What caught my eye this week.
New research from Scottish Friendly makes dispiriting reading for anyone who has spent a decade trying to teach people about investing.
(*Looks around room* “Who me? No no, I was in it for the Brexit banter.” *Shuffles away*)
It seems that having surveyed 2,000 UK savers, the life assurance giant has discovered half of us are afflicted by what it calls ‘investophobia’.
Scottish Friendly says:
- Inflation is currently running at 2.4% yet the best easy-access cash savings rate available is 1.33%.
- Almost two-thirds (66%) of savers are aware that interest rates on savings accounts are less than the current rate of inflation.
- Despite that, more than half (53%) of UK savers say they wouldn’t consider investing in stocks and shares.
- Almost half (49%) say fear of potential losses is the main reason holding them back.
A decade ago, many web explorers who wandered into Monevator Mansions had sworn off shares forever. We seldom see such people anymore.
Ten years into a bull market, we – and often many of you, in the comments – are mostly reminding visitors that bonds, cash, and property still have a place in their portfolios, let alone that it’s not a great idea to go all-in on, say, tech stocks or emerging markets.
Yet out there in the wider world, the majority still wouldn’t touch a share with a barge pole.
Small mercies
Messing about with the tools at Portfolio Charts suggests that a UK saver who kept all their money in cash would have seen an average annual real return of about 1.6% since 1970. Standard deviation was 4%.
Remember ‘real’ means these are inflation-adjusted returns. Cash can lose you money when inflation is higher than the interest rate you’re paid. The tool suggests that happened in 31% of the years.
So what happens if we take a stiff drink and put a modest 20% allocation into global shares, while still keeping the rest in cash?
Mostly good things. The average real return rises to 2.6%. Standard deviation is only modestly higher at 5.1%. And the number of money losing periods actually fall from 31% to 27%, despite the inclusion of risky shares.
That difference between a 1.6% average real return versus 2.6% isn’t much on paper, but it’s significant over time.
A compound interest calculation reveals:
- Over 30 years, a 1.6% return turns £100,000 into £160,000 on a real money basis.1
- A 2.6% return takes your wealth to £216,000 over the same period. That’s a significantly better result, with only a little more volatility and fewer outright losing years.
Of course you and I know that on a 30-year basis, having 80% of your money in cash is very sub-optimal.
- For the record, a simple 60/40-style portfolio split between global equities and intermediate UK government bonds chalked up an average annual real return of 5.3%, albeit with much higher volatility. That’s good enough to turn £100,000 into £471,000 in real terms.
Adding other asset classes can tweak the return profile further.
Here’s one I did earlier
So yes, agreed, having just 20% of your money in shares is far from perfect.
But remember, we’re not look for a home run here – we’re just looking at getting people off a terrible first base with their 0% allocation to the stock market.
And here simple – if sub-optimal – strategies can make a big difference.
I’ve mentioned before that I’ve often started friends investing with a 50/50 allocation split between shares and cash. (Now I’d probably favour a Vanguard Lifestrategy 60/40, unless they really insisted on seeing and cuddling the cash).
Nobody around here is going to suggest having 50% of your investment in cash is ideal. But I’ve seen it change lives.
For instance, a friend of mine – who was running a persistent overdraft when I first met her – agreed to try something similar to this and to start investing back in 2002 or 2003.
To supplement her work pensions held elsewhere, she began direct debiting money from her paycheck every month, splitting it between savings and an ISA stuffed with index funds.
At some point around the financial crisis she meddled without telling me, diverting some equity money into more expensive self-styled ethical funds. But besides that moment of madness/enthusiasm, she basically ignored the portfolio. She only rarely increased the contributions. Most annual statements went unread into a bottom drawer.
She still enjoyed a good result. In fact a couple of years ago she called to thank me for getting her started.
This painless strategy had compounded over 15 years into a significant six-figure sum – a deposit for her first flat, in fact!
I’ve visited her new family’s home in London, and it’s lovely.
The only way is up
Perfect can be the enemy of the good, as my old dad used to tell me. I wouldn’t attempt to turn anyone into The Accumulator overnight.
Know somebody terrified of shares? Try to get them to set up a direct debit to put say £100 – or whatever is a small but meaningful sum for them – into a global tracker every month.
Chances are after a few years they’ll catch the bug and lose their fear. Then they’re off!
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!2
First-time buyer numbers rise as buy-to-let market falls – Guardian
Stoke is the debt capital of England and Wales, followed by Plymouth – Guardian
A global trade war could reverse the deflation of the past few decades – Bloomberg
Anti-money laundering push is steering oligarchs away from London property – ThisIsMoney
How Build-A-Bear fell into its own trap – BBC
Forecasts from widely-respected GMO look gloomy, but be aware it was similarly (excessively) pessimistic seven years ago – Pension Partners
Products and services
Banks will soon require text message confirmation for online Visa card purchase – ThisIsMoney
Hargreaves Lansdown’s power to profit from customers exposed in new report [Search result] – FT
The pros and cons of Pension Increase Exchange – ThisIsMoney
Mortgage deal boost for young professionals [Search result] – FT
Ratesetter’s £100 bonus effectively boosts your expected annual return on £1,000 to 13% – Ratesetter [Affiliate link]
How smart phones are destroying hedge fund secrecy – Institutional Investor
Top places to buy a home in the sun on a budget revealed – ThisIsMoney
Comment and opinion
Simon Lambert: House prices need to fall 30% not freeze for five years – ThisIsMoney
Are you sure your investments are appropriate for you? – A Wealth of Common Sense
The big questions to ask before you retire [Search result] – FT
Exploring the relationship between stocks and bonds – Vanguard blog
The rise and fall and rise of Ben Graham – Novel Investor
The nine essential conditions to commit massive fraud – The Reformed Broker
Nick Train: Value was a 20th Century phenomenon – Portfolio Advisor
A hard lesson learned about investing in cyclicals – UK Value Investor
Who are the greatest investors of all-time? – Pragmatic Capitalism
A tribute to stock picker Chuck Allman – MicroCap Club
Kindle book bargains
Alan Sugar: What you see is what you get by Alan Sugar – £0.99 on Kindle
Einstein: His Life and Universe by Walter Isaacson – £0.99 on Kindle
The Honourable Company: History of the English East India Company by John Keay – £1.99 on Kindle
Moon Over Soho: The Second Rivers of London novel by Ben Aaronovitch – £0.99 on Kindle
Brexit
Soft or hard, no brand of Brexit can command a Commons majority – Guardian
How the BBC lost the plot on Brexit – New York Review of Books
The politics of Brexit have caught up with reality [Search result] – FT
Boris Johnson has ruined Britain – New York Times
Off our beat
Kylie Jenner: The reality teen and almost-billionaire has founded a cosmetics empire – BBC
Fahrenheit 100: Could this be the summer Britain wakes up to climate change? – Guardian
The ‘vegetarian’ mutton curry that unites Bengalis – BBC
The killing of a blue whale reveals how disconnected we are from nature – Guardian
The best banners from London’s anti-Trump march – Londonist
And finally…
“The word ‘risk’ derives from the early Italian risicare, which means ‘to dare’. In this sense, risk is a choice rather than a fate. The actions we dare to take, which depend on how free we are to make choices, are what the story of risk is all about. And that story helps define what it means to be a human being.”
– Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk
Like these links? Subscribe to get them every Friday!
- i.e. The spending power of £1 remains the same. [↩]
- 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”. [↩]
Comments on this entry are closed.
For people who didn’t grow up with financially savvy parents or peers, the share market = gambling. That’s the mental hurdle to overcome. I like that idea of pitching a small allocation, with provable (statistical) results and see if it sticks. More likely to succeed than an all-in hard sell
This also relates to the recent topic of branding “passive” vs “index” investing in a way. You might say active is being the gambler, and passive/indexing is being the house.
“the life assurance giant has discovered …”: such sarcasm ill becomes you. Scottish Friendly has 90 employees.
The Fed funds rate was 20% p.a. in (about) 1980. A couple of years ago it had been 0% for several years. It’s still pretty low. I suppose it should be no surprise that equities have done well, albeit erratically, in that period. Given that massively encouraging backdrop maybe it should be surprising just how erratic their performance has been.
In the last couple of years there has been a small jerk upwards (not an allusion to Mr Trump) without any sign of serious trouble in the US equity market. I assume that nobody can usefully forecast what comes next for equities. Or more precisely I assume that I have little hope of identifying which forecaster might have a decent chance of success. My own bet is that their return will be negative-to-poor for some time. But that’s been my bet for some time now and I’ve been wrong so far.
Consequently I think your suggestion that people who have surplus monthly income put modest amounts into equities is pretty reasonable. Of course if it turns out badly for them they might never forgive you. (Just as I may never forgive you for “paycheck” and “home run”.)
Now, what of people – I have thirty-somethings in mind – who have recently contributed a big chunk of capital into a SIPP? Should they be looking at 20:80, 60:40, 80:20? Should they be looking at a decaying gilt ladder slowly feeding equities? What should they do?
Speaking of The Accumulator, isn’t he due to check in with an update on the Slow & Steady Portfolio, or am I jumping the gun there?
It has 559,000 members and £2.7bn in assets under management.
Everything is relative I suppose.
Source: Annual Report 2017.
@Moongrazer — He’s currently on hiatus due to some sort of real job work implosion. Hopefully he’ll crawl out from under the wreckage and get back to us soon! 🙂
It’s almost like there needs to be a step by step guide in order to ‘script the path’…
Newbies don’t trust the honesty of platforms, funds, intangible equities that seem no more real to them than bit coins (although of course an equity is a slice if a tangible thing and even houses are effectively only owned on paper)
Also you’re dealing with a very impatient, spendthrift society, who can be quite happy never retiring, but these are the people buying our products. They don’t consider probabilities in risk so to them winning 50x on a crapshot bet is more logical than risking 100% loss for 7%ish return after a whole year’s exposure to risk
Also it turns armchair socialists into the very armchair capitalists they might malign
May I further add, newbies think that what goes up must come down, and that there’s no reason for capital gains into perpetuity
Morning Matthew! I’m not sure if you think the above yourself, or if you’re channeling new investors? I think the latter? 🙂
As we both probably agree then, long-term gains from the stock market are indeed possible — even dare I say likely — due to inflation and economic growth:
http://monevator.com/is-investing-a-zero-sum-game/
I only saved in cash for years (apart from a modest amount going into my pension) due to a hand-to-mouth upbringing. That changed after I’d bought a home as I realised I now had surplus cash and quite how generous the Govt and my company was being with pensions…
Perhaps simply encouraging people to put more into their pension does a good enough job of getting more exposure to the gains of the stock market?
@ti – morning! Before I invested I used to think that, because my parents did and other people I met, people assume it ought to be reverting to a flat line, but like you say with inflation there’s going to be a slope, and equities are effectively a vehicle to leverage that inflation, this is one barrier we face in convincing people
I agree with what Chris says about encouraging pension, I don’t think it helps that people are so encouraged to overpay their mortgages – sure it’s safer and makes more sense in a high rate environment, but if that’s all you do for years before you earn look to invest you miss out, it’s all these low rates I think, otherwise cash would be seen as good
I’m currently working on a friend of mine on the same vein re monthly investing. My favourite thing to do with people who are scared (and this was my light bulb moment and I work in financial services!) was to ask people why they won’t invest.most people cite fear of losing money. I then ask if they pay into a pension (most are employed and have company pensions). When they say of course I simply say ‘so what’s the difference you can basically replicate your pensions if you want ‘. Seeing the realisation Dawn is very satisfying and seems to work well
The issue is people are obsessed with property in the UK. A friend of mine is selling his let property atm.100’000 for a two bed flat that apparently generates 450 to 500 a month. I was looking at it thinking that’s an awful lot of effort for 150 a month after a 70k mortgage in an single concentrated asset.i asked why he was selling and it was to buy a bigger btl closer to home. Which to me seemed even less sensible as your even more exposed to the local housing market. Hey hoo what do i know i sent him a link to monevator.com and left him too it.
Your comment about simply getting people to pay more into a pension is a good one that’s what I’ve done with a friend of mine that seemed easier to get her head round and she’s doubled this from,400 to 800 a month.at 35 with only 30k in her pension shell probably be fine
@Matthew — It’s not just inflation, it’s economic growth (/productivity growth, plus expansion into new markets).
Tbh, I’m always about 100% invested in shares. There comes a stage when you’re investment income is so good you don’t really have to worry about losing your job or worry about your boiler breaking.
As others have said, the immediate 25% return (or more) from investing in a pension is better than cash sitting in the bank.
Anyway, should we not be keeping the miracle of equity investment to ourselves?
Let’s not over-egg our pudding, though. The figure that it took 25 years for equities to recover from 1929 is fairly widely accepted. It could happen again, even if recency bias says otherwise in year 9 of a bull market. Multiple eggs need multiple baskets.
Brilliant post. Good diagnosis, data-driven, action-orientated. Wise. Wonderful.
What is the alternative version targeting millennials / Fame-and-Fortune-column-types who would say “stocks/shares – not for me. Property instead please”?
@ti – indeed, growth as well
Although I think the impact of inflation is multiplied in equities through the leverage the companies use, like house price inflation when you have a mortgage, and this is a significant part of the return for equities and blt
(Off topic) I also think that the only reason the universe exists is to increase entropy
@Egremont — I don’t think encouraging someone to get 20% exposure to equities instead of 100% in cash (or even 60% for that matter in many cases, though that’s more situational) is over-egging the pudding. 🙂
@FvL — Cheers!
@Gordon — True, but as you know we must remember that the immediate “25% return” in a pension is in many cases partly tax deferral (depending on the tax-free lump sum and tax rate differentials before and after retiring.) I’m a fan of pensions despite this, obviously. 🙂
@ti agree absolutely, but there’s some irrationally exuberant allocations in the comments!
Average returns are very misleading. If you make 100% return the first year and lose 50% the next your average return is 25% which sounds pretty good. But in reality your total return is 0%. If you naively apply annual compounding based on your average annual return you will say that 100k turned into 156k after two years when in reality you’ve made 0k after two years.
In my opinion annual average return should never be used. Instead take the total return over the period and calculate the corresponding annually compounded return.
@Bastiat — I take your point but it’s a simple illustration.
p.s. Plus the Portfolio Charts data is derived from actual historical returns since 1970, though of course (as you imply) that’s no guarantee about future returns.
It doesn’t really matter how far back you are looking at returns. Also it is not the future that is being misrepresented but the past. The more volatility the more optimistic the average annual return will be and thus any compounding based on it compared to what really happened. By compounding 2.6% average annual return for 30 years you are essentially saying: if you had invested in this portfolio you would have gotten 2.6% return every year for 30 years. As long as there is any volatility in the returns then this is a false statement and your actual annually compounded return is guaranteed to be less than 2.6%. This is because the geometric mean is less than the arithmetic mean (unless there is 0 volatility).
I know what you are trying to show but by using the arithmetic mean you are systematically overstating the return of risky assets like shares vs riskless assets like cash.
Great post TI!
This was very interesting to me, particularly as I read the FCA Retirement Outcomes Review this week. Two of the key messages are exactly what you write about here: many drawdown pots are in cash, and there’s a big level of distrust in pensions.
Thinking about what FvL says, I think it comes down to building trust in investing. How do we go about doing it?
I guess what we are doing now isn’t working. Inverting the problem, when do I distrust things/people? When I’m scared of the consequences. When the thing is too difficult/confusing. When I think I’m being taken for a ride or disrespected. When I don’t know where to start in dealing with whatever it is. When my interests aren’t aligned with my counterparty. When I have negative pre-conceptions.
I think lots of those things can be overcome, to some extent, by starting (the metaphorical taking the plunge). But it is hard to get that confidence; I know I was scared when I first started investing. I think there is much to be said for starting, however small.
Lot’s to reflect on.
It was discovery of the costs of old fashioned insurance companies with profit pension policies that started me on my long journey to learn about investing
The discovery that these funds could take the full 40 % tax relief from pension money contribution in costs was a shattering insight
It left me with lots of scope to increase my pension while learning the basics
That was 20 years ago
Went through Investment Trusts to Index funds and now have 3 funds only.
Retired,sleep at night and the Funds grow steadily (and cheaply)
Still learning myself but find that most people don’t discuss money and therefore will never learn in time how a) how poor financial advice is and b) how expensive it is till too late
Not sure what you do about it
xxd09
@egremont The 25 years to recover from 1929 tends to imply you invested in 1929…even if fully invested at the time of a major market fall, the money invested may have been in the market well before then and recovery for the individual investor might have been a lot less than 25 years.
The question of a set % allocation to safety (bonds typically ) and a % to risky assets is commonly used but there comes a point when you may have a substantial six figure sum in safe assets that provides security of income for many years, as well as dividend income from shares that easily cover living costs, such that a 90+% allocation to equities is not irrational.
It’s a question of risk appetite, an early but successful large allocation to equities can pay off, that what was risky is no longer so.
My investment returns since 2009 have been great but looking back over 28 years when I started its only been around 12% compounded, adequate but far from great. Choosing the start and end dates can hugely sway any investment return reporting, for the future we have no idea what will happen but almost by definition taking on equity risk must pay off over safer investments over time.
“taking on equity risk must pay off over safer investments over time”: but the time required might exceed your lifespan, or exceed the length of time you can bear to continue holding shares that are doing badly. This makes me sympathetic to the proposition that people who are leery of equity investment should probably start with just a little bit.
@dearie me – You can increase your time horizon for inheritances if you leave it “in specie” transfer, so you can include your heir’s time
Also I think it’s better to hold different parts in different funds rather than an all in one fund, that way if one part does underperform for a long time you can leave if alone if you want to and shed what’s done well, allowing us to be more aggressive and not hold bonds beyond what we need, on the other hand Rebalancing should deal with underperforming parts , and you don’t want to really drift away from your asset allocation just to avoid selling a losing fund and sometimes it is better to cut losses (so an all in one fund might be ok)
The answer to this is to start young, and continuously invest.
If you started investing in 2007 before the collapse and dollar cost averaged in, you would be doing fine now. Even if you are highly unbalanced in equities, if your income is going to be consistent, just keep dollar cost averaging in, whether its good or bad years.
If you are close to retirement age and cant afford to lose the nest egg, then find, have a balanced portfolio with risk-off allocation. However, the biggest mistake I see people make is not being 100% in equities when they don’t have anywhere near enough capital acquired for retirement.
If shit hits the fan and equities crash, they will just pump it up again anyway with QE and be dropping interest rates again. There is so much money flowing around and interest rates are so low, there is no crash around the corner, we are WAY off that. Its counter-intuitive because we are in a 10-year bull market, but now isn’t the time to be concerned.
@Andrew
As someone with a very high risk tolerance for equities, a few things do concern me…
Your last paragraph, when people stop worrying then problems tend to be close at hand…
“If shit hits the fan and equities crash, they will just pump it up again anyway with QE and be dropping interest rates again. There is so much money flowing around and interest rates are so low, there is no crash around the corner, we are WAY off that. Its counter-intuitive because we are in a 10-year bull market, but now isn’t the time to be concerned.”
I think it’s when everyone’s on margin loans you have to worry, as I suspect it’s usually credit tightening that sinks a bull run, and we are vulnerable with huge mortgages, the banks are vulnerable, rates need to rise, but very cautiously
And it still scares me both (a) how late I was to finding out about investing and (b) how many other people are still in that position.
There is certainly a large gap in the education curriculum – when everyone had final salary pensions and employers shouldered the risk no one needed to know how to invest. Since the pensions landscape has changed significantly, I’d argue everyone needs to know at least a bit.
Half my money in blue chips. Half in cash. The cash up by a tiny 1%.blue chips down a good 10 %.
Sad really i believe we had a bull market. Over a year of course but sadly this has been a good year for me. Dreading a bear market.
@Griff – a bear market could be a buying opportunity or just a period of illiquid it when you shouldn’t sell, I wouldn’t really worry
I wasn’t really paying any attention to economics a decade ago.
Is this how it felt in early 2007? Everything booming, no trouble on the horizon?
I’m less concerned about a sudden decline than I am about another decade (or two) of stagnation as every government bends over backward to avoid house price declines while wages and work conditions stay depressed.
I’m just saying, if there is a crash, there will be a re-inflation again. If you have cash, it will be devalued even more. The same people who have a lot of cash will be scared to funnel it in when equities are down 40%.
Might as well just dollar cost average into equities forever. I don’t know why anyone would buy bonds with negative real terms after inflation, more or less. Only if you have less than 5 years investment horizon.
“If shit hits the fan and equities crash, they will just pump it up again anyway with QE and be dropping interest rates again.” But can you be certain that the QE and Zirp tricks will work a second time?
A quotation from an MSE comment: “Investing in equities is a risk game. Holding none is risky. Holding lots is risky. Faites vos jeux.” The young novice needs to grasp that “holding none is risky”. The old hand approaching retirement ought to know that “holding lots is risky” and be prepared to accept that risk or to ameliorate it.
@dearieme I can get on board with that.
Will it work a second time? YES, if they inflate and buy financial assets again. If there is some kind of bust, the money in the financial system has to go somewhere, allocated both by investors and central banks and institutions etc. Where is it going to go? Is everyone going to panic sell and buy bonds at effective 0% or a negative -%? Are they going to go cash simultaneously and do nothing with it? Is everyone going to buy gold? No, I don’t think so 🙂
I just don’t see where else money can go, if anything, I think there will be a bond crisis because there is so much money in there with no yields, or close to negative yields. All you need is people to stop buying bonds, the bid/ask drops and you have a crash. The appeal of bonds is already very low, and I don’t see peoples trust and faith in governments to rise (bitcoin proof of that). So I think there will be a general think things don’t fare well for bonds, and where will that money go (or has been going for the past 5-10 years!!!) EQUITIES!
@Andrew — You outline one potential scenario, and it’s a reasonable one. There are plenty of others that could happen. You seem to be describing some sort of deflationary spiral. You then make various guesses about whether people will or won’t buy assets such as gold or bonds at a negative %. I would caution it’s entirely possible people will buy the latter indefinitely at a negative interest rate — the past few years taught us that — especially in a deflationary environment. In your scenario of widespread fear and mistrust, that’s “with knobs on” in my view. The US and UK will always pay their debts (can print own currency) and especially the US will be a safe haven at such a fearful time.
There have been long periods where equities have gone down for one reason or another, irrational or not. I have a hard time seeing a global bond crash being compatible with a massive global bull market for shares (a gradual multi-year bond bear market is another thing altogether, and pretty much what I’d expect as my middle forecast.)
Best to be humble and accept anything could happen in my view, and diversify, and certainly not go all-in on anything. But that’s just my view, not advice of course. 🙂
@dearieme — We’ve had our disagreements over the years about your commenting style, but those are an excellent couple of remarks that I heartily endorse! 🙂
@Andrew, you may well be right. I go at least half way with you – no bonds for us, even though they did us proud for more than a decade.
A young kinsman turns to me for investing wisdom. He has about one third of his pension capital in equities. The rest seems to be in cash earning (metaphorically) 0.0000001%. Should he buy more equities? Maybe. Possibly. Probably.
How much more? When? I suggest he find a good IFA but I know perfectly well that the IFA knows no more about the future than I do. It was easy in the late 80s – buy equities. But now we live in interesting times.
If everyone who invests in cash, instead bought shares. Would the price of shares go up so much they would pay out less than a high interest savings account?
Yeah I agree with you guys, that’s just my own personal opinion, I will be very likely wrong, definitively humble enough to admit that I have no idea haha. But you have to stick your chips somewhere so to speak. If you think people are rational actors (probably aren’t), you have the following situations with asset clases:
– Equities: Looks expensive by traditional measures, but produces value, efficiencies, dividends, profits etc.
– Bonds: No/low yield above inflation.
– Gold: No yield, store of value.
– REITs: Same pros and cons as equities.
– Crypto: Who knows.
I am really just commenting to try and help myself formulate a plan. I have mid-6 figures in cash ready for investment (thanks to successful small business, which has generated above £500k in surplus cash after tax in the last two years). I am either going to dollar cost average into 100% equities over the next 5 years. Or I am going to be done with it and go with something conservative like 40/60 (stocks/bonds) life-strategy.
Basically, the problem is, everything looks expensive because there is so much cash swishing around. We are not in ordinary times.
@ &rew – I think with nowhere to go but equities, if equities get overpriced (as in high p/e, not high share price) then all you’ll see is a (potentially long) period of lacklustre performance where equities still beat bonds (so all the time you have low interest rates/qe)
Drip feeding reduces volatility but probably comes at a price in opportunity cost, depends how much volatility bothers you
And you’re going from having your wealth concentrated in a nano cap to something much safer even at 100% equities, but I don’t get why you’d consider vls40 alongside 100% equine?
@FvL – “See how to exploit capitalism with this one weird trick”
Thinking about it, the beauty of equities (or property, or even cash) is that they’re not “fixed income” so income can increase and p/e or cape ratios can improve without need of a value drop, as I read on fool happened recently with the ftse, p/e decreased despite an all time high
@matthew yeah exactly, agree with that.
LS40 if was to invest the whole amount now. Don’t have the bottle to just whack £500k in global ETF/index fund. I would have to ride it out if crash and although I have a very large risk tolerance, I am not sure I would like it. My nest egg, in a few years, will be enough to retire off 4-5% yield.
@Andrew – this depends on your goals – basic retirement sooner (annuities and bonds) or delayed but comfortable retirement that leaves an inheritance (drawdown of equities) – you can “make safe” the conventional way, by switching to safer assets, or my way, which is growing to a higher target, allowing me to remain aggressive. So it depends how high that higher target would be for you, how long it would take, and whether you can accept that “one mire year” or two.
I think if you’re not sure how you’d cope with volatility, that doesn’t sound like your risk tolerance I’d what you think it is. If you do go with equities i think it’s important to have faith that they usually do recover, and apart from Japan always have done so, because really the crash was just markets panicking and forced into margin calls (p/e was low), but you have to be ok with uncertainty that maybe this time it won’t come back (apocalypse), but then we have to accept this sort of risks at work, when driving, when we have children, etc.
One way to make safer I suppose also is to figure out how cheaply you can live in a market depression (apocalypse scenario)
You could think of a crash as just a period of illiquidity – like if you were unable to sell your small business or house (at a reasonable price) during a recession for a period of time – you haven’t lost the asset, just the ability to sell it for a while (unless something actually happened to the underlying asset)
Good conversation. Just beware that feelings run weird in big crashes. See:
http://monevator.com/coping-with-the-guilt-of-losing-money/
It was the Aleph blog, I think, that said most people should invest at moderate risk. Too low a risk => too little growth. Too high a risk => nerve cracks in slump, shares sold => too little growth (or worse).
I have no idea how one can tell in advance that one would hold one’s nerve in a big market slump. I suspect that windy assertions are worth nothing. I am beginning to look at people who write about rule-based sell and buy decisions as a way of (fingers crossed) avoiding slumps, or “drawdowns” as Americans oddly call them.
If one is happy with rule-based rebalancing I don’t see an objection of principle to other rule-based wheezes. Both are just a special case of market timing.
Hi TI / TA,
Did I hear this right, you guys are currently in the process of writing a book? 🙂
Cheers,
Paul
Instead of having the risk of losing money they opt for the certainty of losing money by putting it in account where it doesn’t even keep up with inflation. Silly beggers!
Been having some fun this evening in the time machine via the NY Times Archive search, browsing articles from 2007-2009. https://www.nytimes.com/search/
It’s remarkable how words like “subprime”, “credit”, “Recession” slowly gather pace and frequency in headlines over a span of several months. It doesn’t seem like a sudden event.
@learner thank you for the NY Times date related search, I am looking with renewed interest at 2006-2007. My recollection of the period in question that it was not that obvious.
Having had three periods of -40% to -50% , 1999 /2000 was a period when when problems in one area were obvious, I knew that my portfolio was not in these areas, it did not provide much protection , pretty much everything goes down.
Staying invested through these periods I came through better off , but it’s not comfortable.
I am rather alarmed that some people dismiss the possibility of a heavy market fall as not that bad, they would carry on through it and buy the dips. I suspect that without prior experience many would fall by the wayside and sell out at the low’s and suffer significant permanent losses.
It seems more prevalent that people ignore the downsides and to me that’s a warning signal. The premise of the original article that some equity exposure is beneficial is undoubtedly true but holding some ‘safe’ assets with low returns is not dumb, it’s paying an insurance premium and provides some ammunition in the event of heavy market falls.