 

When you owe huge (any!) sums the interest rate you pay is key. Unlike our Eurozone friends the UK controls its own governance and interest rates, and if we run out of money we can always print more via quantitative easing (under which the Bank of England creates new money to buy gilts – a legal form of Ponzi Scheme). The UK is consequently considered to be creditworthy, and a “safe haven”. 

Looking at benchmark 10 year bond yields the UK’s current cost of borrowing (what investors demand to invest in gilts) is sub 2%, as it is in the US and Japan (other “safe havens”). Recent EU averages are 3% in France, 5% in Spain and 7% in Italy with Greece a snip at 35%. Hence the sovereign debt crises – countries are forced to borrow at elevated interest rates to repay debts that were already out of control. 

To surface from beneath its vast excess debt the UK’s ability to borrow cheaply is vital, and the coalition’s austerity measures (and not being in the Euro) have helped. But the economy must now grow to generate the higher tax revenues required to enable debt to be paid down; a wicked case of Catch-22 since economic growth is rarely synonymous with recessions suffered both at home, and by trading partners. 

The UK enjoys an AAA credit rating; a major reason why our costs of borrowing are so low. But we chaps fail to see how we can retain this throughout 2012, as we borrow more and more in the teeth of recession and austerity. If we drop an “A” borrowing costs (as in gilt yields) should rise, and gilt prices fall. Europe is in the grip of a vicious debt spiral, and we are susceptible to theirs as well as our own. 

Gilts are like the final base camp on Mount Everest – you cannot go much higher, but there is a hell of a long way to fall. Sooner or later higher costs of borrowing and/or resolution of the debt crises will likely decimate gilt prices. As we have long been saying personal exposure should be avoided (it will be on our watch) albeit it will be impossible to avoid the indirect impacts (which we will cover another time). 

Our second “so what” is that annuity and pension drawdown rates are largely sourced from medium term gilt yields; hence why those currently starting to take income from pension funds (or undergoing a drawdown income review) are being badly squeezed. For these folk gilt yields rising will actually be a blessing – to the extent, of course, that their pension fund had not been invested in gilts. 

Our third “so what” is good news for pensioners. The coalition has announced that for the purposes of calculating pension drawdown rates the determining 15 year gilt yield will be “floored” at 2%. The 15 year yield is currently 2.51%, so income can reduce from here – but only so far. Having said which, were the 15 year yield to slip below 2% the pension “floor” may not compensate for dire consequences elsewhere…..

Rather than ponder unknowns this week we open the bonnet of the financial planning car and look at the chassis and engine. The investment assets you add are what will power your car, but no matter what grades of fuel you use your driving experience will ultimately be determined by the build quality of your vehicle. 

We are often asked why one Wrapper performs better than another, and hopefully a brief explanation will help. For the purposes of the exercise we shall concentrate on the three main wrapper types we deploy in well over 90% of your planning affairs; namely Pension, ISA and General Wrappers (Onshore and Offshore Bond, KB’s Income Control Account and other special Wrappers are different cases entirely).

Matching Wrapper selection to individual Client needs (insofar as pre-existing arrangements allow) is our starting point. The asset allocation process follows, selecting first asset sectors, then asset types, and lastly the individual assets that will best combine to do the job. Umpteen considerations feed in to the final mix, but one constant at every single stage of the process is a heavy focus on tax. 

The three taxes we are predominantly concerned with are income tax, capital gains tax (on Clients themselves; on the wrappers, and on the underlying assets) and inheritance tax. Corporation tax (insofar as it impacts on individual asset types and the wrappers in which they are held) and stamp duty are amongst many other taxes we factor in to deliberations, but we shall concentrate on the “big three”. 

Dividends are paid net of (non-reclaimable) tax at source, so for income tax purposes it makes no difference which wrapper you hold shares in unless you are (or might become) a higher rate taxpayer. In this case we focus equity holdings on Pension and ISA Wrappers to avoid an additional 22.5% or 32.5% marginal rate of tax on income (whether accumulated or not) to enhance bottom line net returns. 

Interest is tax-free in Pension and ISA Wrappers, holding cash in which will avoid 20% tax at source (and 20% or 30% extra to higher rate taxpayers). But income from bonds (sovereign, corporate and some others) rolls up gross in Pension and ISA Wrappers, so taxpayers will save 20%, 40% or 50%. On a Bond Fund yielding 7% pa this enhances returns by no less than 1.4%, 2.8% or 3.5% pa. 

Pensions and ISAs are exempt from capital gains tax. This does not necessarily militate against General Wrappers, since CGT is manageable within all but larger portfolios. Pensions are exempt from inheritance tax but suffer special tax charges of 0% or 55% (most folk) on death, so good planning can make a huge difference. ISAs allow no IHT protection, but General Wrappers can be shielded by KB Trusts. 

So there are no “good” or “bad” Wrappers; disparities are down to how assets are spread across them. Our portfolios are designed to be “self-adjusting” so downturns in some asset classes will be offset by strength in others to deliver long term growth with a “smoothing” effect. If (current) stronger assets are concentrated in any single Wrapper it will shine (for a while) but the aggregate planning effect will be the same. 

Finally, an example of what happens if you do not get basics right. Tesco shares dived this week, and now yield around 4.5% pa net. Despite hiccups we wonder if the shares are not better value on a risk-adjusted basis than bank deposits. We are not advocating buying them, but rather musing that shares being possibly the safest bet for income-starved grannies shows just how crazy the world has become. 

Staying with Tesco and financial planning, we query how they are helping us spend less every day when our food bills keep rising. However, another of their slogans lies at the heart of everything we do. Now, more than ever, every little helps.

Albert Einstein observed “compound interest is the eighth wonder of the world” and Herman Hupfeld wrote “the fundamental things apply as time goes by”. This week we discuss a financial planning basic that is a case in both points, and expand on the fruits of our quest to optimise it for your benefit.  

All received financial planning wisdoms should be continuously challenged, but some endure. Our job is to separate the valid from the outdated, and to keep you aligned with the former while avoiding the latter. If you get the basics right, the rest will follow. Your planning is built on solid foundations of basics, but after building work is complete skilled maintenance is essential. Yesterday’s wisdom can often be deadly. 

One such basic is the importance of income, a key yardstick against which values of most assets can be measured. For example higher yielding shares depend less on (ephemeral) capital growth for total returns. You can bank and roll up income without regard to fluctuating capital values. The great majority of returns from developed economy equities are derived from compounded reinvested dividends over time. 

In a low-everything world a high income is hard to come by; one that beats inflation is a mirage, and the higher the income, the greater the risk. These received wisdoms were learned at mother’s knee – but are now totally out of kilter with modern reality. High incomes with acceptable degrees of safety and reliability are within reach, and can be harnessed to the benefit of anyone prepared to re-test their wisdoms.  

The golden rule applies most of all to equities in low growth developed economies, and near all KB Client assets allocated to these is in high yield Funds. The rule extends to fixed interest and cash assets, but sovereign debt does not offer sufficient income to compensate for solvency and capital depreciation risks. When it comes to cash sub inflation returns from insolvent banks on life support does not add up. 

We do break the rule. Gold, oil and foodstuffs produce no income, but their values dance to different tunes whose additional diversification benefits lie behind why we recommend you own them. Index linked bonds produce little income, but all growth and income is (crucially) linked to inflation. Many other assets (and the wrappers we use to hold them) work well mainly because they can convert income to growth. 

The only other exception to our rule has been Emerging Markets and Asian equities, where high economic and profits growth compensated for lack of yield in the past. But as economies mature dividend cultures evolve, and our quest to secure high income streams from these regions in robust fashion is now complete. We finally have a range of assets in our armoury that can be adapted to any income scenario. 

In a low growth world it is important to match investment income to individual needs as closely as possible, ideally with the latter being entirely covered by the former. This effectively leaves capital growth (the vital engine of future income increases) to “look after itself”; at the same time reducing the risks of capital erosion arising where assets need to be sold to cover income shortfalls. 

To us the prospects of 4%+ pa income from portfolios of strong cash rich companies in high growth economies compares favourably with receiving 2% pa with no growth potential from insolvent banks, or similar yields from absurdly expensive sovereign debt with capital losses baked in. Equities are arguably the new safe and gilts and cash the new risky. The entire concept of risk has stood on its head, so we must too. 

Fully stocking our armoury will impact on three “categories” of our Clients. The first is those taking income from their portfolios and the second those who plan to do so within known timeframes. The third is those in the capital accumulation phase, where conversion of growth oriented holdings to high yielding alternatives will be a gradual process. The income factor will feature more heavily in all Reviews from now on.

Financially 2011 was pretty awful for most folk, and our best efforts could only elevate it to “neutral-cum-nothing” status for our Clients. Reality bit and ensured the marked absence of feel good factors, as the hangover from decades of bingeing on credit began in earnest. 

New tax and financial planning opportunities were scant, and existing ones were whittled away. Some certainty was restored to pension planning (in particular the carry forward rules) as the coalition unwound the mess left by the previous government. But otherwise when any review such as this resorts to highlighting small increases in ISA allowances and introduction of the Junior ISA you know the year’s fare must have been thin indeed. 

A stark example of how barren the financial planning landscape has been was the slashing of pension drawdown rates, combining with historically low gilt yields and moribund fund values to slaughter those looking to their pension funds for income. This is but one tip of the iceberg exerting downward pressure on near all arbiters of our income and assets, with the upward momentum of inflation and taxes creating a harsh double whammy. 

We dug deep into a diminishing pool of old opportunities, and manipulated every wrinkle of financial and tax legislation to create attractive new ones. These facilities and innovations are made possible by our Platform, enabling us to deploy the most complete, flexible and transparent suite of assets, capabilities and tax wrappers in the industry.  This has been by far the most important financial planning development of our professional lifetimes. 

Two of our main investment aims (to outstrip equity markets with far lower volatility) were achieved. Most of you beat the FTSE 100 by wide margins with top-to-bottom deviations of less than 40%. Our other main objective of beating inflation was marginally missed in most cases, but for periods of over one year you remain on track. In truth the only way to beat RPI this year would have been by taking on unacceptable risks – i.e. by sheer luck. 

It is informative to dig beneath the unflustered stability of your portfolios this year to see how their construction contributed to their state of relative calm during most of the year. In fact gentle sideways movements hide the fact that assets making up two thirds of typical portfolios were up, or down, by 15% or more, with small variations in returns either side of zero accounted for simply by your relative exposures to the winners and losers. 

In general your equities, emerging markets debt and agriculture holdings were the losers, whereas the bigger winners were your gold, oil and index linked gilts. The latter were the surprise 2011 top dogs (if anything is a surprise anymore) saying much for the febrile state of the world. Your wonderful non correlated diversifiers chipped in solid upper single digit returns in the form of growth and/or income and/or interest at the heart of portfolios.

Gilts shone as yields were driven down to absurd lows. We sold out last year but secured good returns from the alternatives used, so shed no tears. With the hindsight of genius substituting gilts for this year’s losers would have been “nice” but, while the status quo may persist (fear economic depression if it does) upsides are limited and downsides huge. By stark contrast this year’s losers will be volatile, but offer strong long term prospects.

How you emerged relatively unscathed from this year is down to key factors inherent in the asset allocation process. The symmetry between 2011’s winners and losers is striking, with the downward pull of higher allocations to losers offset by steady returns from non correlated diversifiers. The process is akin to designing a fluid self-adjusting jigsaw puzzle; do it well and it will require only the occasional movement, and/or substitution, of pieces. 

The recent strategic asset allocation revisions aim to rebalance the jigsaw to address the economic backdrop. The move toward further equalising asset sector weightings should give a greater chance of positive returns in the current environment, in which a “no bets” approach means you will not make a killing – but neither will you get killed. This is no time for “inspired” bets – staying alive and grinding out positive returns is the name of the game. 

And now we dare to make a few predictions for the coming year for you to take with liberal pinches of salt. The Euro crises will continue to weigh heavily on markets, and we would be amazed if the first shock of many does not impact before February. Volatility will remain crazed as markets are gripped by alternating waves of optimism and panic. Recession in the Eurozone appears unavoidable but, if mild, we Brits might just avoid it by a whisker.

Recessions are not necessarily bad news for markets. They tend to fall in anticipation, but rise on the fact – looking ahead to the recovery to follow. But recessionary conditions may linger for some years, so rallies in equity markets might be fleeting and unsustainable. But common sense and experience dictate that all but fortune tellers should hold their nerve and remain invested, because no one rings a bell when the real McCoy starts. 

We cannot and dare not predict how individual assets will perform, but need not worry too much about this thanks to the science behind our asset balancing measures. However, we will venture that we expect your non correlated assets to continue chipping in upper single digit returns, and that your index linked bonds should hold up despite stellar returns this year and the consensus view inflation will dwindle (quite probable – but for how long?). 

If we see war in the Middle East your oil would soar (all bets on North Korea are off). We see many factors that could bring the shine back to your gold. Your agriculture holdings would shrug off a poor 2011 on the merest whiff of bad harvests, and food riots would add to global unease. We preach Clients should own our stock hard assets, especially in hard times – the prospects of seeing which in 2012 are particularly high. 

As to our own 2011, our closeted approach finds us devoting increasing amounts of time to research, analysis and the entrails of your Accounts and general planning affairs rather than pursuing new Clients (other than those you introduce to us). Our progression to deskbound tecchies has actually enhanced our capabilities, and our spending more time ensconced in KB Towers seems to find favour as you can always get hold of us instantly.

Next year will surely be tough for us, with fraught markets, rising costs and inept regulators to the fore. But we go into 2012 long prepared and qualified for the new regime forecast to decimate the independent adviser sector with both our business and client proposition strong and capable of continuous refinement. We are told independent statistics place us in the top 10% of peers (whatever that might be worth!) but are not vaguely complacent. 

All other factors aside we are critically aware that our year (and beyond) is inextricably tied in with yours. You are our sole paymasters, and your best interests are ours – so we slavishly attend to yours. This simple logic will hopefully make it no stretch for you to rest assured we will continue to do everything in our power to serve your best interests in 2012.

If a marriage of two can defy counselling, clearly any number of “summits” will struggle to heal rifts between 27 spouses when the love has gone. Dave C has separated us, and divorce may follow – but the alimony will be heavy regardless.

There is hope (but no guarantee) a combination of strict fiscal union and QE might keep the marriage together for the sake of the kids (the Eurozone itself, and the wider world). However, the spouses will probably act only piecemeal each time they stare apocalypse in the face, so the marriage (and financial markets) will remain volatile. Crockery will fly and frying pans will be wielded. We can but duck and hope.

We turn to how Euroland’s marital spats will affect us kids. Taking either a short or long term view, changes made to asset weightings further to our recent Strategic Review already look timely, because if a balanced diversified approach is the most sensible way to address planning in all conditions it is the more so now. But there is one sub-plot that is not currently adhering to our script – the role of gold.

As previously reported the gold price is moving in lockstep with equities, so its role as a diversifier is currently moot. This is largely because safe haven buying is currently focused on the US Dollar, with the double whammy that Dollar strength forces down the gold price. Another is liquidity, because when panic and risk aversion reach fever pitch gold is hit because it is quickly and easily turned into cash.

The same phenomenon was seen in the aftermath of Lehman Brothers in 2008, but the gold price then took off and trebled from its low point. The price could continue south now, but if bank, sovereign or financial asset solvency is called into question next year history might well repeat itself, so the risk: reward balance of holding gold is compelling. That is as close to a prediction for 2012 that you will winkle out of us.

Otherwise many fixed interest assets could implode, albeit we stick with Emerging Markets Debt on diversification, long term growth and “best of breed” grounds. Equities offer upside, but may also be prone to huge downside shocks. If they collapse current (low) allocations may need to be revisited. Your index-linked bonds remain sacrosanct as core holdings for now, despite forecasts of lower inflation.

Your other hard assets (food and oil) will remain volatile, but the laws of supply and demand will ultimately hold sway. Rising prices of both are at the forefront of world government concerns about the inflation that could derail global recovery – which is yet another reason to own them.  Your non correlated assets are unsung gems; the “steady Eddies” ticking steadily upward at the heart of portfolios – but read on.

The FSA’s report this week on its role in the 2008 bank collapses concluded “We cocked up. Oops.” The Chairman admitted (quote) “we are not clever enough.” Now we learn Nanny will be applying her proven financial planning acumen to investigate (?) all but the plainest vanilla (and potentially riskiest) assets, effectively ruling on what you are “allowed” to invest in. We await developments with deep concern.

We got this mini rant (“the KB Spring”) out the way this week as it is hardly festive, and dismissed a review of 2011 next week on the same grounds. Neither would any forecasts for 2012 ooze yuletide spirit. But then all forecasting is futile, as illustrated by the CEO of Standard Life Investments predicting FTSE would hit 6,900 this year. To be fair, with a 28% surge before Auld Lang Syne he could still be right.       

Next week we will look to sign off the year with some yuletide cheer. To get into the spirit we have mistletoe at the ready in the event Nanny drops in at KB Towers for mince pies and sherry. Any suggestions as to where we should hang it?

We are fed up with weekly Euro commentaries. Go on boys and girls, just implement Quantitative Easing, sit tight, and hope it works – it is all that might. But they haven’t (yet) so here we go again. 

This week the outcomes of the Merkozy talks dominate everything, as well they might. They will affect the economic future of the entire world, and especially that of developed economies. They will at least determine whether or not many countries go into recession, and the depth of that endured by those that do (or already are). At worst they could spark carnage; not least bank contagion and sovereign defaults. 

Markets this week have alternately soared on hopes the EU will “muddle through”, and plummeted on announcements that cast doubts on happy outcomes. Revelation of a €115 billion black hole in Euroland banks did not help. Santander accounted for over 10% of the total. It remains at the forefront of our concerns regarding “UK” banks, albeit our fears on this front would abate if the Eurozone gets its act together.

We are in the camp that believes the Eurocrats will throw whatever resources are required (QE!) at the crises. With collective agreement they can certainly deploy a lot of firepower (effectively creative accountancy, but any port in a storm) but can only soothe the patient – not heal it. If they come up with half a trump following the current talks, markets will surge with relief. If they do not, all hell may break loose. 

But QE or no QE Euroland’s future will still be shrouded in uncertainty. Further crises (large and small) will surface regularly, more measures (QE?) will be applied, and fingers crossed that the economic growth required to repair all the damage can be conjured up from somewhere. Measures implemented now can buy time, but (to mix metaphors) sooner or later the music will stop and the piper will have to be paid. 

As regards wealth planning in the short term all bets are off, with the fact that all assets (excluding your non correlated gems) are moving in lockstep signalling that panic has set in. In the medium term financial markets will suffer crazed volatility and be hostages to totally unpredictable binary outcomes. Rising taxes and inflation will exert additional pressure on squeezed incomes, state benefits and asset values. 

So, as ever, the wisest approach is to “look through” the craziness and adhere to what appears most obvious. A central KB tenet is to avoid heat by staying out of kitchens. The Eurozone crises will impact everywhere, but we would rather suffer minor singeing at a distance than third degree burns in the oven. Our long standing policy of steering clear of Eurozone equities and debt to us remains a no-brainer. 

Many of our favoured “core” assets change little over time, but events forever throw up new kitchens to stay out of. Examples of exclusion zones we have come to shun over recent years include developed economy equities and debt and most anything hinging on the solvency of banks and governments. In a nutshell we try to minimise risk by avoiding kitchenettes that might morph into full blown blast furnaces. 

We want to banish the “E” word next week. If the Eurocrats get it together; Dave C kisses Angela M and makes up (go on Dave, pucker up for Britain) and a “Q” is inserted before the “E”, there is hope. No one would argue that Dave did not deserve his peerage.