Good reads from around the Web.
Anyone who knows they could save £300-a-year by switching their energy supplier but invariably finds a freshly painted wall that needs watching will agree that overwhelming choice is a curse.
I’m a bit nerdy about money and I know I should review all my standing orders and whatnot every 12 months or so, but to be honest I don’t.
Life feels too short to wade through all the alternatives – however much I tell myself the savings equate to a substantial hourly wage.
Happily I do manage it every 2-3 years. The worst kind of choice paralysis is when you never make the decision, with devastating long-term consequences.
It doesn’t really matter what brand of peanut butter you buy.
But it surely matters if you want a life partner yet keep dating until your life is half over because you just couldn’t make your mind up.
A plethora of potential portfolios
Closer to the soul of Monevator, it’s a bit tragic if you put off long-term investing not because you never took any interest, but because you did, only to find there were too many options to choose from.
A deep article on the paradox of choice in The Guardian has some insights on this:
Which of us, really, feels competent to choose between 156 varieties of pension plan?
Who wouldn’t rather choose to lie in a bath of biscuits playing Minecraft?
And yet, at the same time, we are certain that making a decision about our workplace pensions is an important one to get right.
But instead of making that choice, [the researcher says] many defer it endlessly.
One of his colleagues got access to the records of Vanguard, a gigantic mutual-fund company, and found that for every 10 mutual funds the employer offered, rate of participation went down 2% – even though by not participating, employees were passing up as much as $5,000 a year from the employer who would happily match their contribution.
We see something similar in comments on Monevator from people who’ve read all about the different portfolios in our passive investing guides but cannot decide where to get started – or when.
Some never do.
Similarly, while I doubt it’s useful to debate whether you should have 1.26% in frontier markets or just the 0.93%, I’m certain it’s better to think about it when the other 98% of your funds have been sensibly invested.
Choose life
This is why I often suggest to new investors that they just get started splitting their money 50/50 between cash and a UK tracker fund.
When I mention this, knowledgeable readers often protest, perhaps even with a strong dose of being aghast.
Haven’t we written reams about global markets, bonds, asset class diversification and so on? Surely I of all people should know that a 50/50 split between UK stocks and a bank account is not optimal?
Of course I do and no it’s not. But it’s inordinately better than not saving at all.
Like a lot of things – a good diet, jogging, going to nightclubs – investing gets more compelling the more you do it. Best just to get started, and to make refinements as you go.
It will hopefully be a long journey. Plenty of time for thinking once you’re underway.
From the blogs
Making good use of the things that we find…
Passive investing
- Are index funds fatally flawed? – Canadian Couch Potato
- Basic arithmetic the fund industry won’t acknowledge – T.E.B.I.
- Should you run an active side-portfolio for fun? – A.W.O.C.S.
- Strategic apathy and the mediocre investor – Abnormal Returns
- The small cap secret no one told you about [Nerdy] – The Irrelevant Investor
Active investing
- Identifying great companies – Richard Beddard
- Did you check your emotions in the crash? – Investing Caffeine
- Emerging markets do look cheap – The Reformed Broker
- Pros and cons of sector investing – SPDR blog
- Investing isn’t easy (on the predictable Globo fallout) – Expecting Value
- WH Smith: Good growth, shame about the pension – UK Value Investor
Other articles
- Beware your inner zombie – The Value Perspective
- S&P 500 Vs hedge funds [Hilariously poor returns] – The Big Picture
- London salaries: Real-life examples – FIRE v London
- Dr Evil’s money mindset mistakes – The Escape Artist
- 5 bad reasons to invest – Bankers Anonymous
- Startups under-reward their employees – Via Medium
- Quit early with an auxiliary fund [Beware dividend cuts!] – Dividend Mantra
- Ermine turns to maths in tackling compound interest – SLIS (vs me)
Product of the week: ThisIsMoney says the upcoming £1,000 personal savings allowance could make taxable savings accounts more attractive than cash ISAs for many (although I’d imagine the rates on offer will change when the allowance comes in). For example, Virgin Money currently has the best one year fixed-rate ISA on the market, at 1.81%. But Charter Savings Bank’s one-year bond beats that with a potentially taxable 2.07%.
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
- 5 ways the European ETF market is developing – ETF.com
- Is factor investing a free lunch? – MarketWatch
Active investing
- Lunch with T. Boone Pickens – Motley Fool (US)
- Tough decade ahead for US stocks, says Jack Bogle – Morningstar
- The financial tide has turned for Valeant [Search result] – FT
- 60/40 portfolios in a near-zero percent world – Institutional Investor
A word from a broker
- Don’t kid around with Junior ISAs – Hargreaves Lansdown
Other stuff worth reading
- ‘Pensions ISA’ decision deferred [Search result] – FT (recall your input?)
- Hammer hits value of alternative assets [Search result] – FT
- London property most expensive in world, says UBS – BBC
- A fifth of under-26 year-old adults still live at home – Guardian
- Dealing with impostor syndrome – New York Times
- Silicon Valley is bad for your health – Fortune
- The rise and fall of the .ly domain – Priceonomics
Book of the week: An overview in the Telegraph explains that author Lee Freeman-Shor divides active investors into five categories – rabbits, hunters, raiders, connoisseurs, and assassins – in his attempt to figure out why fund managers typically pick losing stocks but may still make good gains. Passive investors can safely look away now, but I was intrigued enough to put The Art of Execution
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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”. [↩]
“This is why I often suggest to new investors that they just get started splitting their money 50/50 between cash and a UK tracker fund.”
For someone just starting out I’d suggest a Vanguard LifeStrategy 60% Equity Fund. I’d even be bold enough to suggest that they could then just continue with it for their entire investing life if they didn’t really want to learn about investing. The only major downside I can think of is if Vanguard (or it’s employees) do something illegal but that risk has to be small…
@RIT — LifeStrategy is a very strong contender, true. I do think people can get addicted to seeing cash rise though, in a way it’s hard for those of us who’ve always been savers to understand. I’ve more than a few friends who started out with negative savings on the 50/50 route and now have more than six figures (or who rolled it into a house deposit). The tricky thing motivation wise with LS strategy for these people is the 40% is hidden, so they don’t every see the steady gains on that part of the portfolio. Splitting out cash and shares enables them to understand compounding, while getting used to the volatility of the markets.
But anyway, I wouldn’t argue against LS, just an alternative point of view. 🙂
“I do think people can get addicted to seeing cash rise though” Wondering if in current times where you’ll get 1 and a bit % interest in a savings account before tax if that could actually become a de-motivator? Days/weeks/months of deferred gratification for no/little reward particularly after inflation.
@RIT — Remember, these are *new* savers. You can get 3% up to £20K with Santander, and as much as 5-6% with regular savings accounts. Plus it never goes down, unlike stocks. Plenty of motivation! 🙂
“This is why I often suggest to new investors that they just get started splitting their money 50/50 between cash and a UK tracker fund.”
Oh, yes, this! It’s far easier (and more effective) when someone separates the decisions of “get moving” and “in which direction”.
We have to think of better ways of engaging people to save and invest. I have friends that spend more time agonising on what new car, house, holiday or gadget to buy and what deal they can make than they do about any investments.
There is so much bad press about finance, scams and investments they do not bother and leave it all to their IFA.
A good point to make but how many will listen I wonder?
Thanks for the round-up, TI. Liked the mention of how high auction fees are in the FT. I approve.
I find the paralysis question an interesting one. We know that we have to make a big decision so it has to be *right* so it gets postponed. 90% of life is showing up, it turns out, which means taking the decisions.
One of the things I notice is how much easier it is to make a decision or give a bit of advice to someone else than to prescribe it to yourself. Somehow cool-headed logic breaks down in the face of personalised situations. I’m a snowflake! [Indeed, anyone around here recommend passive investing but dabble themselves? 😉 ]
And that slots nicely into the two main psych articles — AWOCS on the active addiction — which rings true with the rather excellent “What I learnt losing a million” where Jim Paul describes market participants as either investors, speculators, gamblers or traders and describes their motivations and behaviours (His fall came from blurring the line between gambling and trading). And the inner zombie, which reminded me of when I was recently required to review one of Kahneman’s works for a publication and the things he writes about are based on the prejudices we have wired into our thinking which are particularly dangerous if you are unaware of them.
And with all of this in my armoury, all this learning and understanding, I noticed my portfolio flagged up a rebalance this week and I ignored it. I had a clear note from my past self about an action I should take should these events come to pass, and my current self decided to ignore it. I’ll be fixing that on Monday.
* * *
Finally I see we’ve double-dipped on Ermine’s compound interest. As I see it, compound interest is important for two reasons:-
— every pound you have at birth is a pound a year for ever when you retire (this gets gradually worse the older you are).
— costs which look small are in fact huge (supporting all those salaries in FIRE London’s post, no doubt). Not least because returns are small too, but also because they add up over time like everything else does.
This isn’t really inconsistent with either position (Ermine argues that contribution schedules mean that time is short for most money). Most interesting was his abject rejection of higher rate tax — apparently ignoring the effect (as we are meant to do) of National Insurance. Those auctioneers in the opening article still have an awful lot to learn from the Government.
I second what RIT said first… Just pick a Vanguard LS (age appropriate i.e. if you’re 30s or under go with LS80). No hassle.
Or you could just encourage people to read some of the easier books on investing and get that info into people’s heads…
@TI— For new investors is hard to choose. Later is hard to resist the temptation of tinkering.
Or you could just encourage people to read some of the easier books on investing and get that info into people’s heads…
Hahaha. (That’s a hollow laugh… 😉 )
It’s the word “just” that jumps out at me there. 🙂
Of course you’re right in theory, M. In practice it’s wishful thinking.
I am an investing nutcase who comes alive when discussing the subject and yet I’ve persuaded basically none of my friends to read any investing books.
Even those who know I write this blog have given up pretending they read it. Instead they desperately ask me what to do come March when they haven’t used their ISA again.
I don’t mean they ask whether to go for a World Tracker from Fund Company A or perhaps the slightly broader one from fund company B.
I mean they say “Oh god, is it still a good time to put money into the stock market? Cash is rubbish”. And these people have been the recipients of hours of lecturing from me.
I am increasingly convinced most people don’t and never will care about investing or take the level of interest we do in their personal finances. The few who do are the sort who read Monevator.
Even the MoneySavingExpert masses are more interest in clipping coupons than earning dividends.
Read an investing book? Totally forget about it! 🙂
My insights into how to get people saving and investing, for what they’re worth, are extremely hard won, over more than 15 years of trying!
@TI— The situation is the same in Hungary or worse. I have given up to persuade anybody and it is challenging for me not to speak about investing subjects in a company. But the bright side of this we are like small Warren Buffets in contrast to the majority.
@TI Yeah, I agree wholeheartedly. There seems to be a psychological barrier between the general public and investing. Even worse than investment paralysis.
Perhaps it all boils down to that most human of traits – fear of the unknown.
@The Investor
The key is to first help people get a future vision of themselves – the simpler investing books come later, after the seeds have been sown. Judging by your comments, I guess you have not done this… the hours of lecturing will have fallen on deaf ears, because people have not imagined what life could really look like for themselves.
I’ve found that once you help people to imagine a future vision of themselves, and keep seeing it, you can then start giving them info to help them achieve it, and they’ll actually come to you and ask you about what to do.
Giving the strategy first is pretty much bound to fail…
Actually reading the Bogle article on returns for next decade, and the 60/40 article I have to say the 50/50 Cash and UK tracker idea has several merits.
Especially so for people just starting out, who may want to build up a healthy emergency cash fund as well.
A 2 year fix Cash ISA is not likely to be beaten by a gilt tracker fund from where we are now. So you are not losing out on returns, and also avoiding interest rate risk.
Even if market indices go nowhere for a decade the FTSE tracker will still kick out 3.5% pa in dividends, nearly double that of a World tracker or S&P500 tracker.
I bet such an absurdly simple mix ends up beating several absolute return funds over the next 10 years.
@M — If that works for you, great. 🙂
I’ve turned around at least half a dozen direct friends by just getting them started on the 50:50 strategy I mentioned. Two come to mind who began in debt, one of them recently bought a flat in London with a six figure deposit after about 15 years of saving and investing starting from minor debt — and never reading a book (and eventually de-worsifying the more evolved portfolio after the early years by then (without me knowing!) by putting a chunk into strategically dubious and internally inconsistent expensive and purportedly ethical funds!)
I watch what people do, not what they say they do, and the only ones who’ve read books would I’m sure have done do without my urging.
But as I say whatever works, works. 🙂
I’m not disputing you can get people to change direction, I’ve seen that many times. It’s the book bit and the LS suggestions that don’t chime with my own experience. 🙂
Really interesting and vitally important topic, that many experienced investors might just not understand. There’s too much information:
Advice usually always comes with a caveat (“There’s no guarantee”) it scares people away
Silly articles in the Torgraph that say “I just put all my money in property and my adviser said – best place for it”
Too much talk about how “These investments” are the best – do you ever get that with car insurance?
Too much talk about how “These investments” are the worst – do you ever get that with pet insurance?
No real simple comparison tool for providers. Anyone made snowmans spreadsheet interactive yet. I know monevator tries with its table but its too scary for a novice.
Fees too complex – if novices ever get that far.
I like the 50/50 idea. Its real simple ideas like this that work. Seeing the cash side not go down is clever. Vanguard is great but hard for people to understand in many ways. The transparency of the 50/50 could help people more.
I think financial nerds we need to be more responsible in simplifying advice. No wonder people buy active funds through financial advisers or expensive robo advisers.
Nice article on 5% play portfolio. Like @mathmo said how good are the finance nerds at following our own advice? Anyone got an article on “making the step to sell that stupid fund/etf we bought that’s 50% down and we keep hanging onto?” I need one.
Geo @16 great comment, too much information.
Any investor needs to know the answers to the following questions:
1. What am I investing for, specifically.
2. Why did I choose this/these investments.
3. What does risk mean to me and can I live with the downside.
4. Do I know the ongoing charges as a % of my income/investment.
5. Do I understand the tax treatment of my investments.
It’s simple really.
do you think part of the appeal of “50% cash, 50% FTSE tracker” that ppl have at least heard of the FTSE?
because it would probably be more logical to go for “50% cash, 50% lifestrategy 100%” – better international diversification; and you still get the visibly steady cash bit. but perhaps ppl are thinking “life-wtf?”, and that’s scared them off.
@grey gym sock — Absolutely. You can just say “it’s the main index of UK companies” and they feel reassured (use home bias to our advantage!)
It’s all about familiarity and reassurance and making it seem safe. They’ll discover it’s not ‘safe’ in the newspaper money pages sense in time (when their shares fall 20% over six months) but the cash will buffer then and then they’ll discover ‘safe’ really means something else for long-term investors. After a few years of getting comfortable, they can start to diversify out.
Getting them started is the name of the game. Of course I realize it’s not an optimal portfolio in terms of asset choices for anyone, it’s not tweaked for their own circumstances, etc etc. That’s not the point. 🙂
For all you doubters out there, ask around your office — some of the people you wouldn’t normally talk to, or if you work at a bank some parents at your daughters birthday party or whatever.
Most people don’t know anything about investing.
At. All.
In answer to financial ignorance, the state imposes compulsory workplace pensions. This provides opportunities for carpet bagging active pension funds.
One of the single biggest problems with financial planning is that many people do not feel personal responsibility for their own retirement, and if they think about it all they have some vague notion about the state or company pension and cashing in on their family home when the time comes. The concept of financial independence is neither on their horizon nor realistically possible.
It is up to parents to provide financial education to their children and to demonstrate the benefits of planning for our futures. I’d advocate financial education in school and promote increased tax relief for all when it comes to pension contributions, together with a flat income tax regime that removes the perceived inequity between disproportionate tax relief between higher and lower rate payers.
It is rich for people to argue that is unfair for higher tax rate payers to receive proportionately higher tax relief, but in the same breath not consider it unfair that they pay proportionately higher tax on their income. The tax base is increased primarily by increasing participation, not by squeezing higher earners.
Well back in 2009/2010 I woke up one morning and had a vague feeling I should learn a bit more about personal finance, probably motivated by having a little more disposable income sloshing around than I had had up to that point.
Through some fortuitious piece of luck I came across monevator, specifically the post about all those different types of portfolio, i.e. the marcowitz, the harry browne etc. you know the one. That got me started, then I read Hale and started feeling like I was cementing something in place. A few Bogle and Bernstein books followed on from this.
Then the finance led to the philosophy – prob via a link to MMM or some similar site. So I then read Dominguez (a classic), some Hodgkinson, Oliver James, Burkeman, all that sort of stuff – I even started reading Seneca and Marcus Aurelius.
All in – I was never one of these ‘I used to be broke/spendthrift but now I’ve turned over a new leaf’ types – but I have been able to bootstrap my skills in finance and philosophy to improve things quite a lot (I think the two are intrinsically intertwined)
And if I had to pinpoint the start of it, it was that portfolio post on Monevator. So to cut a long story short, education is possible as I am an example of it.
Fast forward 5/6 years and I have a set-up where my salary typically only represents about 10% of my income and is pretty much optional. The amount of stress that removes from operations at ‘The Rhino Plc’ (yes I am one of those saddos who views themselves as a business) is significant and can be thought of as the gift that keeps on giving..
So chapeau to all at Monevator – I don’t know for how many – but certainly for some, its educational value has been immense
@TheRhino — Great story, and very motivational for us humble blog writers, too, to think we played a tiny role the birth of The Rhino PLC. Thanks for sharing.
A Monevator charity for financial education? Workshops and presentations in schools, colleges, universities…