Good reads from around the Web.
Stock markets continue to gyrate, especially in the US which was really the last domino to fall. Some giant US tech stocks dropped 40% or more on Friday, and the Nasdaq fell more than 3%.
As I said a few weeks ago, I think we’re in bear market conditions, whether or not any particular index is down 20% from its highs on any given day.
And at such times, gloom grows.
Telegraph of doom
The Telegraph – which it must be said has called 13 of the last 0 ends of the financial world – has a big story about this all being a perfect storm, and a unique sort of crash.
I’m not so sure about that, or at least not yet.
True, that low oil prices seem to be causing a panic not a boom is unusual.
And with negative yields spreading to Japan, it’s hard to discern a soaring cost of money in the developed world – the infamous “taking away of the punch bowl” that precedes so many slowdowns.
But much of the crash is familiar – especially the diminishing ‘breadth’ in 2015, when only a few big companies kept the US indices afloat.
Now those last leaders (Facebook, Amazon, Google and so on) are falling over, taking the world’s benchmark indices down with them.
Something is probably happening…
Soaring indebtedness in emerging markets – especially US dollar denominated debt – is certainly an issue.
And as the dollar has soared, this debt has become ever more expensive.
But why has the value of the dollar soared, anyway?
The 0.25% percent rise by the Federal Reserve seems puny. More a sort of gentle tutting from a teetotaller while the cups keep getting refilled…
Perhaps this is why many insiders seem to be panicking more than usual. It seems the mechanics of the market itself are causing fear this time, more than silly news headlines.That sort of thing has a bad track record – think 1987’s Black Monday, the Asian Financial Crisis, and of course the 2008 financial crisis.
Add seven years of near-free money to the mix, and the market is probably right to fear some sort of blow-ups are coming. Big over-leveraged funds, perhaps a major state default, and so on.
Still, that’s nothing we haven’t seen and survived before. (Touch wood. 🙂 )
Also, the bright side of market-driven fear is it can unwind as quickly as it comes, whereas genuine economic slowdowns take years to grind out. (Friday’s trading in the US did have an air of capitulation, though it’s far too early to say so.)
It will certainly be fascinating to see how things unfold if you’re an investing junkie like me.
But as I said last time, if you’re passive investor with a properly diversified portfolio, your best bet is probably not to watch it unfolding too closely and instead let your asset allocation take the strain.
(Particularly those government bonds everyone ‘cleverly’ kept telling you (and urging my passive co-blogger) to dump. They’ve been rising…)
Always remember investing is about years and decades, not days and weeks.
Nothing but cash only goes up – and not even that any more in some quarters!
Spare any change?
To refocus on the big picture, let’s instead consider three different stories I read this week about the opposite of losing money.
In Beyond wealth: What happens if you have enough?, posted at Money Boss, the original personal finance blogging superstar J.D. Roth explains how going from debt to abundance did not solve all his problems.
Has he started his new personal finance blog to get richer, quicker? Or is it because creating his first mega-blog (Get Rich Slowly) was what gave him purpose in the first place?
J.D. doesn’t say, but there are other life lessons from the trenches:
Beyond the peak, Stuff starts to take control of your life.
Buying a sofa made you happy, so you buy recliners to match.
Your DVD collection grows from 20 titles to 200, and you drink expensive hot chocolate made from Peruvian cocoa beans.
Soon your house is so full of Stuff that you have to buy a bigger home — and rent a storage unit.
But none of this makes you any happier.
In fact, all of your things become a burden. Rather than adding to your fulfillment, buying new Stuff actually detracts from it.
The sweet spot on the Fulfillment Curve is in the Luxuries section, where money gives you the most happiness: You’ve provided for your survival needs, you have some creature comforts, and you even have a few luxuries.
Life is grand. Your spending and your happiness are perfectly balanced.
You have Enough.
In Drawing A Line On Enough, Mitch Anthony at the Financial Advisor website also argues money isn’t everything.
He relates the life of Mitch Mayo, the millionaire founder of the famous Mayo Clinic, who dedicated his life to purpose once the good life was nailed-on.
Anthony points out that:
More than a few million retirees have discovered (sadly, a bit too late) the truth of [Mayo’s] phrase “contented industry is the mainspring of human happiness.”
In our culture, the only question people think needs answering about retirement is, “Do I have enough money?”
The reality is that the preeminent question really is, “Do I have sufficient purpose?”
Without some form of contented industry present in our life, no matter what our age, it is doubtful that we will experience this wellspring of human happiness.
As I have moved closer to financial independence myself, the idea of retiring has gradually left my consciousness. I don’t yet know what I’ll do, but not working at all feels like it would be a disaster.
That might seem unusual, but I don’t think it is.
We often see very successful entrepreneurs or fund managers who never stop working, for instance.
Surely they have got enough, we ask?
Monetarily, yes – even they probably understand that they do. But a life without work isn’t enough for them.
Perhaps one difficulty is it seems ever harder to define work beyond what you’re paid for it…
Paying for it
A final article this week pointed out that you don’t actually need to have a lot of money to start suffering from these sorts of questions.
Now I’m not broke, I’m terrified made for an interesting (if sometimes slightly head-slapping) insight into going from income-poor to having a decent salary:
The new money I’m making makes me happy, but it also means I have no more excuses for coming up short or not having enough money to live properly.
Which is why, when I got my first new paycheck, I went from doing a little dance to rocking back and forth on the edge of my bed out of worry.
I didn’t want to spend any of it, because for so many years, spending what I made quickly turned into having nothing left to spend.
I didn’t know how to manage my money.
While you may judge that some of his first steps into the life of a high-rolling wage slave look more like missteps, you can’t argue with the candor.
Let’s hope he discovers Mr Money Mustache before too long!
- If you want to read more about how much is enough, try Vanguard founder John Bogle’s Enough: True Measures of Money, Business, and Life
From the blogs
Making good use of the things that we find…
Passive investing
- Investors are so confused about bonds – A Wealth of Common Sense
- Why investors are bad at picking alternative assets – Severian
- A reminder to diversify globally – Abnormal Returns
- Take it easy – Vanguard blog
- Mature portfolios swing around in big numbers – R.I.T.
Active investing
- Why it’s terrible huge companies are staying private – Mark Cuban
- The best research might be none at all – Oddball Stocks
- Postmortem of a good investment in Amlin – UK Value Investor
- Why hedge funds are hiring poker players – The Alpha Pages
- The paradox of unanimity – The Value Perspective
- US stocks are not overvalued [Warning: Maths] – PIIE
Other articles
- In praise of the pension Lifetime Allowance – Simple Living in Suffolk
- Now That’s What I Call Financial Independence: 3 – The Escape Artist
- The five best economic podcasts for 2016 – Tim Harford
- Housing decisions in retirement [US but interesting] – R.R.
- Security theater and investing – The Psy-Fi blog
Product of the week: Mortgage Best Buy tables can be deceiving, warns The Telegraph – you need to consider all the costs for a true comparison. HSBC’s five-year fixed rate mortgages look to hit the sweet spot from its list.
Mainstream media money
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 of that site.1
Passive investing
- EU clamps down on closet trackers – Investment Week
- Morgan Housel: Most swans are white – Motley Fool US
Active investing
- Invest in trusts for a £10,000 income – Interactive Investor
- Active managers outperform, if… – Futures Mag
- Apple is so cheap, it’s ridiculous – Investor Place
- Time to bag a bargain UK bank? – ThisIsMoney
- Google now the world’s largest company by market cap. Sell! – Bloomberg
- Government bond yields send recession signal [Search result] – FT
A word from a broker
- Do Super Bowl ads boost share prices? – TD Direct
- The latest on Junior ISAs – Hargreaves Lansdown
Other stuff worth reading
- Confusion about £1,000 personal savings allowance – ThisIsMoney
- How stories drive the stock market – New York Times
- Pension Lifetime Allowance won’t just hit richest [Search result] – FT
- A pound is still worth a pound – for now [Search result] – FT
- Behind the scenes of high-frequency trading – MarketWatch
- Wolverhampton is the UK’s least happy place – BBC
- A review of all the housing market reviews – Guardian
- Stop slouching – Bloomberg
- Lessons on making 500% betting on obscure sport [podcast] – Bloomberg
- Pretentious and proud of it [Search result] – FT
Book of the week: Amazon has launched its Prime Stations
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- 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”. [↩]
Very interesting article and worth following the link to Money Boss. Thank you.
Linkedin’s fall was incredible. Only Google and Facebook really haven’t corrected yet. Isn’t it kinda of crazy that most of these companies are all right here in the San Francisco Bay Area?
Mass layoffs are coming. Real estate will soften. Save aggressively folks!
You’re right. In my article, I don’t talk about why I started Money Boss. I should have because it ties in directly with the subject. It’s not to get richer quicker — I have all the money I need now — but to give me a sense of purpose. I talk about this extensively elsewhere on the site, but it would have made sense to mention it in this article too. It’s a glaring omission! Thanks for pointing that out.
It feels good to be writing about money again, I have to say. I love the financial blogging community (it’s a smart and helpful group of people) and I love knowing that the work that gives my life meaning also helps others improve their own lives. It’s fun!
1. Love the “EU clamps down on closet trackers”!
So we have an organisation called European Securities & Markets Authority (ESMA). Who?
And ESMA say “ESMA found 15% of equity funds surveyed had an active share of under 60%, and a tracking error of less than 4%. And calls for further invetigations by local financial regulators”
More jobs for the boys?
If an active fund (e.g. Investment Trust) had more than 60% active then as a semi-passive investor, this investor would asking why?
Do these guys have any idea what they are talking about?
2. On another subject this week, catching up in the press, am reading that potential investors in the Gov’t continued sell-off of Lloyds Banking are disappointed, repeat disappointed, that the Gov’t has pulled the offering due to market turbulence/volatility.
So the share price for Lloyds is down and potential investors are now disappointed they cannot pay a fuller price (albeit with a discount)?
Thanks as always for the insights and links.
All Best
Arguably things were getting bubbly especially in tech.
The FT had an article late last year suggesting the rate rise was/is intended to slow things down a tad and thus avoid a much larger calamity in the future.
Doesnt sound so silly..
http://ftalphaville.ft.com/2015/12/15/2147842/the-fed-may-be-about-to-atone-for-the-mistake-of-1998/
Who knows? http://www.marketwatch.com/story/jeremy-grantham-says-this-isnt-the-big-bear-market-2016-02-06
May be an opportune moment to write about the new 1000 interest and 5000 dividend allowance stuff. It’s as clear as mud right now.
#The Rhino#
Martin Lewis did a reasonable effort of running through the £1000 interest allowance on Friday’s Show – should be easy enough to catch up on ITV player.
As for the £5000 dividend allowance … it’s all a scam. If your total dividends are £5k, you get to pay an additional 7.5% tax up to the basic rate tax band.
Eh … sorry, I don’t know what happened above!!!
Dividend allowance should have read “If you total dividends are £5k or less, there is no change (other than the 10% Dividend Tax Voucher won’t be set off against your basic rate taxable band), if your total dividends are over £5k, you get to pay an additional 7.5% on them (within the basic rate tax band).
@felice_pazzo
Just to be clear, you pay tax on any dividend income over £5000. These are two good examples of this from gov website
Quote
Example 3
“I have a non-dividend income of £6,500, and a dividend income of £12,000 from shares outside of an ISA”
With a Personal Allowance of £11,000, £4,500 of the dividends are under the threshold for tax. A further £5,000 comes within the Dividend Allowance, leaving tax to pay at Basic Rate (7.5%) on £2,500.
2.4 Example 4
“I have a non-dividend income of £20,000, and receive dividends of £6,000 outside of an ISA”
You won’t need to pay tax on the first £5,000 of dividends due to the Dividend Allowance, but will pay tax on £1,000 of dividends at 7.5%.
End quote
I also found that reaching financial independence took away the urge to retire early. I don’t think my work changed, perhaps no longer needing the paycheck relieved what would have been job-related stress? Many of the issues that middle-agers lose sleep over such as management changes, layoffs, and greater difficulty replacing a lost job seem less concerning when they don’t affect our long-term future.
What keeps me working full time now is the feeling that my expertise is adding substantial value to my employer’s business. I wouldn’t have the same impact either as a volunteer or at home where the big decision of the day is fish or chicken for dinner. It helps that my employer supports my transitional track by exercising my trainer and mentor roles and not demanding that I climb yet another steep learning curve.
Thanks for the round-up again this week. TI. A pensive are-we aren’t-we time, and yet much more to think about beyond that.
I always find the bonds debate fascinating — I certainly didn’t understand bonds until a few years ago, and that almost certainly means that in a short time it will be revealed to me that I still don’t. However I am a big buyer of the Abnormal Returns arguments about diversification (sheesh — if American investors have trouble diversifying from home bias then what hope for the rest of us?!). In the recent slide, it was noticable that the dollar appreciation made up for the slide. VUSA didn’t look nearly as bad as SPY. Forex probably evens out in the long run, but uncorrelated returns are important in a rebalanced portfolio. (Hello fellow gold owners!). I did delight, however, in RITs insouciance towards volatility in bull and bear swings. Kipling had it down more concisely, of course: treat those two impostors just the same.
And the thing about diversification is that yield isn’t the important bit — so all those heroes chasing corporate bonds because they offer better returns than gilts simply don’t get it in my view: you might as well hold the real thing or the equities. Unless you are in an extremely narrow belief set that in a particular company the stockholders are getting toasted but the bond-holders are going to get off scott-free. In my memory either both are fine or they are all getting a haircut.
So to read AWOCS promise to explain bonds was an instant click. The point he misses is that a bond purchase is an ability to lock-in yield to maturity for a long time. Buy 10-year bunds now and you know that come what may you’ll be seeing 30 bp for the next 10 years, come what may. What don’t know is whether that’s a good deal or not.
What this misses is a fundamental point about government bonds for consumers – they contain something that you don’t want to pay for but other people do. Institutions pay for gilts because they are required to hold capital to lend and spin hte money machine. They know that if they leave their cash on deposit with a bank then the failure of that bank is a big loss for them. if I leave my cash at a bank, the government guarantees that deposit free of charge. Why pay for that security twice? So particularly right now in the aftermath of capital adequacy requirement tightening, I believe that institutions are bidding up the price of bonds beyond their value to consumers and so we ought to have that part of our asset allocation satisfied in other ways.
This is a quite separate point from whether you believe that there is or isn’t an imminent rise in interest rates that will reverse the 30-year bull run, although it might seem a long way off, I can’t help feeling that particular train is closer to its destination than its point of departure.
* * *
Are we already in the pre-April phase? I suppose so. The LTA is a fascinating change, but I’m afraid I think Ermine has the wrong end of the stick on that one. It reads as a touch of a green-tinged rant, than a sober policy reflection. The FT article nails the issue: the levels of tax are punitive over the threshold and you can’t know at the point of the activity whether you have committed yourself to passing them. There’s also some spectacularly spurious maths going on — taking a snapshot of wealth to determine a percentages isn’t the right way to go about things. The question you must ask is what percentage of the current population will *ever* hold assets in excess of that threshold, rather than whether they do currently. Quite quickly you expand rapidly beyond the 5% of the soon-to-be-put-against-the-wall-if-they-go-to-Suffolk bourgeoisie. Also is it rude to wonder out loud whether that is the only half coherent article that CB has ever written since in the post if editor?
@Mathmo… I’ve set up my investing very similar to the ‘slow and steady portfolio’, albeit in different allocations to adjust for my age/ risk profile/ other assets…
…I’m not entirely sure why I’m saving in gilts, especially as I have to pay the broker 0.25pc and Vanguard a further 0.15pc for holding them…
I’m going to continue to do it whilst swatting up on here and see what the future holds…
@PA — if you’re copying “slow and steady” then well done, you are doing an outstanding job. Gilts aren’t terrible: I don’t like them, and they have been one of the best performing asset classes of the past couple of decades. The honest truth is there isn’t a good replacement asset class. I like P2P loans for interest rate exposure, but you don’t half get a lot of exposure to other stuff too.
Also to give some scale, 40bp isn’t a terrible fee to be paying — it depends on how much you (will) have stashed as to whether it’s a huge impact, but it’s only 15% over 40 years, and the best you might do is – say – 7bp (although I can’t imagine how), which is 3%. Your transaction costs, errors in timing and spread will be bigger than that, and almost certainly good expenditure budgeting will have a better result. Although good tools for that are even rarer than the tools for investing. Good luck!
re: Why it’s terrible huge companies are staying private
staying private didn’t harm google as it dodged the IPO bubble of the late 90s and went on to trounce yahoo, the buyer of mr cuban’s operation. no one gobbled private google up since google didn’t feel like selling out. i’m glad we don’t have IPO bubbles like the late 90s anymore. these days people put their money into index funds and chill.
So from April everyone gets cash interest gross and if you exceed 1k you have to fill a return.
The dividend change just seems to be everyone pays more tax on them than they would have before. Curse you George. A big scam as felice points out.
@Rhino
The government is committed to balancing the budget by 2020. The last budget deficit figures I saw for 2015 were about £60bn per annum I think
They also foolishly ruled out any rises in mainstream tax rates before being elected
I doubt the latest revenue forecasts to be unveiled in March will look as good as the ones used in the Autumn
So you can expect a lot more sneaky tax rises in this budget and for the following two budgets until the target is abandoned
Likely targets:
– tax relief on pensions
– housing benefit
– benefit cap
– stamp duty on expensive properties
– fuel duty
– buy to let investors
However, they will be government funding for an arts centre/museum in Manchester announced in order to create the “Northern Powerhouse”, so its all great
@Mathmo
“Gilts aren’t terrible: I don’t like them, and they have been one of the best performing asset classes of the past couple of decades. The honest truth is there isn’t a good replacement asset class.” Mathmo
Yes this is a familiar refrain!
We have reduced gilts for some years now (wrongly?) and turned to Infrastructure Funds, such as HICL and 3IN, to perform as quasi-IL Gilts.
Infrastructure does seem to bring lowish stock correlation, which is a surprise, and a nice yield, but doubts remain!
The usual investor complaint with Infrastructure Investment Trusts is the trading premium.
TI is not keen on Infrastructure!.
How do they strike you?
@Mathmo – thanks, quite a bit to mull over
@Rhino – NO! Top rate tax payers get no allowance, higher rate taxpayers an allowance of £500… Tories don’t believe high paid people are hard working enough to keep the money they make unfortunately
@Planting Acorns “Tories don’t believe high paid people are hard working enough to keep the money they make unfortunately”
Whoops – someone seems to have strayed across from the Telegraph comments section. 🙂
@Tim G… Deserted a sinking ship! Can hardly believe it’s the same paper that brought us the expenses scandal.
I don’t understand how you have to be a low earner to qualify as one of the ‘hard working families’ they talk about so much though
@ PA nice one. I m starting to understand the intricacies. I need to spend a bit more effort on the dividend side.
@Rhino … I’m in favour of low taxes all the way…but if I ever get in the position my non-Isa dividends are in excess of 5k I’ll see it as one of those ‘good problems’ ;0)
Hi all, cheers for thoughts, a few quick replies:
@JD — Thanks for stopping by, and you’re welcome. I remember once you linking to Monevator in 2010 or 2011 and it made my day. Good luck with your new venture!
@freebird — It’s interesting, isn’t it? There’s definitely something of a moveable feast going on with our relationship with money / net worth / financial freedom etc. I suppose most people never feel they have options (or historically followed the same paths, which disguised options they had in reality — the Reginald Perrin affect…)
@david — I think it is potentially terrible. Let’s say Uber wasn’t in a bubble when it reached a valuation of $60billion or whatever it was. That’s $60 bn that only a very small coterie of private equity investors have been able to partake in, wealth creation wise. The Google IPO is a fair-ish read across but even then that market cap was only $20-25bn on IPO from memory.
@mathmo — Yes, I think the different attractions of government bonds to financial institutions versus consumers are often overlooked or skirted over by writers (including us at times) though I have tried to make the point in my articles about cash. Then again, I do think many people will still do better dampening volatility with say a 60/40 portfolio rather than trying to rebalance an equity portfolio and a (say) £200K cash position. Most people are going to find the latter daunting, because cash is seen differently through their eyes to say a bond ETF.
@magneto — I don’t really like or dislike infrastructure, I just think it’s essentially equity risk and at very points it’s been expensive. i.e. I doubt it will do what some people read on the tin over the cycle, although surely it will do *something*. 🙂
@PA / Rhino / Richard — Good stuff on the dividend examples. I should properly update our post, yes, good shout. Re: Telegraph comment section style comments, indeed beware. I’m allergic to too much of that and will nuke with abandon! 🙂 Thanks in advance.
Love the site, will play by the rules ;0)
Its a fair old jump from 25% to 33% for HRT dividends.
I think I’m right in saying that currently a BRT pays no tax on unwrapped dividend income. Whereas a BRT will soon pay 7.5% on dividend income over 5k.
Interesting to read that P2P interest is included in the 1k allowance
@Rhino
Thanks for that. I have to admit that P2P is a bit of a bugbear of mine – not so much the activity in itself but rather the way that it is treated as a form of high-powered savings account rather than a potentially rather risky investment. Interesting to finally see this point being made in the press:
http://www.theguardian.com/money/2016/feb/10/former-city-regulator-warns-peer-to-peer-lending-lord-turner
I’d love to see a Monevator article on this subject!
@Tim G – I don’t think that the P2P market has ever been exposed to a significant *increase* in interest rates, rates seem to have only dropped in broad-brush terms since their inception. It will be interesting to see whether they take that in their stride or whether something unexpected and systemic happens as and when.
The 1k allowance makes it look a bit like you’ve put them in an ISA, for people with small holdings, say < 20k. So that is more attractive. But I still don't like their illiquidity. If you want to get out without incurring costs you have to wait ages. This is nothing like holding cash.
@Tim G — I think P2P has a role and a place, provided you treat it for what it is.
In terms of articles, I was warning of the potential risks as well as rewards 8 years ago! 🙂
http://monevator.com/are-rising-zopa-interest-rates-an-opportunity-or-a-time-bomb/
I also noticed more debts going bad at Zopa in 2009, and was told by Zopa zealots (generally off-site, in references to my article) that I didn’t understand probabilities:
http://monevator.com/spooked-by-my-bad-debts-at-zopa/
As things turned out, there was indeed some sort of glitch in the credit checking that occurred around that time, that they (the zealots, not Zopa) have subsequently referred to many times. Ho hum! 🙂
I also covered its shift to a Safeguard model and (cough cough) predicted the end of the Zopa marketplace back in 2013:
http://monevator.com/zopa-offers-safer-savings-option-for-cautious-savers/
I have been using Ratesetter more than Zopa in recent times. (£100 to you and £50 to me as a bonus if you follow that link and subsequently deposit £1K), but I do still have money in Zopa, too.
However my total exposure to P2P is only about 3-4% of net worth, for the risk/reward reasons you allude to.
Several people — including @TA — have suggested it’s time for a new P2P article, especially with them being permitted in ISAs soon, so I may get on to that.
They’re quite depressing to write from a reader comment point of view though, because you basically just get either people saying “woo-hoo — much better than a crappy savings account!” (ignoring the risk) or “can’t believe Monevator is being so irresponsible” (ignoring the fact I’ll have run through the warnings in the article).
Perhaps I should write it and turn comments off, ha ha! 😉
@TI “They’re quite depressing to write from a reader comment point of view though, because you basically just get either people saying “woo-hoo — much better than a crappy savings account!” (ignoring the risk) or “can’t believe Monevator is being so irresponsible” (ignoring the fact I’ll have run through the warnings in the article).”
Maybe you should forewarn that any comments along those lines will be automatically nuked. 🙂
The contrarian in me is put off P2P by their popularity, but then my inner contrarian is drawn to them by the very fact that I have been put off them in the first place!