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Weekend reading: It’s not perfect, but historical data is the best we have to go on when investing

Weekend reading logo

What caught my eye this week.

Writing a regular personal finance and investing blog isn’t all glamour, acclaim, and partying with insouciant French models, you know.

Sometimes it can even be a tad dispiriting.

You, dear reader, can come across a comment like…

  • “I don’t see the point in bonds – I decided not to buy any when I started investing 18 months ago and I haven’t looked back!”

or…

  • “Stop trying to pump up FED-inflated shares even higher I bought shares in 1999 and they crashed in 2000 and I lost everything IT WILL HAPPEN AGAIN.”

or…

  • “Index funds are for losers. I got my Amazon shares in 2005 when I didn’t know what I was doing and then forgot I owned them and now I’m rich.”

…and you can shrug and be glad you decided not to invest with that particular active fund manager.

(Ha ha. Little joke there, active fund manager friends.)

But as someone who has been writing a blog about this stuff for ten years – well over 1,000 articles in total – it’s hard not to take such silliness personally. Especially when it’s written in the comments of your own website.

It’s understandable that investors in the 1930s, the 1950s or even the 1980s might base their beliefs about investing on personal experience.

Up until the 1990s you had to hunt to find good books about investing.

As for accessing data to reach your own conclusions and devise the right plan – you had to be rich already to buy that data in the first place!

Nowadays though we’re drowning in solid investing advice. Obviously lots of rubbish, too, but there’s so much good stuff being written it’s almost excessive. Filling this page with links every week takes a while, but it’s never for a lack of decent material.

Resources like the wonderful Portfolio Charts has brought data to the masses, too.

So why do some people persist with hokey homemade theories based on just a few years’ personal experience?

Presumably it’s evolutionary. There is good reason to believe what you’ve seen before with your own eyes when another caveman tells you to go cuddle a sabre-toothed tiger.

But as Michael Batnick pointed out in his Irrelevant Investor blog this week, your personal experiences and mine may differ wildly – and when it comes to investing both may be inadequate when it comes to the big picture.

Look at how various cohorts of investors fared with the S&P 500 over the first ten years of their investing life:

Those are extremely different outcomes. As Batnick notes:

Consider an investor who started in 1946 (black) versus one who started in 1966 (light blue).

The former got the chance to invest in a market that compounded at 16.7% while the latter saw stocks compound at just 3.3% while being ravaged by two bear markets.

Now you and I might look at that graph and conclude luck plays a huge role over the short-term in investing.

Some ambitious folk might even believe the graph demonstrates that you need to pay attention to levels of market valuation or momentum when deciding how much to allocate to shares – though I wouldn’t recommend it for most.

But what one should clearly avoid doing is concluding “shares are the only place to be” because you happened to get going in 1946 or “when I hear the phrase ‘stocks for the long run’ I reach for my revolver” because you started investing 20 years later.

True, we can never be sure the future will look like the past.

But it must be better to be aware of a hundred years of ups and downs than to believe investing started the day you opened your broker account.

From Monevator

Asset allocation starts with defining your investment goals – Monevator

From the archive-ator: Bitcoin is a bubble. Probably – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

UK property market is weakest for six years, says RICS – Guardian

Record number of markets have negative total return (in USD) in worst year since 1901  [by that measure]Bloomberg

UK economy grows at fastest rate since late 2016 – BBC

5.8m Britons excluded from mainstream finance [Search result]FT

The firms that have switched to a four-day week – Guardian

Chinese headmaster fired over secret crypto-mining operation at school – BBC

43-year old presidential hopeful offering $1,000 a month to all Americans – CNBC

Real wages picking up, fastest growth in nominal wages for ten years – Deloitte

Products and services

Interactive Investor scraps exit fees for all customers – Moneywise

Government announces probate fees hike – Money Saving Expert

Is rent cheaper in the next street? [Interactive map]BBC

Ratesetter will pay you £100 [and me a bonus] if you invest £1,000 with it for a year – Ratesetter

Would you spend £50 a month, Netflix-style, to go on three weekend holiday breaks a year? – ThisIsMoney

Comment and opinion

Things you see during every market correction – A Wealth of Common Sense

The magic – and danger – of compound interest – Moneywise

What is early retirement like? – Young FI Guy

When things get wild – Morgan Housel

Busting the myths of investment: Do equities outperform bonds? [Search result]FT

Tracking alpha’s shrinkage [Why ever fewer funds beat the market]ETF.com

Merryn Somerset Webb: Life begins at 60 [Search result]FT

You are never done being you – Abnormal Returns

The power of passive [On market/industry structures]CFA Institute

Inflation, not recession, is the big risk for investors – Forager

You are what your record says you are – Epsilon Theory

Investing in venture capital [I’m writing a series on this, too!]Value and Opportunity

‘Bonds with a twist’ sends worrying message on risk – The Value Perspective

For stock pickers: Selling Victrex after a rapid turnaround – UK Value Investor

Buffett’s underrated investment attribute – Base Hit Investing

The odd factors: Profitability & Investment [For investing nerds]Factor Research

Brexit

Brexit is teaching Britain its true place in the world [Search result]FT

Pound skeptics turn believers as divorce deal looks near – Bloomberg

Cabinet Office investigates leak of Brexit PR plan it claimed was “not genuine” – Andrew Adonis via Twitter

Kindle book bargains

The Spider Network: The Wild Story of a Maths Genius and One of the Greatest Scams in Financial History by David Enrich – £1.99 on Kindle

Tiny Budget Cooking: Saving Money Never Tasted So Good by Limahl Asmall – £1.09 on Kindle

The Strategist: Be the Leader Your Business Needs by Cynthia Montgomery – £0.99 on Kindle

A Street Cat Named Bob: How One Man and his Cat Found Hope on the Streets by James Bowen – £0.99 on Kindle

Off our beat

David Attenborough has betrayed the living world he loves… – Guardian

…though on a happier note, the global fertility rate is collapsing – BBC

Britain’s renewable energy capacity overtakes fossil fuels – Reuters

Why the robot apocalypse might not be intentional – Schroders

Trump calls CNN reporter ‘the enemy of the people’ [Video] – Reuters via Twitter

In China, Bill Gates encourages the world to build a better toilet – New York Times

Four forum posts about software that changed the word – Chris Dixon

And finally…

“It’s a huge positive step forward if you can embrace the fact that you don’t have the edge to beat the markets. It will make you a better investor and leave you wealthier in the long run while spending less time worrying about your investments.”
Lars Kroijer, Investing Demystified

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{ 46 comments… add one }
  • 1 Andrewm November 9, 2018, 7:10 pm

    Somewhat tangential but a really good examination of why we spend lots of money on things that maybe we shouldn’t from Seth Godin on the Akimbo podcast this week: The Wedding Industrial Complex. Not FI, very relevant.

  • 2 jon November 9, 2018, 7:45 pm

    Funnily enough we are all born market timers. The date of your birth will determine market valuations you will face when you come to retirement which will determine your safe withdrawal rate.

  • 3 Hospitaller November 9, 2018, 9:30 pm

    “True, we can never be sure the future will look like the past”

    And yet, as you say, there must be value in understanding what happened historically. The problem I find myself yet again wrestling with is Brexit and its likely effect on UK quoted investments. I mean this in the sense that I am unsure that capital markets theory can work too well in the context of a vote to make ourselves worse off for the foreseeable future. I do not know how often that has been done in a major country. Part of me has been inclined to just dump my UK shares and go elsewhere. But the currency problem seems to limit how much I can do of that (ie what if, seemingly against all odds, the markets deem a Brexit “deal” a “success” and Sterling suddenly gains 10%?).

  • 4 Ben November 9, 2018, 10:04 pm

    No cautionary article about taking advice from those who’ve had lucky timing is complete without a hat tipto UK property. I have had friends so convinced by elderly relatives that property is a free money machine that they’ve bemoaned the lack of a deposit with tears in their eyes. What do you reckon? Weren’t you meant to write an article on property anyway?

  • 5 dearieme November 9, 2018, 10:23 pm

    The spaghetti graph is excellent. I wonder whether correcting for inflation would make the results look more scattered or less. For example, the light blue line for 1966-1975 corresponded to higher inflation (I’d think) than the yellow one for 1956-65. In other words I suspect that correcting for inflation would force those two lines further apart.

    “luck plays a huge role … in investing.” And in everything else.

    “UK property market is weakest for six years, says RICS”: only if you’re selling.

    “UK economy grows at fastest rate since late 2016”: written by someone about to move to a better job? Written for a dare? Written by AI?

    Merryn: a minor criticism, but people do trend to treat life expectancies as if they are brute physical facts rather than what they are, namely the results of intelligent, methodical attempts to extrapolate facts – but attempts that ignore the possibility of shocks such as, say, Spanish flu.

    The renewables link makes a wonderful muddle of the ideas of capacity and output. Presumably deliberately?

  • 6 Pinkney November 10, 2018, 1:08 am

    Yes the renewables article was mildly annoying as we would need a sunny windy day and lots of rain and rubbish to burn or imported wood pellets to use that capacity. But it does show we are moving in the right direction http://www.gridwatch.co.uk has a nice real-time view and as I look we are 42% renewable not bad

  • 7 John B November 10, 2018, 9:11 am

    Biggest problem with data is that all too often it ignores dividends. Its often hard to get Total Return results, good to see your S&P example does. I wrote a web page that quotes returns for the FTSE TR between pairs of dates. I must publicise it

  • 8 The Investor November 10, 2018, 9:13 am

    @John B — I’d be interested to see that Total Return web page. Please feel free to share the link here!

  • 9 Brod November 10, 2018, 9:30 am

    @JohnB – All the charts on the wonderful portfoliocharts.com are total return and real, inflation adjusted. The recent improvements to show all the charts at once when you build your own portfolio are great.

    And add in Big ERN’s work on safe withdrawal rates at earlyretirementnow.com which is absolutely invaluable.

    And of course the work of TI, where for me it all started.

    And nobody’s selling you anything!

  • 10 Ben November 10, 2018, 10:31 am

    Ok, ill bite.
    I don’t own any bonds because I think they’re over valued.
    I am happily passive in all my share tracker funds. I just don’t see any upside at all.
    Now all this could change of course, when valuations come down and bonds start reflecting inflation. At the moment I am young and getting a better rate through various bank accounts for shorter term needs.
    I suppose that last sentence is key. Bonds are being priced as risk free cash, I’ve just found a better source of returns for cash.
    A dogma of 60/40 shares bonds (or whatever) might be useful for many (most?) people, but its undeniably better to look at the actual facts and make a decision based on that.

  • 11 A beta investor November 10, 2018, 10:58 am

    John B, please publish TR data, it is vital to demolishing the active investor wins myth. Which of course is why it is so hard to find.

  • 12 Matthew November 10, 2018, 11:00 am

    “So why do some people persist with hokey homemade theories based on just a few years’ personal experience?” – THE INVESTOR

    Because as a race we are often not great at making decisions:

    http://www.visualcapitalist.com/every-single-cognitive-bias/

  • 13 L November 10, 2018, 11:43 am

    @Pinkney – thank you so much for that link – it is wonderful random stuff like that that makes the Monevator comments section worth reading! 🙂

  • 14 Hari Seldon November 10, 2018, 11:57 am

    Before dumping your UK investments, regardless of the currency factor, I’d suggest caution.

    Firstly if you are following a passive strategy, with a rebalancing policy, then I’d suggest you just carry on with your plan. Rather defeats the object of the passive approach, if you are using active market timing.

    On the other hand, if you are investing actively, then the most hated stocks, sectors, markets often provide opportunities….

  • 15 Kraggash November 10, 2018, 12:56 pm

    @Ben For quite some time, government bonds have been dubbed ‘Return-free risk…

  • 16 old_eyes November 10, 2018, 1:12 pm

    The phenomenon you observe of personal experience over-riding evidence and data is not confined to the world of finance. It crops up in every human endeavour. It is a classic demonstration of Kahnemann and Tversky’s work on system 1 and system 2 thinking. In most of our life, we use learned heuristics to make the bulk of our decisions. There is just not enough time to carefully consider each decision, so we use what worked last time.

    This had evolutionary benefits. You did not stop to think about the source of that rustle in the bushes. The downside if it was a lion was so great that instant flight was the best action. If it turned out to be an anteater and a good meal, well they don’t move very fast and you could check it out from a safe location.

    These heuristics work until they don’t work.

    I once worked for an American CEO I called “the one-club golfer”. He had several successes as a divisional manager with a very specific model of business; ruthlessly cut costs and drive sales. Based on that he was promoted and adopted exactly the same approach. You did not need to ask him for a decision; you knew what his answer would be under all circumstances.

    Well, it worked until we needed to innovate to position ourselves in a rapidly changing market, when he nearly broke the company.

    You see the same in the confident marketing director who “knows” what the customer wants, the innovator who is certain that their latest idea is a breakthrough, and the investor who knows what the market will do.

    We have limited capacity to think seriously about possible futures, and we chose where to use that capacity. For the rest, we take a shortcut by choosing what worked last time. The future as a linear projection of the past.

    In all fields, the ignorant make decisions without prior knowledge, often with surprisingly positive results. The knowledgeable believe they understand and frequently get things very wrong. The truly expert understand the uncertainties and are rarely certain about anything.

    Plato quotes Socrates as saying:

    “I seem, then, in just this little thing to be wiser than this man at any rate, that what I do not know I do not think I know either.”

    Donald Rumsfeld got a huge amount of flack for the following quote, but he was absolutely right:

    “Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”

    We have to make guesses about what is going to happen; otherwise we are paralysed. But the wise person looks for decisions that are resilient to unexpected events and fail gracefully. They understand the assumptions they are making and periodically ask – “what would happen if that assumption turned out to be wrong?”.

    It is the knowledge of what I don’t know that pushes me to whole market investing, passive investing and a balanced portfolio. As many have noted it may not be the most profitable strategy at any point in time, but it is less likely to go tits-up when circumstances change.

    And thanks to all the contributors to this site who have shared their thinking; making me understand and challenge my own assumptions. Ignore the certain (on any topic), they are always dangerous to themselves and those who listen to them.

  • 17 old_eyes November 10, 2018, 1:16 pm

    @Matthew I love that infographic! So many ways of making mistakes crammed into one picture. You read it making mental tick marks – “Yep – done that one!”

  • 18 Ben November 10, 2018, 2:05 pm

    Re https://www.etf.com/sections/index-investor-corner/swedroe-tracking-alphas-shrinkage

    They seem to have a problem with their calculations

    “To answer the question posed in the headline, Liu took a step back through time to revisit their historical reports. She found that while for the three years ending in March 2003, 11.4% of all domestic funds managed to remain in the top quartile for three-consecutive years, by March 2016, that figure had fallen to 2.3%.”
    And
    “For taxable investors, even that 2.3% figure is too optimistic, because the greatest expense of active managers is typically taxes. Thus, for taxable investors, that figure is likely closer to 1%”
    How would less funds remain in the top quartile due to tax?
    It would lower absolute returns, but not affect relative performance.

  • 19 PendleWitch November 10, 2018, 3:36 pm

    Hi @TI,
    Thank you for providing the links every week. You do it, so we don’t have to 😉

    Some of us are paying attention… From this week, I know that:
    1) Since I can’t choose my birth year, then I should definitely invest for longer than 10 years!
    2) Humans are such a mess of cognitive biases that it’s surprising we can decide what to eat for breakfast, never mind make logical investment decisions.
    3) Financial writers think there are still a significant number of people alive that remember Tommy Cooper. (He died in ’84.)

    @old_eyes, I was also puzzled that Donald Rumsfeld got laughed at for the ‘knowns/unknowns’ quote. Seemed logical to me!

  • 20 Hari Seldon November 10, 2018, 4:20 pm

    It’s always worth remembering that with US funds they are subject to Capital Gains Tax on transactions within a fund, unlike the UK where CGT is only levelled on the investors holding.

  • 21 MrOptimistic November 10, 2018, 4:26 pm

    Those of us who lived through the ’70s will have memories of financial chaos and stagflation. Such memories can either be attributed to wisdom and experience, or a bias. I hold shed loads of IL stuff and the fact that a DB pension scheme only protected up to a limit of 5% inflation was one factor in transferring to a SIPP. Bias in action?

    @PW. Tommy Cooper? That would be anyone born before say 1970, aged 48 or older. Can’t see that the writers are making that big a mistake ( says he at age 65). Best DR quote was ‘ going to war without the French is like going duck hunting without an accordion’.

    With oil prices sliding (where’s the demand gone), retrenchment after QE, China trying to rein back creation of debt, Brexit, Italy, Trump, Trotskyists, useful idiots, Fed hawks etc, bit narrow sighted to trash sovereign debt and bonds. These are difficult times in which inflation and deflation remain concurrent fears.

  • 22 Caveman November 10, 2018, 5:14 pm

    So interesting to see that graph. For most people 10 years would feel like they have invested for the long term – and they have as the worst 10 year return is 38% over the period (although I don’t know if that’s adjusted for inflation – in which case that could still be a loss. But as that chart shows, which 10 years you cover has a big impact. However you can’t change when you start.

    I think what I’m taking from that is:
    a) My monthly drip feed into global index trackers and also some lifestyling built in is the right thing for me at the moment.
    b) I am right to be in the market rather than cash.
    c) Remember that the recent past (and the more distant past) is really no guide to the future and I may well need to change course in the future
    d) Always DYOR…

  • 23 PendleWitch November 10, 2018, 6:20 pm

    @MrOptimistic, are you saying we’re all old here? I thought Monevator had a young crowd 😉

  • 24 Boltt November 11, 2018, 10:04 am

    @Forager and Inflation risk.

    Yes, inflation risk is a major concern for early FIRE types. Especially with portfolios similar to mine below:

    1. Deferred pensions with capped/fixed indexation
    2. Preference shares with fixed nominal dividends
    3. BTLs – Real investments, but rent increases are not smooth and are usually occur at change of tenant
    4. 5 year P2P contracts on fixed terms
    5. Equities will adjust to higher inflation at their own pace

    What is the best way to hedge inflation?

    I don’t really want to change the portfolio much, but I’m happy buy “insurance”.

    Is there a low credit risk seller of RPI/CPI derivatives or CFD?
    Do they exist, can we buy them easily as retail investors?
    Any Better alternatives?

    As an example let’s assume someone have £1m net worth with £500k being in their capped deferred pension (say 3% cap).

    Ideally they need a “contract for difference” type bet that pays out £5k for every 1% RPI above 3%. It will probably need to be longish term contact so that prices/terms don’t adjust too quickly.

    Suggestions and people’s current solutions please.

    B

    Ps thanks for the article/links, and the regular schedule.

  • 25 dearieme November 11, 2018, 12:25 pm

    @Boltt.

    Our current solution to inflation risk is to hold Index-Linked Savings Certificates, which are unavailable nowadays except by rolling over maturing ones.

    Suggestion: an ETF of TIPS to replace some of your equities and prefs, or a “fund” of TIPS – whichever looks more attractive. Also, buy some gold sovereigns – they are insurance against financial calamities including extreme inflation. A suggestion I’ve seen several times is that preparations against serious inflations might include buying second-hand, low-carat gold jewellery – easier to shop with than gold sovs, apparently, and presumably harder for a government to steal from you.

    I know nothing about using derivatives and am interested in learning something about them.

  • 26 Boltt November 11, 2018, 3:23 pm

    Thanks Dearieme.

    I think I’m looking for a 10 year Inflation Swap – where I pay a fixed inflation rate in exchange for receiving variable inflation rate payment.

    https://www.actuaries.org.uk/system/files/documents/pdf/swapsmadesimple.pdf

    I bet zxspectrum48/mathmo/FvL etc (and of course our writing team) will be able to add some detail – I’m sure it’s riskier that it looks.

    B

    Ps a bit of gold may be useful but I’m not sure about physical gold. My full sovereign risk was lost in a burglary! For a financially fun (terrrifying) novel about economic Armageddon and the benefits of physical gold try reading The Madibles by Lionel Shriver

  • 27 Mathmo November 11, 2018, 3:43 pm

    @Ben — I’ve been there, although I think I’ve now changed: if you think bonds are overvalued, wait till you look at equities… the point about bonds is not a place to find yield or return, but a place to store wealth while you wait for equities to get cheap. Indeed, I consider my bond holding to be the bit that lets me keep as much invested in equities as I do. It was fascinating to look at bond valuations during the recent flutter in equity markets.

  • 28 Steve November 11, 2018, 4:42 pm

    @ Investor

    There are the beginnings of some thoughts above but a useful article might be what so you do when you have reached your investment goal in terms of size of portfolio. In simple terms, what do you do to keep the real value after inflation in place while running limited market risk? Before someone says “just invest in inflation-linked bonds/funds” it is not as easy as it might sound to buy inflation protection which actually does what it says on the tin ie match actual inflation. For example, long-dated inflation-linked bonds can be highly volatile.

  • 29 Snowman November 11, 2018, 6:04 pm

    The Barclays Equity Gilt Studies have a wonderful infographic bar diagram showing the variability of real equity returns over 5, 10 and 20 years.

    If you look at the Barclays Equity Gilt Study 2016 report for example (pages 59 and 65 for UK and US) you will see how real returns historically have been as low as -3%pa over some 10 year periods and even over 20 years you haven’t been assured of any real return and in the UK it’s even been negative.

    And with markets being a complex adaptive system any future outcome is possible, future returns aren’t constrained by what has happened historically.

    You can make good economic arguments for equity returns being low or even negative going forward for the next 20 years. The high level of private debt throughout the world will have to reduce at some point (and it is private debt not public debt that really causes the problems) and that position could take decades to unwind.

    I’m not saying avoid equities at all, but just that you always have to be mindful of being caught in an unlucky period.

  • 30 Ben November 11, 2018, 6:30 pm

    @mathmo
    Yes I get that, but if your stored wealth is slowly leaking away to inflation, and you have a good idea it’s also going to take a hit when governments stop buying their own bonds. That isn’t really what I want. Id rather it be in the market, at least I have some kind of upside there.

  • 31 Mathmo November 11, 2018, 7:33 pm

    @Ben — indeed. You might imagine that gilts offer -1% real returns at the moment (2% against 3% inflation?). So that’s 8bp a month.

    S&P 500 lost 670bp last month, and during the worst of it bonds had a little rally.

    I’m delighted to lose 1% a year on the bonds in order to give me 10% returns on equities. So net 9% on a 50% portfolio, but the option to buy on serious dips / corrections, which boosts my return over 10%.

  • 32 Ben November 11, 2018, 8:08 pm

    @mathmo
    Indeed with the benefit of hindsight. But if I had a crystal ball I would be sunning myself on a beach somewhere :).
    The issue for me is that the -1% is guaranteed (obviously inflation will vary, but we can have a good idea whether a return is going to beat inflation). Whereas stocks more often than not go up (and by more than inflation).
    I’m not really into market timing so it would be a long term asset allocation for me. I can see how the calculation would be different for you.

  • 33 Mathmo November 11, 2018, 9:15 pm

    The portfolio premium is not really an issue of market timing. I don’t need to be lucky and guess when the month with the drop is coming to beat just holding equities. All I need is for it to happen once at some point.

    670 is 83 x 8.

    What do you think is more certain?
    – A – Bonds have negative real returns for the next 8 years.
    – B – Every single one of the next 83 months (ie 7 years) doesn’t show a correction (like last month’s)

    I think on average equities will do better than bonds over the next 8 years, I just think that they are going to do so in a way that isn’t a straight line and I’m going to be there to catch them when they step off the straight and narrow.

    That’s the reasoning I used to rebuild my bond position, but I’m just persuading myself out loud here — if not useful for you, then no problem.

  • 34 Ben November 11, 2018, 9:46 pm

    Well as i said I don’t really time markets, or really keep much of a notice except once a year! So I may well have missed the dip
    Not wanting to have to keep track of that dip I would be looking at what has done better in the past 8 years / what is likely to do better in the next 8 years, for me that is 100% stocks every time.

  • 35 dearieme November 12, 2018, 2:34 am

    Thanks, Boltt.

    Our gold and silver is all “paper” held in SIPPs and ISAs. Whether there’s really any metal ‘there’ is, I suppose, an act of faith.

  • 36 Factor November 12, 2018, 12:24 pm

    @old_eyes (16) “Ignore the certain (on any topic), they are always dangerous to themselves and those who listen to them.”

    But are you certain about that?

  • 37 The Investor November 12, 2018, 1:31 pm

    Agreed, certainty rarely has any place in investing. It reminds me of a favourite bit of variously deployed rhetoric:

    “I wish,” remarked the Prime Minister, “that I was as sure of any one thing, as Tom Macaulay is sure of everything.”

  • 38 Brod November 12, 2018, 3:34 pm

    @Ben – you say that Stocks mostly go up, but according to portfoliocharts.com, 27% of the time the UK TSM has lost money. And 8 years of a bull market is not really representative sample.

    How old are you? Or rather, how long till you retire and need to withdraw from your pot? If you’ve over 20 years, a high equity percentage doesn’t seem unreasonable. Just be prepared for a rough ride, and have a realistic view if you can stay the course of a prolonged (or sharp) drawdown. I invested a small lump sum in 1999 only to see it halved 12 or 18 months or so later. Not nice. But I just forgot about it until I had more money to invest some years later. Then came 2008 and that was end-of-the world-scary. Luckily I was transferring brokers and couldn’t do it in-specie, so I sat in cash until the market was way off the bottom (though I still got a 25% uplift.) This brought home to me the impossibility of timing markets – anchoring, fear, waiting too long, will it go back down?

    Identifying what equity proportion you can stay the course with is difficult. Only looking at your portfolio once a year and having missed the 2018 wobble is encouraging. But remember, it could be the #1 news item next time it falls. Or you could have much more invested and be much nearer retirement so the impact seems greater.

    Putting your equity in geographically diversified portfolio, the rest in bonds*, save regularly, re-balance as per schedule and let it ride. Not glamorous, but effective.

    *btw, I’m pretty sure I read somewhere the Bernstein, the originator of the 60/40 portfolio (I think!) only suggested short-term treasuries for the bond portion. Which would increase your potential losses to inflation but decrease you losses (or gains) to interest rate moves. There really are no risk free alternatives apart from diversification. Yer picks yer poison…

  • 39 Little Miss Fire November 12, 2018, 3:38 pm

    I can see why would would take such silliness personally. I think with the world made up of excuse users that those who step forward to offer advice and guidance often get shot down firing squad style.

    We dont have any bonds but its not based on any past performance or future epectations bias – We just aren’t there yet and thats ok!

  • 40 Brod November 12, 2018, 3:39 pm

    @Ben – please ignore all the drivel above. If you’ve got cash savings surely that’s (some of) your Fixed Income allotment?

    We’ve got an off-set mortgage with a large off-set and I’m accumulating a small DB pension, so I personally don’t see the need for bonds either.

  • 41 Ben November 12, 2018, 4:31 pm

    @
    Brod
    I think we’re on the same page. I’m 34 so only another 45 years till state pension age.

    Hey I started investing in 2008, thinking the ‘dip’ was a good buying opportunity. As I said I don’t try to time the market.

    I wouldn’t so much class my cash as a fixed income allotment, just money I would need shorter term. You are right that this is basically a bond replacement and in a sane world riskier bonds would be paying a premium to savings accounts, and in that case I may actually be making use of bonds.

  • 42 old_eyes November 12, 2018, 9:53 pm

    @Factor,

    “@old_eyes (16) “Ignore the certain (on any topic), they are always dangerous to themselves and those who listen to them.”

    But are you certain about that?”

    Absolutely not. It is just another heuristic. I’m as culpable of pigeonholing as the next man!

  • 43 Get Rich Brothers November 13, 2018, 3:52 am

    Hey TI,

    I think when it comes down to it (for me, at least), the main consideration is that more business will be done ten years from now, and ten years from that, than it is today. Being invested in high quality companies that have shown they can increase their dividend and reward shareholders is as sound a strategy as I’ve come across.
    As you mention, past performance isn’t going to guarantee anything in the future, but we need to play the odds based on something. One of my favourite ways to decide how to do that is take a walk through Walmart and see how people are spending their money. Or listen to conversations in a restaurant. I let that guide my decision making, regardless of how anecdotal it may be.

    Take care,
    Ryan

  • 44 John B November 13, 2018, 2:39 pm

    My very simple FTSE 100 total return calculator between pairs of dates. Almost no error trapping or validation. http://www.johnbray.org.uk/ftse100totalreturn.html

  • 45 MrOptimistic November 13, 2018, 11:02 pm

    I am broadly in the position alluded to by TI, ie got enough (but more would be nice). Don’t want to risk money I have and need going after money I dont have and don’t need. Real return on 2024 IL gilts I hold was nigh on -1.8% last time I looked. So real loss guaranteed if held to maturity. My general approach is to aim for 30% equity 70% bonds with the latter held 50% cash at present. It’s an uncomfortable amount of cash, if there is such a thing.

  • 46 TahiPanas2 November 14, 2018, 4:18 am

    I am retired and an unrepentant long term (forever?) dividend investor. We manage to spend only about 2/3 of our annual income and now invest the excess only in highly diversified ETFs and ITs.
    We have no bonds. Embarrassingly, I suppose, we keep just over one year’s income in the bank supposedly to top up during any down periods. It earns virtually no interest of course and the real value is reduced by inflation annually. However, I don’t really care too much as we are more than comfortable and could withstand a sizable correction without economising. I can’t be bothered sweating the minor percentages which for me is a luxurious indulgence. Most readers here will think me nuts but it takes all types……

    By the way, on the subject of gold. I am sure it works in all but the most extreme circumstances. When Saigon fell to the invading commies, people took to bartering in the street. However, gold proved virtually worthless and cigarettes substituted as the preferred currency of the day.
    TP2.

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