Great reads from around the web.
I can rarely recall such a busy time in the UK. Decisions are being made now that will shape the economy for years to come.
On education and fees, the great student riot has been covered to death elsewhere. Regular readers may remember I feel the problem is simply too many weak students doing too many pointless degrees, creating a funding crisis. I’m all for aspiration, but it has to be credible, not fanciful. The world only needs so many digital photographers and marine biologists.
Those hungry for more should check out A Grain Of Salt’s link below to see why the debts aren’t so onerous, and Simple In Suffolk’s hopeful suggestion that revolting students could at least kill off the heinous X-Factor.
Common sense has at least broken out on welfare reform. Three cheers for Ian Duncan-Smith’s single universal benefit plan (a flat tax next, please!) People need to support themselves, and to aspire to a better life, whether it be materially or in terms of some other lifestyle choice. That thousands spend 20 years or more in a paid-for council house living on hand-outs from the State would shame the founders of the Labour movement. There’s far more dignity to sweeping the streets or cleaning the drains then scrounging off those that do.
Finally, the stock market continues its steady advance, as the global economy (ex-US and Europe) continues to roar ahead.
Many Monevator readers rightly follow a passive portfolio strategy, which means rebalancing when appropriate and ignoring the noise.
But those who’ve tried to be clever (like me!) can’t afford to get the big calls wrong, and the last couple of years have been all about big calls.
In particular, any UK investors who timidly stuck to cash and ignored the recovery in the stock market from its March 2009 low has paid a steep price. Instead of excellent double digit gains, they’ve seen a loss in real terms, especially after tax, due to high inflation.
According to the Bank of England, inflation has been above target for over 40 of the past 50 months! With commodity prices booming, the economy picking up steam, and monetary policy still super loose, inflation still seems to me far more likely going forward than deflation.
The FTSE All-Share still looks reasonable value, although clearly no longer bargain basement cheap. In particular, 10-year Gilt yields are edging higher, while rising stock prices reduce the yield on the All-Share.
At some point the risk-free returns from Gilts will make the return on equities look expensive. But whether it’s in six months time or a decade, nobody knows.
I’m comfortable sticking with shares for the long-term, but I suspect my new money may go more into index-linked gilts or the equivalents from banks like RBS and Barclays.
From the blogs
- Can’t someone else pay? [On student debt] – A Grain of Salt
- Investing for near-term goals – Oblivious Investor
- Know your enemy [profiting from index rejigs] – Index Universe
- Income distribution in the US – The Digerati Life
- Economic parasites: A question of intelligence – The Psy-Fi Blog
- It’s going to be a great decade for British music – Simple in Suffolk
- FTSE 100 cyclically-adjusted P/E ratio – Retirement Investing Today
- What are you really teaching your kids about money? – Moolanomy
- Negative real returns are [for now] the price of safety – Finance Buff
- How to overcome poor grades and get a job – Financial Samurai
- An against the grain approach to saving priorities – Free From Broke
On the Money Maven network
- Len Penzo explains how to find a 24 hour plumber.
- Canadian Finance blog on how to build an emergency fund.
- MH4C has a debt snowball spreadsheet for free download.
- Deliver Away Debt does christmas on a budget.
- Wealth Pilgrim wonders who should buy guaranteed issue life insurance.
- US readers should check out The Military Wallets’ TSP Contribution Limits.
From the big boys
- Table-topping 3.11% one-year savings bond from Skipton – Skipton
- Nassim Taleb on antifragility – The Economist
- Inflation-linked gilts versus Barclays equivalent – Fixed Income Investor
- Inflation sparks rush to safety – FT
- Get set for the Green Deal bill – The Guardian
- SERPS: A game of chance on a pensions promise – Telegraph
- Antiques now the cheaper, greener option – The Independent
- India’s growth potential – The Independent
- A chilling lesson from dead investment funds – Motley Fool
- If a single benefit, why not a single tax? – BBC
- Gamer sells virtual asteroid for $0.5 million profit – Yahoo
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I am not very well versed with investing and the stock market so bear with me.
I first got into the stock market in 07, at that time the FTSE was at about 7,000. By the end of 07 the FTSE had dropped over a thousand points, I cashed out, I made the cardinal mistake of buy high and sell low. But FOR ME it was the right thing to do, I realised that I was risk adverse and I couldnt afford (financially or mentally) to watch the further decline that ensued.
So I wonder what exactly you are talking about when you speak of the recovery in March 2009, because as far as I am aware, there has never been a recovery to the 2007 highs?
” I feel the problem is simply too many weak students doing too many pointless degrees”
Come on monevator, this bit of rhetoric really needs some data to back it up
Claire, I feel some of your pain, I had that experience in the 2000 dotcom crash, and similarly bought too much high and sold low. However, more recentlyI have returned, starting to buy in April 2009 regularly with a long-term aim to get income. My own view is that the finacial system is doomed in the long run, due to peak oil and similar. However, I can’t know when the crunch will come, so I have invested in some non-financial assets, and for about half my capital wealth saving in financial assets I have used and learned much from Monevator’s blog to give balance and overview. He won’t approve of it, but I also used a couple of items from his blog, in particular these NW preference shares and this article featuring Merchant’s Trust investment trust. Both have paid thoroughly respectable dividends, and both have appreciated in capital value, and indeed the capital value of my ISA has increased by over 10%, excluding the dividend income.
There has been a recovery. This chart shows the FTSE100 is within 10% of the high you mention. Against that it should be noted the pounds has fallen by over 25% due to the shocking use of QE, but Monevator isn’t conning you when he says there’s been a recovery.
Roym, This article shows a graph of the percentage of A grades at A level. When I took my A levels in at the end of the 1970s my three As meant I was in the top 10% of candidates in maths, physics and chemistry, because that was how the A grade was defined in the norm referenced system. When it was switched to a criterion referenced system in the early 1980s the self-calibration of norm referencing was lost. We haven’t all got that much cleverer in the intervening thirty years.
.-= ermine on: It’s going to be a great decade for British music =-.
@Claire – There’s nothing wrong with realizing you’re risk averse, although you have to be aware that it will cost you in the long run as most safe assets deliver very little return against inflation. A better approach might be something like passive investing with monthly contributions, where you invest regardless of the state of the market, knowing that over the long-run you should do okay. This is a different way of dealing with fear to selling when the market plunges.
An ex-girlfriend of mine whose index investing strategy I set up for her a decade ago has done well like this, despite all the ups and downs and her complete disinterest in the market and its shenanigans. If we have a decade of solid bullish conditions, which I think is pretty likely sooner or later given the dire past decade, then she’ll really be rewarded by having accumulated a big position in equities ahead of it, through the tough times.
The big risk with selling out on an emotional basis is when you don’t get back in at the lows. The risk is that it’s only when the economy feels good and the market has gone up a few thousand points and is making new highs that some people feels confident enough putting money back in – they fear missing out. As you say, that’s the classic mistake and yet it’s by definition what most people do (the 6-12 months or so before a market top is always accompanied with much higher than normal inflows of capital, and vice versa at the bottom).
Basically, from a long term perspective it’s much safer to buy when stocks are a long way down.
Finally, as ermine has kindly said above, I agree the FTSE isn’t up to its old highs but it is about 65% off its lows. That’s an incredible bounceback — one of the biggest we’ll ever see. As this post from March 2009 explains, the opportunity was there to be taken.
Did I think the market would go up 65% in 18 months when I wrote that post? Absolutely not! I’ve written plenty of posts on Monevator in 2008 admitting I was buying even as the market was falling. I did have some final reserves of capital that I hurled into the market in March 2009, but I absolutely don’t claim to have sat out at then picked the very bottom. Only monkeys pick bottoms! 😉
Right, I’ve rambled a bit there but I hope some food for thought, anyway. Thanks for stopping by!
@roym – Hmm, I don’t have any hardcore data to hand. I’d say it’s a mix of observation, knowledge of how funding works, wide reading, and common sense.
Observation – I regularly meet people in their early 20s who I absolutely guarantee wouldn’t have been in University 20 years ago. People who are doing English degrees but have never read a book for pleasure, and the vast numbers of people doing bananas degrees.
How funding works – In my day job, I’ve been associated with a creative industry that has literally thousands of people go through specific degree courses every year to get them into an industry where barely any will actually get a job, because they’re not smart/talented enough. It’s a running joke/sore in the creative industries. The reason for all the students is the courses attract them, and the students attract the funding. That’s why there’s not been a boom in say mathematics or industrial engineering courses.
Wide reading – The impression I get from most of what I’ve read is that there has not been a flourishing of wonderful teaching and learning in the less exalted swathes of the further education system set up to cater for the arbitrarily increased student numbers. Quite the opposite, in fact.
Common sense (a) – As Ermine says, there’s a bell curve at work. Clearly lots more weaker students are going to university – with the important caveat that there may be some talented students from ‘bog standard comps’ and the like, particularly girls, who now that University is a default position for anyone with half a brain are more likely to go to University than when it was just the best from the comps and the more privileged classes. But I’d prefer a system that raised the aspiration of these smarter students (and I speak as someone who went through a comprehensive school) than the current dragnet approach, which sees thousands do courses that are pretty much useless both academically and vocationally.
Common sense (b) – That’s the student side, on the teaching side there’s been no massive expansion at Oxbridge, Imperial, Bristol, LSE, Edinburgh and the other 4-5 key excellent (as internationally ranked) universities in the UK. If these institutions had received massive funding and had increased their take substantially to go with the higher numbers of students marching towards university, it’d be harder to argue that the expansion in higher education has been principally a numbers game.
I passionately believe that smart, and even semi-smart people should go to University, provided it’s to do something at least academically rigorous. i.e. Someone may do French in Oxford and never speak a word in their job, but you know they’ve been tested and pushed and proven themselves to a far higher level than someone who does Gender Studies at Wolverhampton, which is why the former are pursued by employers and the latter give interviews on the BBC saying that they don’t understand why they did what they were meant to do, ran up debts, and now can’t get a job.
But I don’t believe in the New Labour education project, at all. It was a numbers / race-to-the-bottom game as far as I can see… the equivalent of Thatcher (supposedly) selling off the family silver in the 1980s that Labour berated, but this time done with the university system. They cranked up the numbers, but not the resources and especially not the rigor.
Also, for the record I believe the general advance in A-level and GCSE attainment is at least in some part credible – from what I’ve observed the average schoolchild works far harder than in my day (not the brightest, or those in the elite schools, who always worked hard). So I’m not some Blimpish figure (I hope) who just believes everything is smoke and mirrors (although I do fully echo ermine’s point about how grading is not longer fitted to a curve, which does distort the value of an A now versus an old A, and is clearly reflected in the fact they had to introduce the A*).
Hmm… this is why I tend not to write sizeable comments. I waffle, and think it should really then have been a post! 😉
Thanks as every for stopping by and commenting.
Thanks Ermine and Monevator for your kind responses.
Monevator I see that you recommend the index tracker and thats exactly what I used when I invested. I paid in monthly but also I paid in large sums when I thought the market would only rise further 🙂 I went about the wrong way?
It strikes me that index trackers are really like a train, you are along for the ride? Now thats fine perhaps if you have 20 or 30 years to ride
along but I’ve gone and early/semi retired early, at 37. I decided to retire from the rat race. So I felt like I couldnt have a lot of money tied up in a tracker, I needed certainty and I needed a passive income. So I sold up and what with the equity in the house and my savings I’ve got about £350k in building society bonds that pay me a monthly interest (fixed rate bonds at 4.5%) and thats what I live on at the moment. I realise that I am not getting a very good return and then there is inflation etc, but I’m scared of investing and losing the money that I cant replace and Im terrified of having to return to the rat race.
You have to cash out index trackers at some stage dont you? What if you need the money when the marke is on a down? What if you cant avoid cashing out on a down?
Do you have any suggestions? Have I mis-understood index trackers. I would be grateful for any suggestions:)
@Claire – I have to pop out and buy the Sunday roast, but just briefly you can get an income from the likes of an index tracker. You will need income producing units, as opposed to accumulation units. The income is derived from the dividend payouts of the companies owned by the tracker, minus your managers’ fee.
For instance, the iShares UK FTSE 100 ETF currently pays you 2.82% a year per anum in income.
That’s less than your (excellent) fixed rate bond, although note there’s no further tax to pay if you’re not a higher rate taxpayer, whereas your cash is almost certainly being taxed.
Equally if not more importantly, you can expect your dividend payout to increase at least with inflation over the long term, which if you’ve cashed out at 37 (congrats, by the way!) you really need to be think about.
Another option you may want to look at are Income investment trusts.
Crucially, with both of the above your income payment should fluctuate far less than the capital sum.
NOTE: Obviously as you know the ETF can halve or double or do whatever after you buy it. Your £350K could become £200K in six months! So don’t do it unless you can hold for the long term through thick and thin. Perhaps a £50K allocation might be a way to start.
Also, this isn’t personal advice and I’m NOT qualified to give it. 🙂 I’m just talking generally about your options as ever, but your decisions must (as I’m sure you realize) be your own, and your responsibility.
Just a bit of support for Monevator’s claims about weak students doing pointless degrees: I lecture in one of the institutions he names as internationally excellent, and while I don’t think we offer ‘pointless degrees’ we certainly have a lot of weak students. I’d say about a third of the undergraduates I encounter either wouldn’t have got in to a decent university 20 years ago or wouldn’t have survived the first year, and that’s despite the fact that our ‘A’ level entry requirements are very high and a high proportion of our intake comes from fee-paying schools, so heaven knows what’s going else elsewhere. Notwithstanding, nearly every undergraduate leaving my department leaves with a 2.1. The reasons for this are complex but include lots of changes which taken individually don’t raise massive controversy but cumulatively have the effect of reducing requirements on students and babying them along every step of the way to an extent that anybody who attended a university more than a decade or so ago would find astounding. As to data and evidence, what’s the most likely source of its production? That’s right, and turkeys don’t vote for Christmas.
@Tyro – Thanks for your comments from the coal face, very valuable. I agree too with the babying. You even (especially?) see this today with grammar/private school educated Oxbridge types when they enter the commercial world. They’ve never had to fend for themselves, and they berate employers for not providing the them-centered, clearly-structured and educationally-minded career path that they’ve moved along school and university on.
An acquaintance at a large City fund says he won’t hire Oxbridge grads any more for this reason, unless they’re extremely special – he prefers US graduates who he says are much more self-starting (which, interestingly in this context, he believes is partly down to their large fees and commensurate debts). I must admit even I was shocked, being pretty partial to such entertaining clever clogs, as company at least.
I suppose it’s a reflection of the shift towards grades, curriculum and testing, as opposed to ‘getting an education’ — plus that everything is so much more competitive nowadays that those who get to the top are more likely to be the hard-working pretty smart plodders, as opposed to the very smart but more easily distracted generalists. (As for genius, it will always out! 😉 ).
Thanks monevator, I quite like the look of that 9% return thing with the Natwest that Ermine linked to, I suppose its high risk though is it? No come back thru the FSCS if it goes belly up?
@Claire – Yes, it’s a preference share and not protected in that sense, it’s a security that one buys at owns peril like any other share or corporate bond. I think it’s pretty unlikely anything bad will happen given it got through the credit crunch, but that’s just my opinion. I wouldn’t put more than 2-5% of my net wealth into a security like that, anyway, to be safe.
Not advice, do your own research please, etc.
Looking at the price people seem to be windy of NWLB at the mo presumably due do the impending bankruptcy of the Irish state, to which Natwest’s parent RBS is highly exposed. I’m hoping for the price to take a hit to buy the income at a lower price when the Irish train wreck comes off the rails. It is most definitely not guaranteed, thought I share Monevator’s view of NatWest’s prospects… And likewise, of course, not advice!
.-= ermine on: It’s going to be a great decade for British music =-.
@ermine – As I understand it, Natwest owns Ulster bank, which is the reason for the distress in the price. I’m not unduly concerned currently, FWIW, but it is a new risk factor given the current instability in Ireland so one can’t be complacent.
Did you buy any LLPC? They’ve had a nice run too.
I saw your post on LLPC and did consider that, but I couldn’t really get my head round the implications of the deferred payout and the likeliness of the EU embargo being lifted early. The Nat West issue was simpler to comprehend, so for me LLPC failed the Warren Buffet test of ‘only investing in things you can understand’.
I’m chuffed with NWBD and would welcome a chance to buy more at a good price, so I’m watching the Ireland situation with interest.
.-= ermine on: It’s going to be a great decade for British music =-.