Weekend reading: Deal or no deal we’ll do fine after Brexit says Capital Economics

Weekend reading: Deal or no deal we’ll do fine after Brexit says Capital Economics post image

What caught my eye this week.

Now we know that Russian bots were spewing nonsense about Brexit around the time of the EU Referendum, those harrowing days afterwards make a bit more sense.

Okay, so the level of involvement discovered so far seems modest. But wouldn’t it be nice to believe that one reason most Leave voters found it so hard to articulate their reasoning was because they were native Russian speakers living in Volgograd?

Land of hope and folly

It’s no secret I think the decision to Leave was a huge mistake – especially weighed against the reasons many gave for voting that way.

Returning sole legislative authority to Parliament and reducing immigration were the only logical reasons to vote Leave. Everything else we still hear cited – inequality, the London-centric economy, globalization, the absence of ship building and mining, too many brown people on the High Street – won’t be solved by Brexit.

Yes, this is probably sour grapes on my part. Looking at the marvel that is the vaunted UK Parliament in action since the vote is almost enough to make me wish I’d voted Leave too.

How satisfying it must be to see our unshackled political leaders rally around at this time of great national need! To watch Britain bestride the European negotiations with Churchillian authority! To smirk at the perfidious and weak EU caving as predicted within mere days to our every demand!

Well no, none of that has happened. But we have had a Parliamentary sex scandal – and a nostalgic Carry On Cocking Up film is surely in the works for national release on Brexit Day.

A positive spin on Brexit

Enough of my cynicism. Food may lie rotting in the fields because immigrants are going home, banks may already be leasing office space in Frankfurt, and as a nation we may be clutching a red box containing £100 and a Tory intern’s photocopied mock-up of the new Blue British passport yet still desperately hoping the EU says ‘Deal’ – but not everyone is so gloomy.

Neil Woodford’s fund firm asked Capital Economics to produce a huge and hugely pro-Brexit piece of research entitled: Where Are We Now? and it’s a fairy tale for Brexiteers. A long one, too. It starts as an infrographic but you can dig into realms of sector-by-sector research.

I haven’t read every last page, but from what I’ve seen there isn’t a negative number inside. Except for a potential fall in net migration, of course.

To be fair Capital Economics is mostly looking at things from a ten-year view. As I’ve said before, I agree that on that sort of timescale the UK will appear to be doing okay. The economy will probably be smaller than it might have been – because free trade works – but there will be plenty of other things to blame. Both sides will probably be able to argue they were right.

But both sides won’t have been right.

Right now both sides were wrong. Remainers were wrong that the economy would crash – it hasn’t. Leavers were wrong that leaving would be a doddle – it’s a nightmare.

I hope Capital Economics has split the difference because the scenario it paints as its middle-case outcome is one I think most of us would bite the hand off a banker for right now.

From Monevator

Have you tried our new broker comparison tool? – Monevator

We now have two ways to help you to save money on platform fees – Monevator

From the archive-ator: A brief guide to the point of bonds – Monevator


Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

Household finances under strain as Nationwide warns of tough times ahead – Guardian

Chancellor urged to cut stamp duty in the Budget on Wednesday – ThisIsMoney

Mortgage costs would offset stamp duty cut, says study [Search result]FT

Homeowners with a mortgage end up with 15% lower private pensions – ThisIsMoney

Top of the market? A rediscovered Leonardo Da Vinci painting goes for $450m – BBC

Returns are almost never average – Vanguard blog

Products and services

Most banks have failed to pass on the 0.25% rate rise to their customers – ThisIsMoney

Number of untaxed vehicles in UK trebles after tax disc abolition – Guardian

Infrastructure fund investors spooked by Labour PFI plans [Search result]FT

If bitcoin were a country, its energy consumption would be 66th in the world – The Value Perspective

Criticism of index-tracking funds is ill-directed [Search result]The Economist

“I’m Hungarian and worked in the UK for eight years. Will I get a state pension or could I lose NI contributions after Brexit?”ThisIsMoney

Hargreaves Lansdown has hit the million customer mark – Hargreaves Lansdown

Comment and opinion

Saving rate and mortgage loan repayments – The Finance Buff

Every day is Black Friday for index fund investors – The Evidence-based Investor

If it doubled (quickly) then the US market might be in a bubble – The Brooklyn Investor

How to cynically raise $20 billion in the fund management business – The Reformed Broker

Saving for retirement: How much is enough? [Search result]FT

Even with low expectations, bonds still have their uses – Bloomberg

Chart crimes – The Irrelevant Investor

Dividends for life: 3 stocks you can trust [PDF]UK Value Investor

Guy Spier: How to build a career in money management [Video]YouTube

More (very lucid) thoughts on speculation versus investing – Gannon on Investing

Tesla’s truck is all about the journey – Bloomberg

Don’t worry about the flattening US yield curve [For nerds like me; you’ll need to zoom]Calafia Beach Pundit

Podcast Special

This is how a currency trader actually picks what to buy and sell [Podcast]OddLots

A selection of quality personal finance and investing podcasts – The FIREStarter

Talking of which, The Escape Artist is on the Choose FI podcast [Podcast]The Escape Artist

A chat with Robert Shiller, and various index fund matters [Podcast]Canadian Couch Potato

Meet the people who listen to podcasts at super-fast speeds – Buzzfeed

An intriguing interview with Claude Erb about markets, sequence of returns, gold, and much else [Podcast; sort of what I expect it to sound like when we pass the singularity and genius-level Artificial Intelligences appear on CNBC for a chat]Meb Faber

Off our beat

Manhattan retail: The new rust belt – Global Macro Monitor

On the (non) viability of start-up island nations [Search result]FT

Raze, rebuild, repeat: why Japan knocks down its houses after 30 years – Guardian

And finally…

“Most of the time the future is indeed like the past, and so extrapolation doesn’t do any harm. But at the important turning points, when the future stops being like the past, extrapolation fails and large amounts of money are either lost or not made.”
– Howard Marks, The Most Important Thing

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator http://monevator.com/weekend-reading-deal-or-no-deal-well-do-fine-after-brexit-says-capital-economics/


Weekend reading: Buy-to-let market showing signs of retreat

Weekend reading logo

What caught my eye this week.

When former Chancellor George Osborne announced he was raising stamp duty and reducing tax relief on mortgage interest for landlords, there was some scoffing.

“We’ll just raise rents!” the less sensitive cried. “Generation Rent can pay our taxes!” 

Well it turns out that riding one of the greatest asset price booms the UK has ever known doesn’t make you an economic wizard. Rents are falling across much of the UK. Now there are signs some landlords are selling up.

A graph in today’s Financial Times [search result] shows that:

“… growth in outstanding buy-to-let mortgages is failing to keep pace with new mortgages being granted, in a reversal of the broad relationship between the two over the past decade.

This strongly suggests some buy-to-let mortgages are being redeemed as investors sell rental properties.”

Here’s the graph:

Graph that suggests landlords are beginning to cash out of buy-to-let sector.

Source: FT/Savills

I can add my own anecdotal observations to what this graph seems to be suggesting. One of the several reasons why articles on Monevator have been a bit thin on the ground recently is – wait for it old-timers – I’ve been looking to buy a property!

(What’s that? Oh yes, I agree. If there was ever a sign the bubble is about to burst, the last bear in town turning is surely it. Expect a long post on why I’m embarking on such madness in due course.)

I can confirm landlords are thin on the ground right now. One agent told me that in the area of London where I’m looking, 50% of sales used to go to landlords! Now they’re lesser spotted.

This is good news for first-time buyers, who have struggled for a decade to cope with the landlords’ trifecta of interest-only mortgages, tax relief, and deeper cash reserves.

I’m not someone who thinks landlords are evil (far from it – and mine have all been great) nor that there is no case for tax relief, say.

But I do think owner-occupiers should come first on our property-starved island.

On balance then, I am all for the changes to the attractiveness of buy-to-let, and the impact they seem to be having. Prices will probably stall or fall as the effect of higher taxes kick-in, and the economics of land-lording will be reset at a lower level.

Property has been a great windfall for the forty-plus demographic, but I suspect it’s time to look for new opportunities.


Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

‘$300m in cryptocurrency’ accidentally lost forever due to bug – Guardian

Gas and electricity fuel price have risen at triple the rate of inflation – Guardian

Investors shun UK markets to shelter in bonds – Telegraph

Budget could end valuable tax perks for investors [Search result]FT

UK can ignore Brexit and stay in EU, Article 50 official says [Search result]FT

How Nationwide got annual pension contributions to 23% of staff salaries – Guardian

UK market has been more expensive, but expected returns still low – Value Perspective

Products and services

The online brokers taking the misery out of mortgages – Guardian

Paragon Bank’s new easy access account tops tables with 1.31% rate – ThisIsMoney

Get an extra £100 if you invest £5,000 with Ratesetter via my affiliate link – RateSetter

Evaluating funds using Morningstar’s new style box – Morningstar

Investment trusts’ discounts narrow as demand rises [Search result]FT

NS&I boosting Premium Bonds prize fund rate to 1.4% from December – ThisIsMoney

Barclays admits posting out pin numbers with new cards – Guardian

Comment and opinion

Considerations for cashing out of the stock market – A Wealth of Common Sense

How good decisions and compounding can lead to huge results – Of Dollars and Data

Mean vs median vs mode life expectancy for retirement planning – Oblivious Investor

Merryn: Paradise Papers reveal a turning tide on tax avoidance [Search result]FT

The truth behind three common indexing questions – Vanguard blog

Bond investors are stock investors’ latest concern – Bloomberg

What order to use savings in retirement to reduce your tax bill – ThisIsMoney

How the top 1% really feel about paying tax – Guardian

Stock pickers, where’s the line between speculation and investing? – Gannon on Investing

FANG futures – The Macro Tourist

Why I’ve sold my Rio Tinto shares – UK Value Investor

Feeling giddy (and greedy?) with markets at all-time highs – SexHealthMoneyDeath

The bank of Mum and Dad: ‘A huge amount of money. And guilt’ – Guardian

Off our beat

Animation: The rapidly aging Western world – Visual Capitalist

Being a Startup Founder is a minimum wage job – Medium

The tension between creativity and productivity – Kottke

And finally…

“Are you going to be okay?” I said to Debbie. We were in the bedroom, Debbie sitting on the bed watching me pack for London. “I’m leaving you with all the animals, and Kylie in a strop. It’s all a bit unknown. The enclosures should be fine, but to be honest, if Ziggy and I built it, it only comes with a 24-hour guarantee, which runs out, um, about lunchtime. After that we can’t be held responsible.”
– Simon Dawson, Pigs in Clover

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator http://monevator.com/weekend-reading-buy-to-let-market-showing-signs-of-retreat/

Weekend Reading: Don’t bother trying to second guess the next move from the Bank of England

Weekend Reading: Don’t bother trying to second guess the next move from the Bank of England post image

What caught my eye this week.

Behold! Interest rates have risen from the dead! Excuse the fervent tone, but the Bank of England has not lifted rates for as long as Monevator has been in existence. That’s no mean feat given that my first articles were written in September 2007.

(Curious? The first article on this site explains how to calculate dividend yields. Heady days).

So will rates now steadily rise towards the dizzy heights of 5% or more of yore?

I doubt it. I wouldn’t hold your breath on them being above 1% in a year’s time, personally.

Who knows though? Neither the Bank nor the market expects more than a couple of hikes over the next two years, as the BBC reports, but such forecasts are far from infallible:

Mr Carney told the BBC that the Bank expected the UK economy to grow at about 1.7% for the next few years, which he said would require “about two more interest rate increases over the next three years” […]

The financial markets are indicating two more interest rate increases over the next three years, taking the official rate to 1%.

I had a discussion with a reader in the comments to last week’s Weekend Reading. The reader wondered ahead of the hike whether using an active bond fund might make sense?

His reasoning was that bond market moves were more predictable than the gyrations of equities, and hence the case for passive investing was weaker.

I begged to differ.

It still regularly surprises me how people who have sensibly decided they have no edge in the stock market appear to think they can saunter up to the multi-trillion pound bond market and know better than it – which is really what deciding you can select a market-beating bond fund manager amounts to.

I don’t mean to pick on this thoughtful reader in particular. There have been literally hundreds of people commenting on Monevator articles for the best part of a decade making calls on the bond market. Maybe two or three said they thought government bonds – which have mostly risen throughout – looked like a good buy. Most of the rest proclaimed they were getting out of bond funds, or at most suffering them through gritted teeth, before an imminent crash.

I’d guess at least half these people were self-declared passive investors.

The reader wrote:

If the BoE raises rates next week, the affect on bonds is entirely predicatable. I would have thought just buying a bond fund that re-rates downwards is not a great idea.

At least a bond manager should have been able to foresee and mitigate the affect of a rate hike (not entirely, but just so that the damage is less than in a simple tracker)?

Views appreciated.

But as I replied, things are not so clear cut:

The short answer is that the affect of a rate rise is NOT entirely predictable.

First-level thinking that says ‘rates have gone up so bond fund will go down’ will get a person nowhere in active investing. You need to be thinking second or third level (and be lucky!) and for years on end to beat the market as an active investor.

To give just a couple of counter examples, if rates rise but the BOE attaches commentary that’s more bearish than expected about the prospect of further rises, UK bonds and bond funds could easily rally.

If the rate rise spooks the stock market or drives the pound higher and there’s a mini equity crash, again bonds could rally.

Perhaps most obviously of all, since the BOE has been hinting at a rate rise for months, it could all be baked into the price by now and the actual rise be a non-event

These are just three of many dozens of possible scenarios.

Equally, rates could certainly rise and bond funds could fall — it’s totally possible. But in active investing (and I speak as one) you have to get these calls right again and again — so that you’re mostly right more than you’re wrong, and with the right-sized positions. Not once or twice to talk about at dinner parties. 🙂

Secondly, there’s the risk/reward of predicting and positioning for a rate rise, as an active bond fund manager. Pundits and commentators to this blog have been saying rates will rise and bonds crash for nearly a decade. Even I threw the towel in — after years of warning readers not to be so sure — and asked if a bond crash might finally be upon us back in June 2015.

Luckily, humility won the day and I concluded it looked that way but I wasn’t sure, and that pure passive investors should probably do nothing to change their strategy, or alternatively only tweak it.

As things turned out yields fell even further (i.e. Bond prices rose and there was no crash). The US 10-year yield has only this month finally gotten back to where it was that summer of 2015 — having nearly halved along the way! The UK 10-year gilt yield is still below where it was then, even after months of talk about an imminent Bank Rate rise.

Also — the US Federal Reserve raised rates for the first time in December 2015 and a second time in December 2016. Did bond funds fall as was “entirely predictable”? 🙂

No, yields rose (i.e. bond prices fell!) after the first rate rise. They then rallied with the Trump election, before sliding again after the second rate rise in December 2016.

See: https://www.bloomberg.com/quote/USGG10YR:IND

But let’s leave aside the fact that bonds did the opposite of what they would supposedly obviously do. At some point I am sure rates will rise and yields will indeed rise too (i.e. bond prices and bond funds will fall for a while).

The point is an active bond fund manager has to get these bets right with the right amount of money at the right times to outperform. If a bond manager had decided it was ‘obvious’ yields would rise after those rate cuts I mentioned above, positioned accordingly, and were wrong, then they were now down say 20% over a few months versus the benchmark. They now have to make that back by being right later, and more again to start to outperform.

This stuff is hard. 🙂

Active bond managers are about as expensive as active fund managers, and in corporate bond investing at least they take as much research oomph behind them too. Yet expected bond returns are lower than equities, and right now they are very low. This means the higher fees for active bond management eat up even more of your return.

Oh, and none of this is to even get into the mathematics of reinvestment — rising yields are bad for bond funds in the short term, but in the long-term they can boost returns (due to reinvesting higher yields) which means someone who only looks at their portfolio every five years say might not even notice there’d been much of a correction unless it was truly catastrophic.

So there we have it — bond price moves are not entirely predictable, the consensus about the direction of even central bank rates has been wrong for a decade, passive investors reinvesting their bond income might even welcome rate rises over the medium to long term, and in the meantime with active bond funds yielding maybe 3-4%, TERs of say 1+% are monstrously expensive.

I don’t see going active with bonds is an obvious decision. 🙂

Incidentally I’ve noticed that for some reason, even people who accept the logic of passive investing in shares seem to think bonds are no-brainers. They are not!

The bond market is an even bigger, deeper, harder, and even more competitive market. Perhaps only currencies are bigger/harder (bordering on random in my view over anything other than the multi-decade view, and perhaps even then.)

Also, to the point in my article above, it’s taken me about 20 minutes to write and double check this reply. I have written something similar about bonds at least 50-100 times over the past 10 years.

This is not your fault at all — I fully understand you’re a commendably curious investor looking for views, and you are welcome to take or leave mine as you see fit — but you see how it all gets a bit tiring.

Oh, and as a coda, UK government bond yields fell and prices rose in the immediate wake of the Bank of England rate rise. Things clearly aren’t quite so predictable…

I didn’t know that would happen. And again I want to stress I have no problem (just far too little time) with readers finding their own way and asking questions. After 15 years as an investing obsessive, I’m still learning new things every day. If anything I’m less confident about what I do know than a decade ago.

I need to be uncertain, because for my sins I’m an active investor. My returns live and die by my speculations. My uncertainty has been hard won. Spend a few years honestly tracking your returns and you’ll discover nothing is “entirely predictable” in investing.

Happily, most readers are, like my co-blogger, passive investors. And if you’re going to be a passive investor, then be a passive investor. Whether in bonds or equities or anything else.

Embrace it! In most cases it will be better for your returns than being almost passive. And you will certainly have a lot more free time and less hassle in your life.

From Monevator

Another week where the universe caught up with Team Monevator and we produced no new articles. Let’s go back in time and pluck something…

…from the archive-ator: Who’s your Star Wars money hero? – Monevator


Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

What was happening the last time the Bank of England raised rates – Evening Standard

Savills predicts UK house price growth to halve, with London worst hit – Guardian

Fees and charges decimate returns for European investors [Search result]FT

One in five of the UK’s 55,000 free-to-use cash machines could be at risk of closure – Guardian

New state pension rules mean workers pay through their 40s and 50s ‘for nothing’ – Telegraph

Migrant labour shortage leaves fruit rotting on UK farms [Search result]FT

Clients of US financial services giant Charles Stanley are spurning cash – The Value Perspective

Products and services

Build your own home — grand designs for beginners [Search result]FT

Buy and sell shares as often as you like for £1.49 a month with new Dabbl app – ThisIsMoney

Bank of England interest rate rise: when is your lender increasing its rates? – Telegraph

How TSB’s current account can earn you £255 in a year – ThisIsMoney

Fund managers join rush to launch ETF products [Search result]FT

Comment and opinion

Statistical illusions – Morningstar

What length of retirement should I plan for? – Oblivious Investor

US markets fly as media noise goes by – Investing Caffeine

Value investors are giving up, but we’ve seen this movie before – The Macro Tourist

Understanding evidence-based investing – ETF.com

What’s your Uncertainty/Humility score? – Morningstar

Locations versus size: Househunters discuss the compromises they made – Guardian

If people don’t save enough, where are all the bankrupt (US) retirees? [For nerds]Kitces

Off our beat

Living by numbers – The Idler

Abandoned land in Japan will be the size of Austria by 2040 – Quartz

Should you sell your start-up for $50m, or try to build a unicorn? – SaaStr

Robots will build better jobs – Vanguard blog

Inside London’s huge experiment in predicting the future of housing – Bloomberg

Learning to spot fake news – NPR

The three-degree world: the cities that will be drowned by global warming – Guardian

And finally…

“Volatility is not an appropriate measure of risk for personal financial planning. When one is in the safety zone above the critical path, volatility may not be risky, but a low-volatility portfolio may be quite dangerous when one has fallen below the critical path and the portfolio value is plummeting toward zero.”
– Wade Pfau, How Much Can I Spend In Retirement?

Like these links? Subscribe to get them every Friday!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator http://monevator.com/weekend-reading-dont-bother-trying-to-second-guess-the-next-move-from-the-bank-of-england/

Weekend reading: Look for low expense ratios not star power when investing in funds

Weekend reading: Look for low expense ratios not star power when investing in funds post image

What caught my eye this week.

Every few days a comment is left by a new visitor to this website – or I’ll get an email via the contact form – telling us we’re mistaken to champion passive funds as the best choice for most investors.

The reason given is invariably the past performance of manager X or of fund Y. (We’re also invariably informed the commentator has been investing in it for Z years and has done very well, thank you very much.)

Depending on how eloquent the comment is, I may publish it . Sometimes I’ll reply to it, and explain the shortcomings. Often I delete the glib ones.

Now before someone screams “censorship!” imagine how you’d feel replying to the same erroneous line of reasoning for ten years, from people who don’t know half as much as they think they do but are twice as confident about it as you are – and also remember that publishing their comment unchallenged could mean another reader sees it and embarks on a money-wasting strategy, despite the best intentions of your own website.

See? Delete!

It’s just not worth looking for winners

The evidence shows most active funds underperform. Anecdotal asides that this or that fund has done better from a fly-by-night commentator simply highlight the exceptions.

Of course, some active funds do outperform. Some will be lucky, but as an active stock picker myself, I happen to believe that genuine investing skill exists, too. It’s just that very few funds demonstrate it – making it very unlikely you’ll be invested in one that beats the market, let alone the half a dozen you’ll need for a well-diversified portfolio – and that active funds cost more – meaning that searching for the needles in the haystack will reduce your returns.

Low returns in turn mean you’ll have less money to spend when you retire. Which means you’ll be able to buy fewer things you need, or that your money will run out sooner. The decision to try to beat the market against all odds has big consequences.

Unless you’re an investing nut, why bother? Go passive.

Stars in their eyes

The allure of buying better funds persists though, and it’s not hard to see why.

Mostly in life we hire experts and pay more for the better ones. Investing is weird in that doing the complete opposite is a better decision. But people understandably struggle with the concept. It feels wrong. They look for other approaches, but they’d do better to spend more time getting their head around the merits of cheap index funds.

This week for example the Wall Street Journal made a big splash in the financial gossip-o-sphere pointing to the allegedly poor predictive value of Morningstar’s five-star rating system.

Unfortunately the article is behind a paywall, but the introduction sums up the accusation:

Investors everywhere think a 5-star rating from Morningstar means a mutual fund will be a top performer – it doesn’t.

For its part Morningstar disagrees with the Wall Street Journal‘s claim. The company wrote a detailed rebuttal, concluding that:

The Journal’s story notwithstanding, the star rating has been a useful starting point for research that tilts the odds of success in investors’ favor.

The forward-looking Analyst Rating, while newer, has also exhibited predictive power.

Used together, or separately, we think these ratings can improve outcomes and help investors achieve their goals, which is entirely in keeping with our mission as a firm.

I don’t know whether Morningstar’s rating system on average directs investors to the better-performing funds of the future. (Anyone can point to the winners with hindsight.) We’ve noted before that rating systems and best buy lists are pretty useless for passive investors anyway. And while I am an active investor, I buy companies, not open-ended active funds, for myriad reasons.

However I’m inclined to agree with Barry Ritholz who writes over at Bloomberg that:

It should come as no surprise that misunderstanding what fund ratings mean is a very typical error made by, well, just about everyone.

It isn’t a forecast of future returns, nor could it be. If it could successfully do that, Morningstar would have long ago set up a hedge fund to profit from its newly discovered abilities to identify winning investments.

As Ritholz also points out, Morningstar itself has regularly pointed to low expense ratios as “the strongest predictor of performance.”

And in case you haven’t been paying attention, it is passive funds that have the lowest expense ratios. So this finding is code for ‘passive funds beat active funds.’ Again.

You’ll find a list of the cheapest passive funds for UK investors on this very website.

From Monevator

Patient investing requires a little faith – Monevator

Monevator readers discuss fee changes at Interactive Investor / TD Direct – Monevator

From the archive-ator: 10 reasons why houses are a better investment than shares – Monevator


Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

Average credit card rates now 50% higher than before the financial crisis – Telegraph

Workplace pension charges to go online in transparency push [Search result]FT

The top 10 UK tax complexities [Search result]FT

Britain is ready for an interest rate rise, says Lloyds boss – Guardian

Jack Bogle: Vanguard might be about as big and as cheap as it can get – Morningstar

Fees on the world’s cheapest ETF portfolio are down to 0.05% – Abnormal Returns

Products and services

What you need to think about when writing a will – ThisIsMoney

3-year Poppy Bond ISA pays 2% – and 0.15% to Royal British Legion – ThisIsMoney

New Amazon service will enable couriers to open customers’ front doors – BBC

Interactive Investor and TD Direct fee changes: how much will you pay? – Telegraph

Help to buy has mostly helped housebuilders – Guardian [As – ahem – I predicted!]

I lost £109k in Santander smishing scam – and the bank did refund‘: Three key steps to stop you falling victim to fraud at the bank – ThisIsMoney

Comment and opinion

What the charts don’t tell you about stock market crashes – A Wealth of Common Sense

Investing in unicorns – Fire V London

Unilever has ‘expensive defensive’ written all over it – UK Value Investor

Value investors: There’s always something you don’t love [Podcast]Meb Faber

It takes no talent to keep predicting a stock market crash – The Reformed Broker

Passive investors should never laugh at active – The Macro Tourist

Have active managers given active management a bad name? – Morningstar

Get rich with conspicuous consumption – Mr Money Mustache

The fund for emergencies and piss-poor financial planning – 3652 Days

The three great misconceptions about retirement saving – Can I Retire Yet?

Cryptocurrency and blockchain

Bitcoin, blockchain, and cryptocurrency [Excellent introductory podcast]Motley Fool

Bitcoin’s bewildering race to $100 billion – Bloomberg

The Bitcoin boom: Asset, currency, commodity or collectible? – Musings on Markets

The flood of cryptocurrency ICOs is an echo of the dotcom boom – The Value Perspective

Off our beat

Nerds and nurses are taking over the US economy – The Atlantic

How I spent three years becoming a minimalist and why you should too – Medium

Does getting super-rich mean getting a taste bypass? – Simple Living in Somerset

And finally…

“Go ahead, take a look at reality. You’re floating in empty space in a universe that goes on forever. If you have to be here, at least be happy and enjoy the experience. You’re going to die anyway. Things are going to happen anyway. Why shouldn’t you be happy? You gain nothing by being bothered by life’s events. It doesn’t change the world; you just suffer. There’s always going to be something that can bother you, if you let it.”
– Michael A. Singer, The Untethered Soul

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator http://monevator.com/weekend-reading-look-for-low-expense-ratios-not-star-power-when-investing-in-funds/

Patient investing requires a little faith

Patient investing requires a little faith post image

Some years ago, my wife, Kate, and I were at dinner with a group of my work colleagues and our company’s CEO.

Our boss tried an experiment with the table. He drew two hypothetical stock charts on a napkin and asked us what we saw. A Rorschach test for stock nerds, you might say.

My fellow analysts and I, eager to impress our boss, searched for clever technical explanations.

“Oh, I see a ‘cup and handle’ pattern,” we might have said – or some such nonsense. We all missed the point of the exercise.

Kate, who teaches science, took a different approach. She looked at a horizontal zig-zagging chart and said, “That looks like a predator/prey diagram.”

On the second chart, Kate took a second to consider it, and said, “That looks like…faith.”

The graph looked something like this:

The table was impressed by both answers, but particularly by the second one.

The more I’ve thought about Kate’s observation, the more I believe she captured – unintentionally yet brilliantly – the essence of patient investing.


With hindsight, it’s easy to determine which markets, companies, funds, and ETFs were great and worth holding onto through turbulence.

Historical returns, however, don’t capture the emotional roller coasters along the way.

Consider this. Had you bought shares of Wal-Mart on the 1st of September 1987 and held through the 1st of September 2017, you’d be up over 2,330% (including dividends, not reinvested). That’s an 11.22% compounded annual growth rate.

Those data points alone make it sound like it was nothing but rainbows and kittens for Wal-Mart investors over 30 years.

On the contrary!

During that period, there were 16 calendar months where the stock dropped by more than 10% and 97 weeks with 5%-plus losses. And this doesn’t include extended periods of market under-performance.

Equally important, during that three-decade period, Wal-Mart posted 26 calendar months of 10%-plus gains and 121 weeks of 5%-plus gains. A lot is made of investors selling after price drops, but my guess is most of us – certainly myself – have sold at least one good performer in order to ‘take a profit’, only to watch the stock multiply after that.

There were plenty of opportunities along the way for Wal-Mart investors to sell on panic or euphoria. It’s precisely these moments of emotional trading decisions that can derail a well-constructed investment strategy.

What it takes to stay invested

Though the impact of investment fees have on performance have been in the spotlight (and justifiably so), our poor behaviors can play an even greater role in under-performance.

This isn’t to say that a stock price plunge or a huge run-up in a stock or fund shouldn’t make us reevaluate our position. That absolutely should happen. Burying your head in the sand is not a realistic solution.

Skepticism is a healthy trait for investors. As the saying goes, the opposite of faith isn’t doubt, but certainty. Without some modicum of faith, emotion can run wild after reading a positive or negative news story, or after a substantial gain or loss in your stock or portfolio.

So, in what might we place our faith to stick with an investment – in good and bad times?

Your investment philosophy: Being comfortable in your investment approach, setting out an appropriate financial plan, and properly allocating your portfolio to various asset classes can help you weather market turbulence. Presumably you’ve created your plan with adverse market scenarios in mind. Put some faith in that strategy.

A company: If you’re a stockpicker, you might ask whether you believe a particular company you own is doing something special. Do they continue to execute on their business plan? If so, then to the extent possible diminish the stock market’s influence on your opinion of the company. Don’t check stock prices every day. Turn off real-time quotes on your broker’s homepage. Imagine you invested in a privately-run business where there was no daily price telling you its value. What would you use to measure a private company’s progress? You’d look at business fundamentals – dividends and book value per share growth, returns on equity, and so on. Use those factors to measure confidence in the company, not the stock price.

Optimism: Having invested through the financial crisis, I recall the allure of pessimistic arguments and admittedly I fell victim to some of it. A costly mistake. Bearish opinion always sounds much more refined and intelligent than the optimist saying things will turn around – even if the optimist don’t know quite how. But looking at a long-term chart of the US and UK stock markets, the pessimists haven’t seemed very smart for very long.

Historical evidence: While past performance is no guarantee of future results, there is compelling research that shows the benefits of being a patient investor. In 2013, for example, Morgan Housel dug through Robert Shiller’s U.S. market data going back to 1871. He found that your odds of generating positive after-inflation returns were as good as a coin flip in a one-year period. But over greater than 20-year periods, you would have always come out ahead in real terms. It’s not guaranteed these returns will repeat themselves, but it’s as compelling evidence as I’ve found for being a patient investor.

I’m not endorsing blind faith, but rather a healthy faith – a faith that comes with a dose of skepticism and introspection.

Being ‘actively patient’ is not simple. It’s hard to stay calm during both bull and bear markets.

With time and experience though, we can learn to filter financial results and market news to investigate the facts and discard the noise.

Bottom line

Faith seems too simple and perhaps a little naive when there are so many complicated explanations for investment performance. But the ability to keep your cool and stay focused whether times are good or bad is rare in investing.

The market is full of driven and intelligent people trying to outguess each other in the short run. Don’t play that game. Placing faith in the evidence, whether in your passive or active investing strategy, in a business or group of businesses, or in optimism alone can differentiate you from the crowd and help you achieve your long-term goals.

Todd Wenning, CFA is an equity analyst based in the United States. Opinions shared here are his own and not those of his employer. A full disclaimer can be found here. For compliance purposes, Todd cannot reply to comments below, though he welcomes any correspondence sent by email. You can read Todd’s expanding collection of dividend articles here on Monevator or check out his book, Keeping Your Dividend Edge.

from Monevator http://monevator.com/patient-investing-faith/

Weekend reading: Should we invest in the robots, or in the toys they’ll use to keep us happy?

Weekend reading: Should we invest in the robots, or in the toys they’ll use to keep us happy? post image

What caught my eye this week.

Josh Brown at The Reformed Broker wrote this week about the rise of the robots – and of artificial intelligence (AI) – from an investing perspective.

The perceived danger of advances in AI is a common theme these days. (I just saw Blade Runner 2049, and very good it is, too.)

But Josh struck a novel note when he suggested fears about AI and automation mean some investors are no longer putting money to work to replace their income when they retire in their 60s – but rather to have a life-raft if AI kills their job long before then:

There is a sense of desperation underlying the way in which we’re investing. […]

A 45 year old married father of two with a mortgage and a pair of college educations to fund. The remote yet persistent threat of a nuclear war is not what keeps him up at night.

In fact, he might almost see it as a relief should it come. He is a bundle of raw nerves, and each day brings even more dread and foreboding than the day before.

What’s frying his nerves and impinging on his amygdala all day long is something far scarier, after all. He, like everyone else, is afraid that he doesn’t have a future.

He is petrified by the idea that the skills he’s managed to build throughout the course of his life are already obsolete.

“Just own the damn robots!” concludes Josh, and I agree you should have a few horses in the race.

Hopefully there aren’t many Monevator readers who only own the UK stock market or companies listed on it. But if you’re one of them, know that you are getting very short-changed in the robot department. When chip designer ARM was acquired by SoftBank we lost our last great listed tech titan. You have to look overseas.

Personally I own technology investment trusts and individual tech shares. If you are a passive investor with solid exposure to the US market (perhaps through a global tracker) you’ll be getting a lot of technology through that, too.

Fun and games

I wrote an unfinished post (actually a chapter of a very unfinished investing book) along the same lines as Josh a few years ago. I agree it’s worth some thought.

But actually, I am not at all sure that all the riches will go to the robot owners.

For starters, it’s very unclear whether robots and AI really will take all our jobs. I’ll grant you things do feel different right now, but historically technology creates far more work than it destroys. Also, my friends working in the field say progress is very over-hyped.

But even if robots do take all today’s jobs, that doesn’t mean they’ll necessarily take all the wealth.

When industrialization replaced 98% of the jobs in farming, farmers didn’t become rich, nor did the manufacturers of farm equipment inherit the world. You’d have done better to invest in companies benefiting from the resultant urbanization boom, and the changes to leisure and consumption.

What will we do if robots do all the work but fail to get all the pay?

Perhaps we’ll play more computer games. Maybe instead of shares in robot makers – or even companies that make use of robots – we should own game creators like Electronic Arts.

Think that’s a depressing future for humanity? Then alternatively you could buy shares in Diageo, the UK whiskey behemoth. Perhaps we’ll all drink ourselves into oblivion…

From Monevator

Book Review: Living Off Your Money by Michael McClung – Monevator

Brexit logic in 140 characters – Monevator on Twitter

From the archive: Rebalance your portfolio with new contributions – Monevator


Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

Reverse Brexit to avert economic disaster for UK, says OECD – Evening Standard

Sterling’s long-term decline [Search result]FT

Half of UK adults are financially vulnerable, City watchdog finds – Guardian

Are you ready for an interest rate rise? [Search result]FT

Property market divide and pensions mean 45% of UK wealth is held by top 10% – ThisIsMoney

Robert Shiller: A stock market panic like 1987 could happen again – New York Times

UK inflation at five-year high of 3%; real wages squeezed – Reuters via Twitter

Products and services

Leeds launches new best easy access Isa and Virgin Money pays 2.4% – ThisIsMoney

Millennial railcard to launch next year offering a third off fares – Guardian

As annuity rates rise, does it still make sense to stay invested? – Telegraph

Government’s pension dashboard set to go ahead – Money Observer

TSB’s new 28-month balance transfer card is fee-free for 30 days – ThisIsMoney

Yorkshire Building Society closes thousands of accounts paying 3.55% – Telegraph

Property raffle website offers chance to win London flat for ‘price of a coffee’ – Telegraph

Comment and opinion

Return data on example portfolios from a British perspective – Portfolio Charts

If Bitcoin isn’t a bubble it’s a spookily good impression – The Value Perspective

Alternatives to screening for stock pickers – Gannon on Investing

Simon Lambert: A rate rise is about credibility not inflation – ThisIsMoney

Advise for aspiring share traders [Careful!]The Irrelevant Investor

“I make £10,000 a year from my cards business – and still have my day job” – Telegraph

Deconstructing Amazon Prime: Loss leader or value creator? – Musings on Markets

The Fearful Fifties – SexHealthMoneyDeath

The theory of maybes – Morgan Housel

So what does all this Brexit baloney really mean then? – Simple Living in Somerset

The economics of having twins – A Wealth of Common Sense

What have these financial bloggers changed their minds about? – Abnormal Returns

Off our beat

Grand Theft Life: Interview with Wait But Why’s Tim Urban [Podcast]ILTB

The weird strategy Dr Seuss used to create his greatest work of art – James Clear

The War to sell you a mattress is an Internet nightmare – Fast Company

“Neutron stars are some of the smallest, densest stars we know. They do not have much more mass than our sun, but all of it is compressed into a ball no bigger than the width of a mid-sized city (about 15 km, or 9 miles). That’s a lot of compression. A teaspoon of neutron star would weigh 10 billion kg (or 22 billion lbs) – about the same as 1 million very large elephants.” – Quartz

And finally…

“Today’s most dangerous crises, the ones that threaten the very survival of the financial system, are not modern dress reenactments of the ‘tulip mania’ bubble of old Amsterdam. They are warp-speed flashbacks to Black Monday.”
– Diana Henriques, A First-Class Catastrophe: The Road to Black Monday

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator http://monevator.com/weekend-reading-should-we-invest-in-the-robots-or-in-the-toys-theyll-use-to-keep-us-happy/

Book Review: Living Off Your Money by Michael McClung

Book Review: Living Off Your Money by Michael McClung post image

How should you manage your money when you retire? Should your portfolio change when you finally sign your F.U. letter to the boss?

Is the famous 4% rule really safe or is there a better way?

While the passive path to accumulating your pension pot is well lit by blogs, books, and preachers of the gospel, the more difficult question of how to safely ration your retirement savings has no simple answer.

Attempts to supply a silver bullet to retirement spending often flounder. Proposed solutions may be unrealistic, mistranslated, too narrow, or grossly oversimplified on their journey from academic journal to custom and practice.

Michael McClung’s achievement is to survey that landscape with the rigorous eye of an engineer who wants to build a house that won’t fall down.

He’s poured his findings into Living Off Your Money. It’s a practical, safety-conscious, and evidence-based manual that DIY investors can use to avoid the retirement quicksands.

Hazards ahead

One big thing lifelong savers need to grasp as they contemplate retirement is that we become more vulnerable as we rundown our stockpile.

An unfortunate sequence of returns can put us on a crash course early on. Inflation and even the blessing of a long life can put us on prison rations in our twilight years.

The situation is worsened because traditional retirement rules-of-thumb like the ‘4% rule’ are about as reliable as ‘red sky at night’.

The 4% rule is prone to failure, numerous caveats that don’t fit into 140-characters or fewer (or even 280), and it’s barely applicable outside the US. And where the 4% rule can leave some retirees on the brink of poverty, it can leave others departing the stage with most of their hard-earned loot unspent.

The system offered by Michael McClung takes a data-forged sword to those twin-headed terrors. His design relies upon two important techniques that many retirees may struggle with:

  • Dynamic asset allocation
  • Dynamic withdrawal rate

Dynamic asset allocation means that your yin and yang of equities and bonds is no longer fixed by some permanent cosmic ratio. Instead, your percentages can pitch up and down depending on the motions of the market.

A 50:50 portfolio could, with McClung’s system, average between 30%-70% equities over the course of a retirement.

In extreme conditions you could end up with 100% of your portfolio in equities. Conversely when equities are storming ahead you’ll convert them into high-quality bonds, ensuring there’s fodder in the barn for when winter comes. And when equities are blown away like dandelions in a category five hurricane you’ll live on bonds until they’re gone. There’s no automatic annual rebalancing here.

With a dynamic withdrawal rate, your income rate can also vary every year.

A tempestuous retirement could see withdrawal rates swing between 2.5% and 6%. Benign conditions might bless you with an average withdrawal rate of 7.7%. When your portfolio swells, a dynamic withdrawal rate lets you spend more. When conditions worsen you batten down the hatches.

All this may make the system sound random, but it’s rather that the plan flexes in response to market feedback. It gives you a brake and an accelerator to apply rather than putting you on rails until your retirement train terminates.

If that sounds like market-timing, it isn’t.

Trial by data

Living Off Your Money builds on the work of other retirement researchers. (These guys have lower profiles than North Korean late-night comedians, and are probably only familiar to you if you’re into obscure financial planning journals.)

All have sought to improve upon the cult of 4% inflation-adjusted withdrawals plus annual rebalancing.

For his part McClung reverse-engineers their systems, tests them to within an inch of their algorithms, and then bolts together the best parts to come up with his recommendations.

The major difference between McClung and most other retirement researchers is that McClung has subjected these formulas to more tests than a talking ape.

Standard practice is to pit your proposals against the historical performance of US equities and bonds and leave it at that.

The danger is that a system that worked well when US assets outgrew those of most other nations may not look so clever when planted in poorer home soils. Even US investors may not enjoy such sunny days again. Non-US residents have no reason to expect to.

McClung guards against this by testing his contestants against the UK and Japanese datasets. Neither has enjoyed the same hot-hand as the US.

No retirement strategy trumps all others, everywhere, every time. Optimisers are missing the point – you might as well try to optimise a baby. What works in one situation won’t always work in another. McClung acknowledges this and recommends a plan that:

  • Works well during historically difficult retirement periods
  • Is robust across geographies
  • Maximises withdrawals
  • Avoids catastrophic failure like a zombie plague
  • Leaves a large margin for error

He doesn’t stop there. McClung also checks his system versus the chilling effects of a low-growth world. His recommendations assume a globally diversified portfolio and performance. McClung’s mindset is world-first, not America-first, which makes his work directly applicable to UK investors in a way that most retirement research isn’t.

The Living Off Your Money strategy can also be calibrated for shorter and longer retirements. That is especially handy if financial independence is on your ‘to do’ list.

Don’t misunderstand me – McClung isn’t claiming his method is fail-safe. Very few retirement strategies would look good after a dose of German-style hyperinflation and being on the wrong side of two World Wars.

There are no guarantees, only probabilities.

The downside

There’s always a downside in investing and the trade-off demanded of you by the Living Off Your Money approach to retirement spending is that you can tolerate a volatile income and asset allocation.

Yes, you’ll probably be able to spend more over the course of your retirement. But there will be times when you’ll need to spend less. (The reality is that many retirees do naturally vary their income anyway outside of the confines of the retirement researcher’s lab.)

Sticking to the plan may also mean going all-in on equities in extreme conditions. Many retirees couldn’t cope with those strains.

To help alleviate some of these issues, McClung explains ways to take the edge off his purest prescriptions.

Floors and ceilings can be used to contain your equity allocation. There’s also an extensive section on creating guaranteed income to cover the bills when your withdrawal rate dips alarmingly low.

You may need to work longer to be able to afford such optionality. That’s the price of sleeping well at night.

Easy doesn’t do it

While McClung is a master of retirement theory, he doesn’t wallow in it. He never loses sight of his goal of creating a book that can genuinely help people.

The explanations are clear, and McClung carefully ropes off step-by-step practical sections that can be chewed on separately if you’d rather skip the methodology hors d’oeuvres.

Yet his work is steeped in integrity. McClung goes to great pains to explain his guiding principles and assumptions and – unlike some financial writers – all of his recommendations can be fulfilled in real life. There’s even a spreadsheet on his  website to support anyone who wants to implement his strategy.

None of this changes the fact that reading this book and managing your portfolio by its light requires a fair degree of investment literacy.

The truth is, nobody should manage their retirement investments without a strong financial education and Living Off Your Money can help school anyone, regardless of whether you ultimately apply its teachings.

Long-term Monevator readers will be in their element. But if you just want to get by with a couple of blog posts and a few simple rules that could be printed on a tea towel then this isn’t the plan for you. Your best bet would be to accumulate so many assets that you are left with plenty of room for error.

On the other hand if you have a strong risk tolerance, genuinely enjoy engaging with investing, and want to do more with less then McClung might just change the course of your retirement.

If you’re not sure which camp you fall into then McClung has made three sample chapters available for free.

Alternatively, check Living Off Your Money out on Amazon and let us know in the comments below what you think of it.

Take it steady,

The Accumulator

from Monevator http://monevator.com/review-living-off-your-money-by-michael-mcclung/