Good reads from around the Web.
I have half-written several posts over the years about how ordinary savers have been shafted by the aftermath of the financial crisis, while the reckless were rescued.
While we still hear angry complaints that the bankers were bailed out by the Government1, the big winners were the millions of middle-class consumers who over-stretched to buy houses they couldn’t afford in the boom and then saw interest rates fall to near-zero levels – and who have since enjoyed bubble-like returns from property in London and the South East.
Many Monevator readers are homeowners who got lucky on interest rates. But before you get too indignant I’m not castigating everyone as fortunate chancers.
It’s those at the extreme end – who would have got their comeuppance in a typical recessionary purge – that should be glad things got so bad it saved their bacon.
Similarly, it’s not cavalier risk-tolerant active investors like me who’ve suffered from low interest rates.
It’s more normal successful young people who earn say £30,000 a year and who have saved what would have once been considered a heroic £2,000 to £3,000 a year towards a house deposit, but whose savings have (relatively speaking) gone nowhere while prices – at least in the South East – have gone into orbit.
The new normal
A young couple who bought a two-bed flat in Tooting in 2007 when prices were already high, using a £25,000 deposit from his grandmother and a four-times multiple of her salary, because they had to start somewhere, they wanted children in five years, and they needed to get on with their life – they were pragmatic, not reckless, as I see it.
In contrast, the 10th decile who paid 6-10x their income for their properties, who employed self-certification to make up their income anyway, those who created deposits from credit card advances, and those who had their parents remortgage the family home to enable them to buy a ritzy flat in Fulham where they couldn’t afford a bicycle shed – they are the ones for whom the financial crisis was like a windfall Monopoly card that reversed the normal run of recessions.
- Those who had bought a second or third buy-to-let property at the peak of the bubble.
- Those who had paid a year’s salary for a brand new BMW, on credit.
- Those who acquired a holiday flat in Paris by re-upping their mortgage in Westminster.
All saved by a situation so dire that interest rates went to 300-year lows.
Now, I can already hear some of you loosening your fingers to bash out an angry defense of these buccaneering go-getters…
- Perhaps I’m just seeing through my own circumstances?
- Hasn’t the stock market or even bonds been fine for investors – bad luck for those dumb enough to stay in cash?
- Was the Bank of England supposed to sink the economy for the sake of moral hazard?
- And so on.
True, these points all have some reality behind them. The older I get, the more I realise there are three sides to every argument – my view, your view, and the truth – and the less tolerant I am of those who believe they have a monopoly on two of them.
Alas, the Venn diagram of those who believe they are always right and those who comment on blogs is very large, too – even among our readers, who are in general about the smartest and most sensible in this sphere that I’ve encountered.
And to be fair, perhaps the overlap is large among those who write blogs, too.
“The first principle is that you must not fool yourself – and you are the easiest person to fool.”
– Richard Feynman
The result is I’ve avoided too much crusading about all this over the years.
But maybe that was a mistake, given the magnitude of these shifts.
Sinking the marshmallow test
While I muse on whether it was wisdom or cowardice that has so far prevented me climbing more frequently into the bully pulpit, I will point instead to an article on the virtues of saving by Gaby Hinsliff in The Guardian of all places.
Despite writing for a paper that has never seen a consumer that doesn’t deserve compensation or a family that isn’t hard-pressed, hard-working, and yet let down by Government, Hinsliff has written eloquently on the dangers of not rewarding those who get by under their own steam:
Saving teaches self-discipline, impulse control, the ability to forgo instant gratification in exchange for future reward – all the things famously measured by the Stanford marshmallow test, in which four-year-olds were offered the choice of one marshmallow now or two if they could bear to wait 15 minutes.
What makes the experiment so famous is that those few kids who resisted temptation didn’t just grow up to get higher exam scores, but were also still leading more successful lives four decades later.
But what if it had all been a con, and there hadn’t been a second marshmallow?
What happens when you save and save for a whole lot less reward than expected?
For eight years I’ve written a blog based on the belief that a second, and a third – and fifty more – marshmallows will come to those who do the right thing.
Is this the best we can do?
Now, perhaps you’re alright, Jack. (As I am, as it happens). You bought your flat in 1997 and didn’t go on holiday in that year, and anyone who says the current system is distorted is a hopeless whiner.
But even if you believe that, if you’re reading this blog presumably you believe in the power of incentives?
And to that end, don’t we want to see more marshmallows instead of:
- Homes located where people want or need to live looking permanently out-of-reach to everyday successful young people?
- Kids lumping around great tranches of debt acquired from often pointless university degrees instead of starting to save for the future?
- Saving and investment to pay better than borrowing and betting?
As for the expected upcoming changes to pension tax reliefs (featured in two links below, and I could have included another half-a-dozen) I appreciate this is a tricky issue for various reasons we all understand.
But should we too readily swap a level playing field for one that looks set to be made massively less generous to those responsible middle-class higher earners who save for an increasingly uncertain future, compared to the perks enjoyed by previous generations?
We’ll pay for this
We had a financial crisis driven by debt – yet so far those with debts have won the day.
In fact the single best financial move of the past 20 years was to skip university, scrape together all the money you could from rich relatives, lie about how much you earned to get a dodgy mortgage, and then take a massive punt on the biggest house you could buy in the priciest part of the country and cross your fingers.
When even a Guardian columnist understands we have a motivational problem when it comes to striving to do better for yourself, you know we’re in trouble.
Note: It seems the new tracking tool we highlighted on Tuesday might not be as great as it first appeared – please see The Accumulator’s latest thoughts in light of his further findings (aided by you guys!)
From the blogs
Making good use of the things that we find…
- Winning the loser’s game [US but relevant] – Investing Caffeine
- The finance industry is glad we’re clueless – Evidence-based Investor
- 3 things that matter during a market sell-off – A.W.O.C.S.
- Has factor-based investing stopped working? [Nerdy] – Predictive Alpha
- On the couch: Howard Mark’s latest memo – Oaktree Capital
- Everyone is a closet technician – The Reformed Broker
- Liquidity above all else – Bason Asset Management
- Beware of hair-brained themes – The Value Perspective
- An esoteric five-way starter portfolio – Fire V London
- Greenlight Capital’s Q4 investor letter – Value Walk
- The 3 numbers that can make you a millionaire – The Escape Artist
- Senior moments in early retirement – SexHealthMoneyDeath
- Double digit market falls are commonplace – The Irrelevant Investor
- 2015 review: Saved by saving – Retirement Investing Today
- Building a business takes tenacity – Fred Wilson
- Life is short – Paul Graham
Product of the week: Paying 3.2% on money locked away for five years makes Milestone Savings a table-topper, according to ThisIsMoney. But there’s a catch – the rate is ‘expected profit’, not interest, and it may vary.
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.2
- Where’s the payoff for active investing? – Morningstar
- US investors can pretty much own the market cost-free – Morningstar
- Beware of Wall Street’s proprietary indices – Bloomberg
- We’ll never see another Warren Buffett or George Soros – Marketwatch
- FTSE fallout ‘hurts’ UK investment trusts [Search result] – FT
- Why I’m hanging on to resource stocks [Search result] – FT
- Tech’s “frightful five” will continue to dominate – New York Times
- The golden age of private equity wasn’t so golden – Bloomberg
A word from a broker
- Higher rate taxpayers set to be walloped – Hargreaves Lansdown
- Directors who bought own shares while the market swooned – TD Direct
Other stuff worth reading
- Morgan Housel: Why does pessimism sound so smart? – Motley Fool US
- Protect your pension before March Budget – ThisIsMoney & Telegraph
- Merryn: 5 reasons London house prices will crash [Search result] – FT
- The 3% stamp duty surcharge might apply to overseas homes – Telegraph
- Stories from the UK’s 20-year-old house price boom – Guardian
- 25% of alcohol sold goes to the 5% who drink too much – Guardian
- How Denmark’s Odense city cycled its way to success – Guardian
Book of the week: I watched Into The Wild last night. It’s a movie about a young man who turned his back on consumerism and walked into the woods of Alaska to live off the land. As I watched it, I found several echoes of the early retirement movement, albeit expressed in a more adolescent context perhaps – which is worrying, considering (spoiler!) the very bleak ending. Apparently the book it’s based on – Into the Wild – is a US bestseller and popular set text in schools. Surprising.
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- Tell that to long-term Northern Rock, HBOS, RBS and even Lloyds shareholders. [↩]
- 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”. [↩]