What caught my eye this week.

I read hundreds of investing-related articles to compile these Weekend Reading links each week. Far more than when I was just doing my own active investing research.

I enjoy it. But I also wonder how much it skews my perception of the markets and investor behaviour.

Hot takes and weird observations are what spreads and commands attention, after all. Nobody is very motivated to write “same old, same old” – except of course my staunchly passive co-blogger.

And reading all this kerfuffle every week has led me to wonder whether the stock market really has become as ‘degenerate’ as the Millennials commentators say?

Or is that just how it appears from inside this snow globe of opinion?

Funding the fanaticism

Some things have clearly changed a lot over the past decade. Mostly driven I’d suggest by free share trading and vast social media platforms, but also by the influence of crypto – especially the mega-bagging returns from Bitcoin and Ethereum that have underwritten this shift towards investo-gambling.

How many twenty-somethings would be YOLO-ing their life savings if Bitcoin had fallen back to $10 and stayed there?

Exactly.

It didn’t though – it minted millionaires – and the lingo of the resultant crypto movement has leaked into how punters wielding free share dealing apps talk about stocks, and how at least some trade them.

There’s lots of reports with data showing that retail traders are an ever-bigger driver of stock volatility. But are these just the same people who were punting on tinpot resource stocks 25 years ago, and hyping their trades on ADVFN and The Motley Fool?

Or is it all a sign of some deeper structural malaise?

Asymmetric investing warfare

Over the past few years a narrative has developed that explains this apparent embrace of reckless speculation not through the technological drivers I see – zero-commission apps, mass-broadcast platforms, and blockchain – but through an almost Marxist lens.

In a compelling piece this week, a crypto-focused blogger called Jez presented what he dubs ‘hypergambling’ as a logical response to asset inequality:

the core issue here is the cost of owning a house, and the expected timeline on an average salary.

with this core social contract broken, people look for shortcuts. crypto, memestocks, and the rise of option and leverage trading are examples of the public’s increasing desire for volatility and asymmetric upside when linear can’t buy a house.

It’s interesting that my fellow curator-in-arms Tadas Viskanta also believes these forces are real:

For a long time it seemed the arc of financial markets was bending towards the interests of the individual investor. One could easy argue that arc has shot off in another more degenerate direction.

But then Tadas reads even more from the opinion hosepipe than I do. Pehaps he’s suffering from the same narrative overload?

Either way, there’s also the bigger, bigger picture.

If you’re someone like me who believes the current US administration is wildly overstepping multiple lines of legality, cultural norms, and decency, then it becomes even easier to fear the wider world “turning and turning on the widening gyre”, as Yeats once put it:

“Things fall apart, the centre cannot hold. Mere anarchy is loosed upon the world.”

Why play by the old rules when even the ostensible leader of the free world is trying to bend the data to his will?

As the longstanding economics blogger at Bonddad put it this week:

Now we have the additional wrench in the works in the form of a mafia-style blowout being the operative behavior from the US Administration.

If sowing chaos were a winning economic move, banana republics everywhere would be wealthy.

There’s a good reason why they’re not, and that’s because chaos and corruption make it impossible for producers to foresee the results of their economic actions.

With the first family having their hands all over crypto even as legislation is rewritten by their guys at the top, the stage is arguably set for what Bloomberg’s Joe Weisenthal has dubbed ‘The Golden Age of Grift’ [paywalled link].

Investment manager Cullen Roche quotes official statistics to show a trend that isn’t all in our heads:

Will this chart now go ‘to the moon’ like a heavily-pumped memecoin? Or will the US government stop collecting the data before it gets the chance?

Unfazed while Rome burns

This dispiriting landscape is a long way from the core Monevator message of sensible passive investing.

Heck, even my active investing antics are snoozy and long-term by comparison.

And in contrast to the flashmob stock punters who gather at Reddit’s Wall Street Bets, I’ve stressed you should take what I and anyone else writes with a large dose of salt.

Moreover there’s plenty of evidence that ever more people are investing in index funds.

Fund giant Vanguard has produced data too that shows very few of its customers are trading in and out of their funds based on the latest news headlines, or other tumult in the markets.

So which way are we really going?

Perhaps like everything else these days we’re polarising into two camps. Shut-out degenerate gamblers looking for a quick leg-up into money-baller society on the one hand, and steady Eddie millionaires next door – eventually – plodding towards financial freedom on the traditional path on the other?

Or perhaps it’s all just light and mirrors and it’s the same as it ever was?

Tell us what you think in the comments, and have a great weekend!

[continue reading…]

New contributor Frugalist explains how stoozing enables him to supercharge his savings. And if those words make no sense to you then luckily we’ve got 2,000 more where they came from…

Never get into debt and never gamble. Those were the only two pieces of financial advice my mother ever gave me.

Unfortunately by my late teens I’d figured out how to profit from both. It caused no end of horror when the logo-covered post began to arrive.

Today I’m much closer to that maternal ideal though.

I save, I invest, and I never miss my debt payments.

Oh yes – I’m still in debt.

However I’ve got debt on my terms now. I pay no interest, and rather than gambling with my borrowings I’m putting the proceeds into a sure thing – savings that pay me interest.

This is called ‘stoozing’ and no, I didn’t invent that term while smoking something funny.

Instead I must give credit to the stoozing pioneers in the 2000s. Some of you may even be grey enough to remember discussion board user Stooz, after whom the practice is named. (The Investor is ancient enough to confirm this).

In those halcyon early days, I was too worried about school and finishing The Elder Scrolls IV: Oblivion.

But I caught on eventually – and to this day I remain an ardent credit card stoozer.

What is stoozing?

In essence, stoozing means borrowing money at 0%, then stashing it somewhere else that pays more than 0% as interest.

You can then sit back and enjoy the fruits of your arbitrage:

• You borrow £50,000 at 0% and stick it in an account paying 5% interest
• That’s £2,500 in your pocket every year

I can already hear the complaints!

What about your credit file? What about tax? Where is this magical 0% credit card with a £50,000 limit?

Okay, okay – it isn’t quite that easy.

But it is completely true that I’ve meaningfully supplemented my own income with relatively little effort through stoozing this way.

Tools of the stooze

There are three kinds of credit cards that make stoozing a reality. 

First is a 0% spending card. With these, you spend on your 0% card as usual until you reach your credit limit, making minimum repayments as you go to avoid paying interest. You put the cash that would have gone on spending into a savings account instead. 

Second is a money transfer card, where you move money from a credit card into your bank account for a one-off fee.

Third is a balance transfer card. Here you take debt from one credit card and shift it onto another – usually for a small transfer fee. Balance transfer cards are great for rolling over the debt that you’ve already built up.

Wealth warning Remember, I’m moving this debt into cash savings, so net-net I’m not actually going into debt. I can always repay my card balances with my accumulated savings, hence the risk of responsible stoozing is very low. However if you don’t trust yourself to be completely disciplined then don’t go near stoozing with a bargepole.

How to get started with stoozing

The process is best illustrated with an example.

Let’s imagine that Jane gets a 0% spending card with a credit limit of £11,000. After a year of using this card for normal spending – and saving the cash she’d otherwise have spent – she has a balance of £10,000 on the card and £10,000 in her savings account. 

Jane then gets another card. This time it’s a 0% money transfer card. With this she can transfer £12,000 to her bank account with a 2% fee (£240).

At this point, Jane has £22,000 of cash savings, and is down £240 from the transfer.

But over the coming year, she makes 4.5% in her savings account. Like this Jane earns herself £990, leaving a £750 profit for the year. 

Even if Jane earns an above-average £40,000, this is more than a week’s net wages.

When her credit cards start to come towards the expiration date of their 0% rate period, Jane can get a balance transfer card, to move her debts to the new card. This keeps the game going.

At the more extreme end, I’ve even stoozed with a personal loan, when borrowing rates dipped below 3%.

Fees and taxes are a drag

Typically, you pay lower pro-rated fees on shorter deals. Below I’ve set out how this affects the annual profit, based on some of the currently available deals on the market.

I’ve assumed a £10,000 balance transfer with the cash saved in a 4.5% savings account, which earns £450 annual income.

Transfer Fee	Months	Annualised Fee	Annual Profit
2.99%	34	1.06%	£344
1.49%	22	0.81%	£369
No fee	14	0%	£450

You can see that short-term cards have the most profit potential, in exchange for the extra hassle of shorter timescales.

The long-term cards are still worth a look though. With these you can avoid repeated credit checks, reduce the hassle involved with transferring balances, and keep that stoozed capital working for you for a longer period. 

Either way, a single card could net you around £1,000 profit over three years – or more if you’re happy to renew every 14 months.

Don’t forget about tax

You’ll probably pay tax on your savings interest:

• As a 20% basic-rate taxpayer you can earn £1,000 tax-free from savings
• As a higher-rate 40% taxpayer your allowance falls to £500
• At 45% you are considered so rich that you get no allowance

Here’s what each bracket of taxpayer would earn on three different savings balances at 4.5% after income tax is deducted, taking into account the personal savings allowance:

Savings	0%	20%  (£1,000 allowance)	40% (£500 allowance)	45% (No allowance)
£10,000	£450	£450	£450	£248
£25,000	£1,125	£1,100	£875	£619
£50,000	£2,250	£2,000	£1,550	£1,238

Even as a higher-rate taxpayer, a £10,000 savings pot at current easy access rates won’t attract tax. So just dipping your toe into the stoozing waters may be appealing.

But to push the envelope further you’ll need to explore tax-free savings products.

My preference is Premium Bonds. But also consider gilts or even a standard cash ISA (assuming you won’t otherwise be filling your stocks and shares ISA with, um, stocks and shares).

Stoozing and emergency funds

Here’s another angle to think about for anyone chasing financial independence.

Some gurus argue against emergency funds if you’re striving for FIRE, on the basis that keeping any capital in cash creates too great a drag on total investment growth.

For instance, if you start your FIRE journey by saving up a £40,000 emergency fund in a cash account that only matches inflation – and only after that’s in place go on to take another 20 years accumulating your investments – then if those investments earn a 7% annual real return, you’ve missed out on £115,000 of growth on the money that’s stuck in your rainy day warchest.

On the other hand, if you skip the emergency fund and lose your job when the market is down, then you could do even worse by needing to withdraw from your investments at a low ebb.

However I think stoozing can act as a middle ground.

Rather than funding your £40,000 emergency fund at the expense of your investments, you could instead fuel at least a part of the fund with 0% credit card debt. 

Ideally your debts will be structured as a ladder (effectively the opposite of a bond ladder).

Like this, chunks of 0% debt come due each year and can be renewed, rather than the entire amount coming due in the same year, with the risk that lenders won’t cover it all.

This way if you lose your job, you can spend your stoozed cash before needing to touch your investments. This should help you avoid selling your equities at the bottom.

Proceed with caution

Of course my suggestion isn’t a get out of jail free card.

If you burned through your entire emergency fund over the course of a year, then I reckon you’d prefer not to also have £40,000 of credit card debt to think about.

But on the flip-side, you’re protecting yourself against most short-term emergency scenarios, without bearing the full cost of an emergency fund. You should also have a larger investment portfolio to sell from if needed – even if it dips from time to time.

Why not just pay for any emergencies with a credit card if you need to?

Well, I’d argue that you can’t rely on credit cards or lines of credit in a crisis, because lenders can take them away when you need them most.

With my suggestion you’ve taken on the debt already. The lenders gave you the money cheaply when you were less of a risk. 

In contrast they probably wouldn’t want someone who has lost their job to owe tens of thousands on credit cards…but tough luck. They’ve already made their decision and you’ve already borrowed the money.

Finally, if you are on a very secure professional path, like to live by the seat of your pants, and you eat risk for breakfast, then you could go one step further and eschew savings accounts altogether. Just throw your 0% proceeds straight into the market. 

That’s not for me though. It exposes you to too many ways for things to go wrong – and potentially all at once.

Perhaps my mother did get to me after all.

Other downsides to stoozing

On the subject of risk, I’ve heard a drumbeat of a thousand ‘buts’ in the background.

You’re right! There are lots of other negatives to think about before stoozing.

A big one is mortgage lenders. Here you’re at the whims of computer-driven decision machines, who look at your credit file and care little about the interest rate of your debt.

If you’re holding more credit card debt than your annual net salary, they can start to get a bit jumpy. (And not all of us can talk our way into getting a bespoke mortgage.)

One option is to time the ending of your 0% periods around your mortgage renewal date, so you pay them down to a level that lenders don’t care about. (For me this has had the added bonus of reducing the anguish of my long-suffering mortgage broker.)

If you check a couple of ‘How much can I borrow?’ tools from the big lenders, you can get a picture of how much 0% credit card debt you can take on without it wrecking your maximum mortgage borrowing amount. 

Another option is to keep renewing your mortgage with the same lender.

This enables you to secure a more competitive rate than the standard variable rate, but without you having to freshly pass the underwriters’ desk.

On the record

Securing other credit cards and overdrafts can be even more pesky for the same reasons. Again they seem to me to get especially anxious when credit card debt exceeds annual net salary, but it’s not an exact science.

Of course, as dedicated Monevator readers we’d never be looking to get a credit card to actually amass proper Pay Interest To Have Stuff Now debt.

But suppose you wanted to get into the credit card points hacking game?

Someone who could be the perfect candidate for the latest air miles reward card with a juicy £100 sign-up bonus, say, may well be rejected if their credit file makes it look like they’re carrying the same debt as a small developing world country. 

In this case you might write letters of appeal to the underwriters, boasting about your meaty pile of offsetting Premium Bonds. Really – I too was surprised to discover that this can work.

But it takes a pretty special offer to motivate me to try.

Should you start stoozing?

I wouldn’t blame you if you said stoozing isn’t worth the hassle.

But personally I’m expecting to make around £3,000 in net profit this year. And even in the years of rock bottom rates, I still found opportunities. 

To me that’s worthwhile money. All made by doing something I think of as fun.

In true Monevator fashion, I’ve even ploughed my stoozing profits into my investment portfolio. This supercharges the returns from stoozing even further.

The big downside – one that I have no argument against – is that people will think you’re weird if you let it slip that you have 23 credit cards.

So try not to discuss stoozing at parties.

Especially if my mother is there.

Deciding upon your asset allocation can be as simple or as complicated as you wish to make it. You might watch a couple of TikTok videos and decide to go all-in on Griftcoin. Or spend the rest of your life drawing Bollinger bands on charts of obscure Japanese small caps.

A much better alternative is to:

• Learn the basic tenets of strategic asset allocation– that is, what blend of asset classes suits your circumstances and in what proportion?

• Understand what each of the main asset classes is for – how it behaves, the threats it combats, plus the risks and trade-offs you accept by holding it.

• Gain exposure via low-cost index trackers that deliver the performance of each asset class as faithfully as possible.

• Set-and-forget your portfolio, because it’s designed to cope with all investing weathers: rain, shine, inflation, deflation, stagflation, market crashes, and bursting bubbles.

In this post I’ll run you through a simple method to create a robust asset allocation. We’ll consider what questions to ask yourself along the way and some of the rules of thumb you can use to narrow down your answers.

But before that we need to do some spadework.

Asset allocation preparation

The first thing to understand is that there isn’t an optimal asset allocation.

Nobody knows in advance what the best performing assets will be over the next five, ten, or however many years.

That’s why the one consistent piece of advice you will hear is: Diversify.

Plenty of commentators make predictions. Forecasts are catnip for humans after all. Moreover, no one is ever seriously taken to task later for the accuracy of their calls. But it’s still notable that financial prognostications are bedecked with the kind of get-out clauses that would make a fortune-teller cover their face.

Forget the prediction game. It makes fools of us all.

In contrast, adopting a strategic asset allocation positions you for long-term success while offering protection against the many dangers that assail investors.

It’s all pros and cons

The second thing to know is that every asset class has its strengths and weaknesses.

Equities (also called stocks) are violently unpredictable, while nominal government bonds and cash are vulnerable to inflation.

Nothing is inherently ‘safe’.

However the mainstream assets we cover in this article can all play a role in a diversified portfolio.

Your task is to decide which mix is most likely to serve your personal goals.

Who’s portfolio is it, anyway?

Finally, it’s worth thinking hard about your particular objectives and risk profile.

Loud and influential figures on the Internet will speak of the astounding opportunities in Strategy X and the obvious inefficiencies of Strategy Y. But these confident voices rarely consider your age, financial situation, knowledge level, time constraints, or your baseline interest in the markets.

What’s sauce for them may be poison for you.

Compare a 60-something multi-millionaire retiree to a 20-something who’s scraping together £50 for their first ISA investment. These two are almost certainly not playing the same game nor speaking the same investment language.

So be careful who you listen to. Ask where they’re coming from.

Asset class action

To better understand which asset classes deserve a starring role in your portfolio it’s worth sketching out your plan in broad outline.

Think about:

• Investment goals – what’s the money for? Financial independence at 50? Retirement at 65? The rainiest of rainy days?

• How much do you need?

• In how many years will you need it?

• How much can you invest towards your goal?

• What expected return might your portfolio produce?

An investment calculator can help you work out if your numbers add up.

The physics of investing mean that:

The amount you save…

Multiplied by your average investment return…

Over the years you invest…

Determines your future wealth.

If that amount falls short of your target number then you can decide to save more. Or invest for longer. Or to try to live on less.

By way of returns

Note though that your average investment return lies largely outside of your hands – which is something that many people find hard to accept.

Your portfolio’s expected return can stand in for your actual investment return when you first boot up your plan.

But your actual number achieved depends on unknowable future investment results.

You might attempt to nudge up the returns you achieve by increasing your allocation to a high-growth asset like equities.

But this is a risky move. Banking too much on such a volatile asset also increases the chance you’ll undershoot your target if stocks fail to deliver according to your timetable.

Fate is fickle.

Getting going

Alright, that’s enough planning background for now.

Don’t worry if your numbers are a little hazy. Think of investing as like piloting an old sailing ship in the days before GPS.

You just need a rough idea of where the land lies to begin with. You can always make further course corrections along the way.

Keeping it simple

The minimalist’s approach to portfolio diversification splits your money between equities and government bonds.

These two assets are a time-tested and complementary combo.

Equities are powerful like a rocket engine. When firing beautifully, they can shoot your wealth into the stratosphere. But this engine is prone to stalling. Occasionally equities will send your portfolio into a gut-wrenching free fall.

That’s why it’s wise to invest in government bonds, too. Firstly as an alternative (but lesser) source of thrust. Secondly because bonds often work when equities fail. This ‘flight-to-quality’ effect means bonds can cushion your portfolio during a stock market crash.

Historically, equities have outperformed all other mainstream asset classes – on average, if you can wait long enough for the market to come good.

And this tempts some people to go for glory with 100% stock portfolios.

But sometimes equities do suffer long losing streaks. You could spend a decade or more going nowhere.

That’s fine if you patiently keep buying shares on the cheap. History tells us they will rise again.

But problems rear when you can’t wait – because you’re a forced seller, or because you’re impatient, or because you panic when stocks bomb.

It’s easy to be swayed by the high average returns of equities. But you will rarely experience the average return.

Equities can be dreadful for years. Or they can be amazing for years, then suffer a terrible rout that wipes out all your progress.

Most likely, you’ll endure a wild ride that periodically flips from good to downright scary.

You probably shouldn’t give it 100%

These psychological switch backs are why people are generally ill-advised to go 100% equities.

Traditionally, such a high level of risk is more readily borne by:

• Beings with an emotional temperature near Absolute Zero.
• Someone who isn’t relying on the money.
• Investors who can easily repair the damage – typically because they are young and so have committed a negligible amount of their lifetime savings to the market so far.

In reality, few of us can happily stomach watching our wealth drop 50% to 90%. Many people don’t realise how awful it feels until it’s too late.

Hence, the trickiest part of asset allocation is understanding how much equity risk you can personally take.

Your place on the risk tolerance spectrum is impossible to know with any confidence until you’ve received your first shoeing in the market.

The finance industry uses risk profiling tests in an attempt to understand how you might react before then.

But we’ll offer an even cruder approach below.

Choosing your equities

Despite all the risks, most people must invest some of their portfolio in equities. That’s because their goals require a long-term rate of growth that they’re unlikely to get from bonds, cash, or the other asset classes.

Stocks’ inherent riskiness can be somewhat tempered by investing in the broadest pools of shares possible.

Spreading your money this way enables you to avoid taking concentrated bets on individual companies, industries, or regions that could hit the skids.

Global tracker funds enable passive investors to diversify away such idiosyncratic risks at a stroke. Moreover they enable you to invest in every important stock market in the world at the tap of a button for minimal cost.

Critically, the allocations of global index trackers are driven by the aggregate buy and sell decisions of every investor operating in these markets.

You’re harnessing the wisdom of the crowd when you invest this way.

Bring on the bonds

The point of bonds is to dilute the riskiness of equities. Hence we usually want to pair our shares with the least volatile bonds around:

• High-quality government bonds – ideally nominal short to intermediate durations, and/or short duration index-linked.

• From your home country – so UK governments bonds (also called ‘gilts’) for UK investors. Or else global government bonds hedged to GBP.

• You can use individual bonds or bond funds.

What percentage of your portfolio should be devoted to bonds? Again, there’s no ‘correct’ answer. It depends on your personality, goals, and financial situation.

However we can throw a rope around your number using some general principles and rules of thumb.

Remember, we’re only investing in equities because we need the growth they offer over the long term. Whereas if you happen to own an orchard of money trees and wade through fallen bank notes like autumnal leaves then you won’t have to bother with all that nasty bear market business.

In such a scenario where you don’t need much growth – say just 0.5% to 1% real return per year over the next ten years – you can hugely reduce your reliance on equities.

In other words, if you’re more interested in capital preservation, then a bigger allocation to shorter-dated conventional government bonds and index-linked gilts makes sense.

Associated rule of thumb: 120 minus your age = your allocation to equities.

In particular if you need the money soon then equities are a big risk.

And by ‘soon’ I mean anytime in the next ten years.

Rushing roulette

Equities have a one-in-four chance of returning a loss inside any five-year period and a one-in-six chance of handing you a loss within a given ten years, according to Tim Hale in his superb book Smarter Investing.

So do not allocate anything like 100% to equities if you will need all of your money within that period.

Associated rule of thumb: Own 4% in equities for each year you’ll be investing. Put the rest of the portfolio in bonds.

If your target is flexible, or you can delay your plans, or the stock market money is a bonus in the big scheme of things for you, then you can increase the risk you take accordingly.

For example, if your retirement living expenses are amply covered by income streams such as a workplace pension and the State Pension then you could up your equity allocation in your ISAs, say.

If equities plunge in value then no matter. You can ride out the dip and enjoy the upside whenever a recovery comes.

That said, your risk tolerance is the house that rules all.

Risky business

The nightmare scenario with any asset allocation is that it’s too risky for you.

If you panic and sell when markets plunge you’ll lock in losses and permanently curtail your future returns.

Even young investors can be psychologically scarred by early losses that put them off investing for life.

But how do you know your risk tolerance until you’ve experienced a serious setback?

One solution for new investors is to dip only a cautious toe into the market to start with. For example, you could opt for a 50:50 equity-bond split until you’re tested by your first market crash.

Associated rule of thumb: Think about how much loss you could take. 50%? 25%? 10%? Write down the current value of your investments. Cross that figure out and replace with the amount it would be worth after enduring your loss.

Could you live with that if it took ten years to recover your original position? Limit your equity allocation to twice the percentage amount you can stand to lose.

William Bernstein, in his wonderful book The Investor’s Manifesto, provides handy instruction on how your personal risk tolerance might modify a rule of thumb such as ‘your age in bonds’:

Risk tolerance	Adjustment to equities allocation	Reaction to last market crash
Very high	+20%	Bought and hoped for further declines
High	+10%	Bought
Moderate	0%	Held steady
Low	-10%	Sold
Very low	-20%	Sold

Bear in mind that your risk tolerance is a moving target. It’s known to weaken with age and as the amount at stake rises. Therefore even a seasoned investor should reassess their allocation from time to time and consider lifestyling to a lower equity allocation as they age.

Finally, remember that the rules of thumb aren’t scientifically calibrated. They’re quick and dirty shortcuts based upon the practical wisdom gathered by previous generations of financial practitioners and investors.

Hopefully they can guide you to the right destination at a relatively safe speed. But sadly there are no guarantees.

Here’s a final rule of thumb: a 60:40 equities and bonds split. This has become the industry standard for the ‘don’t know’ or ‘Joe Average’ investor.

Press play to continue

Once you’ve thought through your equity/bond division, you’ve made the asset allocation decision that will have the biggest impact upon your ultimate returns from investing.

The hard work is potentially over. If you like, you can now draw a line under the process and even outsource the fine details to one-stop, fund-of-funds like Vanguard’s LifeStrategy series

Keen to go further? Then you can carry on tweaking your asset allocation in search of further diversification.

Inflation defence

Equities, government bonds, and cash will take you a long way. But they do leave a chink in your armour.

All three assets typically flounder during long and hairy surges in inflation.

This doesn’t matter so much for young investors, who can rely on positive long-term growth rates from their shares to outstrip inflation eventually.

But retirees living off their portfolio should think about incorporating an inflation-resistant asset that they can sell as needed if consumer prices spiral.

Short-term, index-linked, government bond funds are likely to perform better than other bond funds in these circumstances. However, rapid interest rate rises proved an Achilles heel for these assets post-Covid.

Individual index-linked gilts (affectionately known as ‘linkers’) are a better match for fast-rising prices.

Linkers seem complicated at first, but mostly that’s because they’re unfamiliar rather than intrinsically complex.

If you’re an older investor who’s prepared to devote some time to learning about them then I think index-linked gilts are worth the effort.

Commodities also thrive during at least some inflationary episodes. And they can be bought off the shelf using diversified commodity ETFs.

Commodities also require a slog up a learning curve. You especially need to consider how extremely volatile commodities can be.

Still, the asset class’s long-term returns look reasonable – sitting between equities and bonds. We’ve put a 10% slug of commodities into our model retirement portfolio.

Gold is the final mainstream asset that periodically performs well against high inflation.

The yellow metal isn’t specifically designed to counter inflation like index-linked gilts are. Nor does gold have a reassuringly long track record of outstripping inflation like commodities.

But gold has worked during two of the last three price shocks.

Although gold’s recent performance makes it look like a no-brainer, the story is more nuanced over longer periods. Do make sure you understand the pros and cons of gold before making an allocation.

Further asset allocation ideas

There are plenty of other asset classes you could consider. We can debate them in the comments.

But the selection above covers the crucial assets. By themselves, they are enough to hit your goals and muster a porcupine defence against any of the major economic threats you’re likely to face.

One thing I haven’t mentioned is that many people have substituted money market funds for bonds since the latter crashed in 2022.

However, there are four reasons not to do this:

1. The long-term returns of nominal government bonds are significantly higher than money market funds.
2. Nominal government bonds are more likely to reduce stock market losses during a crash.
3. Similarly, nominal govies are the place to be if deflation sets in.
4. Lastly, government bonds are far better priced now than they were in 2022.

Reasons two and three also explain why you’d hold a nominal government bond allocation that’s separate from a slug of index-linked bonds.

How much?

Know that it’s absolutely fine to carve out your allocations in big 5-10% blocks. The odd fiddly percentage point here and there will make little difference to your final score.

Most people should avoid adding so many sub-asset classes that you end up with a raft of sub-5% allocations.

These add unnecessary complexity for negligible gain.

Model behaviour

Okay, I know that’s a lot to take in. No wonder many investors turn to model portfolios to help firm up their ideas.

Some ready-to-share asset allocations we’ve written up include:

• Investment portfolio examples from the investing greats (and us…)
• Our own Slow & Steady model portfolio
• The All-Weather portfolio – especially well-suited to older investors
• Our decumulation portfolio

However you go, you’ll find there’s a good range of low-cost index trackers to cover almost all the asset classes you might include in your portfolio.

Take it steady,

The Accumulator

Note: we updated a decade-old article on asset allocation to create this post, so early comments below may refer to this previous incarnation. We like to keep our old discussions for posterity, but please do check the dates with anything time sensitive.