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Weekend reading: Down but not out

Weekend reading: Down but not out post image

What caught my eye this week.

Another roughhousing in the markets. It’s enough to make you wish you’d pursued a gentler hobby. Maybe kickboxing.

The falls are now officially deep. Even British investors tracking their global returns in our ever-punier pounds have taken a foot to the face:

Presumably I won’t get readers telling me this time that I’m being spooked by phantom bears. Because the pain is finally spreading to all corners.

Okay, bully for you if you had more than my few percent in gold.

Indeed more growth-minded investors like me are frantically tapping the mat like we’re trying to drive nails into the ring with our bloodied hands.

Meanwhile I doubt there’s a professional developed market bond manager in business who has seen a market as bad as the past six months. (Apologies to any septuagenarian fixed income experts reading.)

Even value investors have not been unscathed. Lately they’ve found a puck coming in their direction can still smack them in the face. The cheap and stodgy FTSE 100 threw in the towel this week. It is now down nearly 7% for the year.

You’d still rather have been in value than growth of course, if you’re a naughty active sort.

The UK’s largest, growthiest – and until recently frothiest – investment trust Scottish Mortgage has fallen 46% year-to-date.


Old hands might be expecting it’s around now that my gung-ho alter-ego will enter the ring, raise his fists, and urge that it’s a great time to buy – like in March of 2009 or 2020.

It could be. It’s certainly hard to imagine (non-UK) investors being much more bearish.

Alas Alter-Investor is still over in the corner, on the other side of the ropes, biting his gum shield.

Maybe I’ve just taken too much of a battering to feel bullish. (And yes, that could certainly be a contrarian cue.)

My portfolio has been battered for over a year. While I did pretty well to sidestep the first round of disruptive tech carnage in 2021 – swapping a fair bit of clearly over-valued growth companies into my old favs, UK equity income trusts – I got greedy too soon.

Back in December I was warning that the under-the-surface growth sell-off could well herald a wider crash. Yet as I noted then, I was already seeing apparent bargains in my beloved software, cloud, and consumer tech shares.

Slowly my income trusts mostly went back out the window for fast-growers down 30-60%.

Who doesn’t like a bargain?

Unfortunately it was time to learn again that a share that’s down 80% is one that fell 50% before you bought it – and which then dropped by another 60%.

I am astonished by how far some of these – growing, cash-generative – companies have fallen. That astonishment is smeared across my portfolio in red.


The good news for me is that on the back of my concerns about imminent quantitative tightening earlier this year – and with an eye on my leverage – I acted in February to shift a huge proportion of my portfolio into a new bucket I call ‘low volatility fixed income’ on my infamous spreadsheet.

True, even that’s since fallen 4%. It’s a shame I didn’t just call it ‘cash’. But the move has saved my net worth from a deeper ravaging.

The only trouble is I don’t want that to sit around forever while inflation has its wicked way with it.

Remember my spin on investing risk and thermodynamics:

“Investing risk cannot be created or destroyed. It can only be transformed from one form of risk to another.”

Inflation risk is one concern. Opportunity cost – missing the rebound – is another.

That’s the trouble with any sort of strategic tactical allocation market timing.

First you have to get out without doing so at the bottom.

Then you have to get back in.

Fight Club

So yes, perhaps I’m punch drunk. Read me accordingly.

Certainly it isn’t time to sell, unless you’ve realized your asset allocation or risk tolerance is far out of whack. (Even then proceed cautiously).

You want to sell when everyone is chasing rainbows, not when grizzly old veteran investors like me are feeling under the cosh.

The market has front-run a lot of this regime change away from free money – hence the turmoil. But the falls so far are hardly historic, and in the US especially they’re from extreme valuation highs.

Moreover the impact has only just begun to be felt in the real world of mortgage rates, company earnings, and that ultimate lagging indicator – jobs.

I haven’t learned my lesson, and I believe there are opportunities in the decimated growth sector.

But away from those on-the-ropes stocks, I feel there could be more of a kicking to come.


However you invest – passively or actively – this is a Joel Edgerton market where you want to roll with the punches, not a Tom Hardy one where you want to risk all for knock-out glory.

Try that and it could well come back to smack you in the face.

Here’s live footage of Mr Market in 2022 versus yesteryear’s everything-goes-up lockdown traders:

It’s been a rough six months for most of us – but it will pass.

Go for a walk. Stay invested. Add new money. Check your household budget as the economic squeeze intensifies.

And have a great weekend!

From Monevator

How do accumulation funds work? – Monevator

Stress testing your home loan as mortgage rates rise – Monevator

From the archive-ator: How to spot a bear market bottom – Monevator


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!1

UK’s Bank Rate up another 0.25% to 1.25% – BBC

Bank of England now foresees 11% inflation – BOE Monetary Policy Summary

US hikes rates by most in one day since 1994 – ThisIsMoney

Bitcoin falls below $20,000 for first time since 2020 – Coin Telegraph

UK holiday bookings boom as Britons think twice about trips abroad – Guardian

Renters to receive new rights to challenge landlords in biggest shake-up for 30 years – ThisIsMoney

Covid wave rising in the UK, with more than one million infections in England – Guardian

How much money is needed for ideal life? Most are okay with £8m, study finds – Guardian

Products and services

What is Making Tax Digital for income tax, and how are you affected? – Which

Fixed rate savings hit 3% for the first time in three+ years – ThisIsMoney

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

UK lenders raise mortgage rates ahead of further BoE hikes [Search result]FT

AJ Bell and Hargreaves Lansdown aim bring IPOs to retail investors – Finance Feeds

77% of Gen Z leave their wallets at home and pay with their phones – ThisIsMoney

Nationwide Start to Save review – Be Clever With Your Cash

Homes in historic seaside resorts, in pictures – Guardian

Comment and opinion

Off the treadmill – Humble Dollar

Under-spending in retirement can be a feature not a bug – Morningstar

A 67-year old who ‘un-retired’ on the big challenge nobody talks about – CNBC

The problem with inflation is that it erodes trust – Morningstar

Is passive investing a blatant lie? – Banker on FIRE

Too good to be true – Of Dollars and Data

Five obvious signals of the top of the bubble, in hindsight – NY Mag

(Another) bear market mini-special

Stocks on sale – Humble Dollar

Two simple and cheap ways to manage a bear market – A Teachable Moment

Merryn S-W: Time to cut your stock market losses – or not? [Search result]FT

Anything could happen and nobody knows anything – The Reformed Broker

A time to puke – The Belle Curve

Five things to keep in mind during bear markets – Validea

You are paying attention to the wrong bear market – Abnormal Returns

Crypt o’ crypto

Crypto lender Celsius stops all withdrawals and transfers… – Protocol

Another lender, Babel Finance, freezes withdrawals – Crunchbase

Naughty corner: Active antics

An interview with Stanley Druckenmiller [Video] – via YouTube

Fed tightening need not lead to a recession – Calafia Beach Pundit

Jeremy Siegel says US stocks are already pricing in a recession – Yahoo Finance

Have active funds really shone in the downturn? – Morningstar

How bear market rallies trick gullible investors – MarketWatch

Kindle book bargains

Ultralearning by Scott Young – £0.99 on Kindle

The Dealmaker: Lesson’s From a Life in Private Equity by Guy Hands – £0.99 on Kindle

Think Like A Rocket Scientist by Ozan Varol – £0.99 on Kindle

Stuffocation: Living More With Less by James Wallman – £0.99 on Kindle

Environmental factors

The floodgates have opened for solar to crowd out fossil fuels – The Gregor Letter

Larry Swedroe: can investors improve returns by reducing ESG risks? – TEBI

Interesting Twitter thread promoting nuclear over solar power – via Twitter

Not all ESG funds are created equal [Research, PDF]SSRN

Off our beat

35 lessons on the way to 35-years old – Ryan Holiday

How eBay turned the Internet into a marketplace – Guardian

Why The Man Who Broke Capitalism is an urgent read – The Lefsetz Letter

Sentient or not? The Google chatbot transcript…  – via Medium

…and why this new generation of A.I. could make writers and artists obsolete – Vanity Fair

Olympiad – Indeedably

The dismantling of Hong Kong – NY Mag

And finally…

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
– Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds

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{ 91 comments… add one }
  • 1 PC June 18, 2022, 12:47 pm

    Yes, Extraordinary Popular Delusions and the Madness of Crowds is well worth a read .. one of the classics.

  • 2 xxd09 June 18, 2022, 12:53 pm

    Too late for any action from an amateur investor like me -not that I was intending to do anything but sit tight ( with my head in the sand?)
    My more financially savvy son in law asked me about “real assets”
    I replied-when to buy them?-too late now-followed by my next question-when to sell them?
    Then Bloomberg has an article on fertiliser piling up everywhere because farmers refuse to buy it at current high prices
    Makes “Don’t look for a needle in the haystack-buy the haystack “ seem almost sensible advice for an amateur investor like me
    My 33/62/5 -equities/bonds/ cash portfolio currently down 9%

  • 3 Amit June 18, 2022, 1:22 pm

    “A founding economic principle that everyone is motivated by ‘unlimited wants’, stuck on a consumerist treadmill and striving to accumulate as much wealth as they can, is untrue.”
    – From the Guardian link on how much money is needed for an ideal life.

    Can’t believe, a reputed research body reached such a conclusion on the basis of polling people on their aspirational target, without regard to how that target evolves with time. There were times when I thought a £50,000 target was good enough, and a decade and half since, I would aspire for £3m. Haven’t they heard of the hedonic treadmill?

  • 4 Chris June 18, 2022, 1:46 pm

    Well – against all advice I cashed in the passive half of my SIPP about a month ago which was 12% down on the year. Glad I did as it would have fallen a further 7% by now. Can’t believe the bond heavy part of the portfolio dropped just as much as the equity part. About to add it to the income trust half of my SIPP which is only 5% down on the year. Thank goodness for the last few years of a US based bull run. Still quids in.

  • 5 MonkeysOnARock June 18, 2022, 2:38 pm

    So far I’ve managed to stay pretty sanguine about the turmoil in the markets, but a quarterly check-in on investment performance at the end of this month might well be a painful reality check. Consolation is that I’ve got a fair while still in the accumulation phase if things go to plan…

    I’ve also been following the even more dramatic shocks in the cryptocurrency world pretty closely, despite not having any crypto myself – definitely a bit of schadenfreude mixed in there if I’m honest, although I hope people only risked what they could afford to lose or manage to get out in time.

  • 6 Martin T June 18, 2022, 3:42 pm

    @TI are we permitted to know what the ‘low volatility fixed income’ bucket actually contains, please?

  • 7 Passive Investor June 18, 2022, 4:26 pm

    Great post. Investing feels dreadful just like it did in 1999 and 2008. Time to stop looking at the portfolio, reflect on your risk tolerance but invest every spare penny you have – stocks are on sale compared with a year ago.

  • 8 Jim June 18, 2022, 7:04 pm

    Just ordered that charles mackay book on ebay. Change from 3 quid delivered to my door.

  • 9 Peter June 18, 2022, 9:22 pm

    Bonds did not serve it’s purpose. Negative correlation to stocks is nowhere to find so far.

    I feel mislead by so many voices on internet about negative correlation between stocks and bonds. Most of these voices talk about it like it’s a certainty, like it’s a fact that when stocks go down bonds go up (or at least hold their value).
    Current events clearly show this is not always true.

    Bonds are not as volatile as stocks – and look where we are with this statement. Bonds of 7-10 duration encountered similar falls as say equity global index fund.

    Bonds not only did not help but contributed to higher portfolio losses.They increased volatility instead playing it’s role of doing exactly opposite.

    Seems like raising interest rates kill negative stock bond correlation.

    Just a shame I need to test it on my own skin instead knowing this up front from self financial education.

  • 10 Bobby June 18, 2022, 9:44 pm

    Its going to get alot worse for everyone. This recession is going to be a bad one. The cracks are just starting. Layoffs are going to be next. Home construction is next thing thats gonna get hit pretty hard. Nice job on the economic front for our prescious Biden

  • 11 Chris June 18, 2022, 10:01 pm

    Maybe cash isn’t such a bad option for now.

  • 12 Erico1875 June 18, 2022, 10:07 pm

    I could have predicted this mayhem.
    I transferred 20K into SMT in October 21. It’s now around 10K.
    I’m tempted to now put another 5k in now though

  • 13 Seeking Fire June 18, 2022, 10:11 pm

    In my eyes, there are two things going on here, which aren’t interlinked but are unfortunately both going the wrong way.

    The first is asset price valuations. imho equity markets do not look particularly cheap albeit there are some interesting pockets of value and clearly markets are cheaper. For ex, Vanguard high yield dividend etf is now throwing off >4% with the FTSE 250 is nudging that way as well. Dividend yield isn’t a great indicator but it’s interesting none the less. FTSE 100 looks cheaper as always. S&P500 looks less expensive but I think we are another 20 – 30% away from an article that says who isn’t buying here based on CAPE, Yield, Book Value, P/E and other very imperfect metrics myself! Short bear markets have been due to liquidity injections and the opposite is happening here.

    You’ve got to be upset if you’ve bought a UK ILG ETF to hedge against inflation. Absolute disaster – acknowledging a monevator article did suggest this might happen. To be fair at some point once rates stop climbing they will probably start performing quite well. I suspect many people didn’t fully appreciate the duration. I’ve always preferred the unhedged $TIPS partly to diversify away from £.

    For most people the answer to recent market performance is to do nothing, it’s a feature not a bug – the volatility and market falls are positive for future long term returns although the near / medium term could be very tricky. I agree with the premise though to look at where things could cause you to blow-up – e.g. default on your mortgage, face margin calls, have to sell stocks due to illiquidity, not over lever oneself. For that reason, I personally have chosen to keep enough cash on the sidelines to cover the outstanding mortgage rather than pile it into the market today.

    The second is the UK economy, which looks a slow moving train wreck with the creeping realisation that there’s limited levers left to pull to kick the can down the road leaving govt hoping something will turn up and hence why they are desperately trying to turn the agenda to something, anything else. We are heavily exposed to global fortunes being neither energy nor food sufficient and dependent on exporting enough services & goods to pay for our imports, which is proving difficult given our choices made. If nothing turns up it could be really hard in the UK for a while. Running substantially negative real interest rates might save some mortgage owners from defaulting but financial repression has its only set of negative consequences with an increasingly pissed off majority. The only option is to invest for growth and take some medium term pain. Of course no one wants to hear that and so it won’t happen. The answer here for an investor is to diversify away from the UK given you are pretty heavily exposed through your job & house, insulate yourself as much as possible both metaphorically and literally and keep your fingers crossed.

  • 14 Peter June 18, 2022, 10:30 pm

    @Seeking Fire any clue why UK ILG ETF performed so badly during high inflation? It’s at least counterintuitive. I know these are long duration bonds so sensitive to interest rates but should there also be some other opposite force in this asset class to push it up? Inflation linked not so much it seems.

    I would love to know how one can buy TIPS being based in UK. And I mean not a TIPS fund but actual TIPS.

  • 15 Seeking Fire June 18, 2022, 10:39 pm

    @14 – Peter. Last time I looked the ishares etf ILG had a duration of >23 and so the rise in interest rates has hammered its performance. Once rate rises tail off, if inflation persists one would expect performance to improve. But it hasn’t done the job people thought it might although that’s not the instruments fault – it’s peoples misunderstanding of it – they certainly were not complaining when it was going up and and up over the past decade! The ishares $TIPS etf equivalent has done better but only because (a) the duration is circa 8 and (b) £ to $ has weakened, which might of course reverse albeit if it does it will mean inflation in the UK trends lower that will be good news.

    Sorry don’t know on individual purchases, never looked into it myself.

  • 16 Peter June 18, 2022, 10:48 pm

    @Seeking Fire thanks. Yes understanding ILG ETF is a challenge for me to understand as an asset class. It’s harder than actual Inflation Linked Bond itself. With actual bond (and not ETF), things seem to be easier to understand because the rules are clearer. Just a shame that for retail investor buying actual Inflation Linked Gilt certificate rather than Inflation Linked Gilt ETF is not easy or maybe even impossible.

  • 17 Learner June 19, 2022, 12:51 am

    I don’t think anyone said bonds are always negatively correlated with equities, just that they tend to be less volatile so they dampen the movement of a portfolio which is good for your mental health. Recent extremely low yields might mess with that to some degree though (*prepares to be roasted by ZX*).

  • 18 Tom-Baker Dr Who June 19, 2022, 1:32 am

    @TI – ‘Okay, bully for you if you had more than my few percent in gold’.

    Last weekend I was down 2% from my last peak in the end of April this year. I also noticed that the percentage of gold had grown large enough to make me consider rebalancing it and buying more equity funds. In the end my natural tendency to do nothing won the day. Now I am on holiday abroad and won’t be rebalancing or checking my portfolio until I get back home 🙁

  • 19 Passive Investor June 19, 2022, 3:55 am

    @Peter You answer your own questions really. Inflation linked bonds have long duration, the price was artificially high because of limited supply and high demand from pension funds, and they are in any case a hedge against *unexpected* inflation (Rather than inflation expected by the market). To a first approximation Bond ETFs with an average duration of X will perform the same way as a bond with the same duration X in a portfolio. Remember if you hold individual bonds on a buy and keep basis then the duration of your portfolio will fall steadily with time. So a portfolio of individual bonds is quite high maintenance with high transaction costs if you want to control the duration.

  • 20 far_wide June 19, 2022, 7:58 am

    @TI full acknowledgement we’re in proper passive investor rocky territory now. At least in my case, I hope you didn’t feel concerns were being waved away, it was simply an observation at the time that the damage to VWRL+co in GBP terms was pretty mild. It was at the time, less so now.

    As a youngish FIRE’ee I feel I have to be especially mindful of what to do next. This market feels so different I have to say to the COVID drop. Those drops felt almost comic-book like, they were so huge. Yet this market somehow feels more permanent, certain, persistent, grinding. Words like that.

    The market seems to be far ahead, so far, of the real world economic pain it suggests. Further ahead than usual? Everyone still employed, and just the first signs of cutting spending coming through.

    In terms of what I’m going to do. Well, I feel inflation may start to steady, so cash at 2.6% for 1 year doesn’t seem bad. VAGP bonds at a YTM of 4% doesn’t seem bad either. Meanwhile, of course simply rebalancing into equities is probably the right long term thing to do. With a market timing hat on though, and coming back to those ‘grinding, unrelenting’ type words, it really doesn’t feel quite time for that yet. Gold, in $ terms, is actually down 10% in the last 3 months, so buying some more might be a good idea if I’m wrong and things continue to worsen in stocks/bonds/inflation, and also if crypto continues to tank (and by golly is it tanking this weekend!).

    So, yeah, I have no bloody clue in summary. Answers on a postcard.

  • 21 Neverland June 19, 2022, 8:05 am

    Like this is for the S&500 in dollars, theres no great losses:
    14 Feb 2020: 3,400
    This Friday: 3,675

    The huge monetary stimulus to avoid a gaping recession worked and now its being withdrawn; now somebody has to pay for it all

  • 22 ZXSpectrum48k June 19, 2022, 9:09 am

    @TI. Equity markets are a sideshow compared to rates. My focus is primarily in EM rates derivatives, so seeing daily moves of 25bp is nothing new. For my G3 equivalents, however, who are used to moves of 3-5bp daily, 25bp is very rare. The last week or so we’ve seen that almost every day.

    Volatility follows the same conservation law that risk does. What created low volatility over the last 10 years, now creates the opposite. The huge short convexity position and short-sighted changes to the regulatory environment after 2008 that now mean that momentum players are totally dominant is being exposed.

    The response to COVID in 2020 was massive money creation. A massive transfer of wealth from govt to households. It’s another conservation law, that creation process will lead to an annihilation process. That annihilation can take many forms: currency devaluation, inflation, asset price falls and taxation. The UK is lucky enough to be participating in all of them!

    It was basically impossible to work out when these conservation laws would kick in, or at what level. Only that at some point they would. The 70/30 portfolio, that has done so well for so long, was due for a right kicking.

    I don’t know what happens next. They key is always to stay disciplined and manage the downside. My issue with your comments is that you don’t seem to have thought through this scenario. You should never be shocked by what the market delivers. Anything that can go up 100%, can clearly go down 50%. You’ve sounded in the last two weeks, like you are over your skis. The question is did your hedges work? Where is your stop?

  • 23 The Accumlator June 19, 2022, 9:26 am

    @ Peter – on those UK index linked gilts:



    Gilts historically performed worse than equities during a downturn about 1/3 of the time:

    Very high inflation is the nightmare scenario for equities and conventional bonds:

    I completely agree that the government should have kept issuing index-linked certificates. Providing a simple anti-inflation product that saves regular folks from taking their chances in the bond market would have been very helpful.

    There are times when nothing works. Then it’s time to pull on your tin hat, stop looking at the portfolio, and wait for the storm to pass. Could take a while.

  • 24 Ben June 19, 2022, 9:30 am

    I suspect we’ve got a long way to go. All assets have been buoyed up by the 20+ year decline in interest rates, with the rocket fuel of QE pushings things further during the financial crisis and then further still – unnecessarily – during covid. Reversing this mess will hopefully be quicker but will takes years not months.

  • 25 Mr Pungus June 19, 2022, 10:58 am

    I am firmly in ostrich mode.
    Have an offset mortgage so occasionally consider moving that cash to the market but I think I’m going to sit on my hands for a bit.

  • 26 The Investor June 19, 2022, 11:08 am

    Cheers for the discussion everyone one. A few quick replies:

    @xxdo9 — If we get into a truly persistent inflationary climate/mindset, then eventually producers (and manufacturers) can start to store non-perishable materials purely to avoid or even profit from the price going up in future years. So you end up with a large amount of over-stocking, ballooning inventories and so on, and big accounting profits and losses as these inventories are market up and down. Perhaps that’s already happening with fertilizers? I can’t believe farmers would be able to avoid buying what they need for long, I imagine supply chains are quite short at their end. But it’s a guess!

    @MonkeyonaRock — Checking in on a quarterly basis is a grand idea if you’ve no reason to be checking in on markets more frequently (work/active investing). Smooths the highs and the lows, and when markets are trending down you only get four bad experiences a year instead of every day/hour/five minutes!

    @Martin T — I’m not keeping it a secret for any great mystical reason. It’s more the same reason why I never did my my follow-up to my regime change post (but did indeed follow-up as I’ve said before in my portfolio) — I didn’t feel I had any certain approach to share, especially with passive investors who are inclined to say things like “you said you had 13.54% in corporate bonds three and a half years ago!” when I might have 13.54% in corporate bonds for an afternoon. (I exaggerate for effect). Passive investors are right to have that mindset for their aims and goals, but as ever I do things my way and it’s already been traded around a bit since February. (Bad when the relatively volatility and return is so much lower, as trading costs matter more particularly with something like an investment trust with 0.5% stamp). Broadly it was/is a hodgepodge of renewable and infrastructure trusts, commercial property trusts, various fixed income securities including ETFs, some gold, and I thew my NS&I index-linked certs into this basket too. The renewable/infrastructure trusts have offset a bit of the high quality bond decline, but the latter has still inflicted some pain (which is why it’s down overall) and I have been slowly increasing my exposure averaging down into those declines. I say none of this as a recommendation anyone does anything like it! And there’s a reasonable change the whole lot could be liquidated and stuck into equities at some future point, albeit I said I’ve told myself I’ll never go above 90% equity exposure again (coming out of Spring 2009 I was at 100% for context). So we’ll see. Basically I don’t want to detail it because I don’t want anyone to follow me with this, or think of it as a recommendation, not least because I have no desire to keep people up-to-date on the micro level!

    Okay, I’ll best post this and add a few more replies 🙂

  • 27 ZXSpectrum48k June 19, 2022, 11:34 am

    @TA. “I completely agree that the government should have kept issuing index-linked certificates. ”
    I don’t. The job of the Treasury should be to fund our debt and expenditure as cheaply as possible. Why should it pay RPI flat on a 2-5 year certificate when it can pay 2.44% fixed for 50-years?

    It’s like you think this govt exists only to make it easier for rich people to get richer. Actually just a minute …

  • 28 The Investor June 19, 2022, 11:36 am

    @Peter — I can’t talk for all sources, but when we’ve spoken about bonds providing a buffer we’ve said “usually” or “mostly” or caveated it some other way. (I am sure of this because sometimes @TA chastises me for adding even more caveats, on the grounds it can over-complicate things for people). In general human beings have a problem hearing that something has done X maybe 70% of the time and not feeling hard changed if it does Y for them, because they’re in a 30% moment. But the facts weren’t wrong, and the probability of something other happening was always there. (See also people complaining about polls!) That said, I do feel your pain. These bonds declines are pretty historic, and lots of people hadn’t done the numbers before. (See @TA’s links for some ideas for how to do that).

    @Erico1875 — Commiserations, I’ve done the same with various tech bits and bobs. (If you happen to capitulate and sell, please let us know! 😉 )

    @SeekingFire — Agree with nearly all that. The tricky thing about trying to diversify away from UK economic risk is that a lot of big UK companies (and aspects of the economy as a whole) have done well when the pound has weakened. So you have to factor that reflexivity into things. Then you have the increasing willingness of this current government not just to damage the economy permanently (most obviously with Brexit) but also to impose politically expedient levies such as the windfall tax on energy (dreadful) and the cladding burden on housebuilders (more excusable, but the builders didn’t set the rules). You could imagine that getting worse if the current direction of travel (/arsonist in charge) continues.

    @TBDW — Yes, your Permanent Portfolio-ish exposure was made for times like these (huge cash, high gold) although the latter seems to be coming off the boil. I was reading about a truly enormous gold discovery in (from memory) Uganda. Will take a long time to reach the market of course.

    @far_wide — Thanks for that. It’s the nature of being a writer who is always to be found at the same spot that you get fingered for exactly what you do and don’t say by readers who can come and go at their leisure, to suit their prognostications. So I appreciate your comments very much! 🙂 As for not having a clue, I think if anyone feels they have a very strong handle on how the next 3-24 months will play out they are deluding themselves. That is not to say they can’t construct a more certain outcome. In extreme you could put everything in cash and know you’d have exactly what you started with nominally in two years plus 3% interest (with a real return adjusted for inflation of course). But if you’re engaged in the practice of risk exposure, you will deviate by degrees from that. Complicate to suit. 🙂

    @ZXSpectrum48k — Conservation law is a nice lens to see it through. Sort of a Minksy moment type view. Regarding my own state / skis, well I am just writing honestly as always about the ups and the downs — and favouring more writing about the downs. (Readers can search in vain for an article about my stellar 2020 I believe. On the other hand here’s one I wrote about Tesla 😉 ). I decided a long time ago that I was an emotional creature (like nearly everyone) and I’d better get in tune with my emotions, because they can provide signals (see also Soros’ back pain…) whilst still trying to behave as rationally and logically as I can. So when I say both my psyche and my portfolio has been battered over the last six months, it’s accurate. I could present myself otherwise, and simply point to the posts saying things are going to get rocky like perhaps some Internet / YouTube gurus that we’re steadily losing traffic to would (only to flip their opinions two days later) but I’d prefer to plough my furrow of telling readers how I feel. I’ve been spanked in 2022, and it’s made worse by feeling I should have done something differently with the information and intuition I had. But mostly it all comes down to buying back into small cap tech (/disruptive) growth too soon, and that sector having a drawdown for the ages (arguably worse than 2000 if you consider today’s companies actually have huge revenues, cashflows, and in many cases earnings).

    I suppose if I seem overly gloomy/rattled it’s probably also because my income situation is very different to previous bear markets. As mentioned here at the time (have to rush out for lunch so can’t dig out the post right now) I quit my main contract back in late 2020. Since then I haven’t made any attempt to replace it, while other small income streams have dwindled and even this blog is going through something of a post-Covid slump. Normally I threw my earnings at a bear market, and this time I can’t really do this. Perhaps I should get a new job haha.

    Finally, I always relish and often learn something from your posts, but you and I are playing very different investing games. I find little to disagree with in your post, as a way of approaching the markets. But as you know I do most things differently to you (individual stocks, massive trading, pseudo-strategic asset allocation/market timing). If I had your maths — and certainly if I was running other people’s money and taking a toll — I’d do things differently, maybe. But my portfolio was built this old-fashioned way of taking on exposure and risk with fairly modest amount of money and compounding it for dear life. 😉

    I’m less exposed to equity markets on a % of net worth basis than at any time in the past 20 years, though this is partly an artifact of me wanting a belt and braces approach to my upcoming mortgage renewal (remember: with a shrunken income, and an already battered portfolio to set against it).

    But exposed I am, and not correctly for the prevailing momentum, and it’s cost me (and many others, I’m not feeling particularly stupid here) dearly.

    Have to race out to show a long-lost relation around London! Have a great Sunday all.

    Edit: % of net worth

  • 29 Vroom June 19, 2022, 11:46 am

    @ZX, I was a G3 short end swaps trader through the credit crunch. In those days 25bp daily was a quiet week! Fun times.

    @Accumulator, “They” can issue Linkers at negative real yields and compel pension funds etc to buy them. Whilst that’s the case they’d be mad to issue more granny bonds to you and I at a positive real yield (or even the lower CPI +0.01% where they’re rolling the old RPI + 0.95% or so issues). Essentially “they” are in the financial repression game and we are exactly the people they have in their crosshairs..

    @TI, I love playing market timing too, also with variable success. Having spent a lot of time modelling inputs etc (read: losing money) I’ve pretty much reduced it “don’t fight the Fed”. A cliché for a reason. Whilst Powell has his foot on the market’s throat it’s a long bumpy downhill ride for risk. When he finally takes a breather you need to be able to add a lot of risk quickly..

  • 30 IanT June 19, 2022, 12:00 pm

    Just for a bit of perspective, and as a warning to those who think stocks are now in bargain territory, a massively diverse global tracker like LGGG is down about 5% from where it was a year ago, and the even more diverse Vanguard Global All-Cap fund about 6%.

  • 31 The Investor June 19, 2022, 12:36 pm

    @IanT — That fund is unhedged. Great for U.K. investors but the global market doesn’t rate assets / returns in sterling terms. As I’ve kept reminding readers over the past six months this is a cushion from pound weakness (/dollar strength).

    This is just to say the re-rating of particularly the all important US market has been deeper in its local currency. Not to say falls can’t continue. I mentioned in my piece these aren’t yet historic declines on a broad basis by any means.

    (Apologies for typos — on phone/tube!)

  • 32 djh June 19, 2022, 1:50 pm

    Have been trying to avoid looking at my investments but I got an email recently saying fees were due, so had to login and deposit some cash to cover them and, much to my chagrin, temptation took over and the sea of red was sure a sight to behold!

    I really wish the fees could be taken via direct debit instead, then at least I could try to remain blissfully ignorant…

  • 33 Brod June 19, 2022, 3:26 pm

    Well, just checked the scores on the doors and since my end of December statements (more or less the ATH), I’m down 6%. Mostly I suspect due to the £, moving an additional 15% from Bonds to cash (making 20%), global equity diversification (see £, above), and a 20%+ allocation to gold (reduced in late April to 15% as I thought it way too high, especially with interest rates rising).

    Now my IPS says I shall move 0.5% to US Small Cap Value, Global Large Value or Global REIT every two months. So far it’s only been US Small Cap Value as it has fallen furthest from its ATH. My three purchases are down 12%…

    My target Asset Allocation is 72/25. It will take about 6 years to get there. I’ve thought about accelerating the process by lump summing in 5% when the S&P reaches 25% down (I think I meant 30% 🙂 ) and again every further 5% fall. I don’t want to miss any rebound but I suspect that could take years and I should be patient…

    The real sod is that I was planning in pulling the trigger in April…. then in August… Now, who knows? First World problems, eh?

  • 34 Whettam June 19, 2022, 7:43 pm

    As always @TI thank you for post / links and interesting follow up discussion everyone. I must admit personally currently feeling more sanguine / relaxed and less emotional about Q2 2022, than I did the initial drop in Q1. I’m not going to get to retire when I wanted to, I have accepted that now, we are still relatively in a strong financial situation, so just focusing on trying to enjoy life now as much as possible. Like others have said I don’t think the market will unfortunately recover as quickly as it did in 2020 (0r the autumn 2018 wobble).

    From a personal portfolio perspective I’m trying to learn from the experience, although I was investing in the dot com crash and the GFC. I was not as hands on as I am now and the sums were a lot smaller. I’m 9.5% down (unitised) (this sounds much better than the £ value 🙁 ), but this is “better” than my two benchmarks Lifestrategy 60 & 80. My 20% “Alternative” (e.g renewables, infrastructure, property) allocation has helped, they did exactly what they were there to do (this time, I acknowledge they might not next time). Also I have been using their dividends to buy passive equities. My largish cash allocation (getting ready for TFC, which I’ll still take as soon as I can because of LTA) has also helped.

    Unfortunately some holdings have not helped, I previously mentioned on monevator that 5/6 of my global trusts had outperformed their benchmark for about three years, I should have shut up or even better sold them at their highs. In some cases this is due to widening discount, but others underperformance (or both). I’m not going to do anything sudden, but I have decided my reaction to this will be to reduce my active equity holdings, I’ll keep some of the more income oriented trusts, but for equity growth I’m going to increase my passive core.

  • 35 Seeking Fire June 19, 2022, 9:26 pm

    I think the unlikely but not implausible tail risk for us little old folk in the UK is that inflation gets out of control for various reasons, BoE has to admit defeat and start aggressively hiking, all these people roll off their two year mortgages to a 5/6% rate vs a 1 / 2% they’d taken out, housing market totally tanks and UK has a very sharp recession. Not predicting this (no one knows anything) but not holding much store in someone who says this can’t happen. So one needs a plan to manage that tail risk imho. Cash reserves, Gld, $TIPS, Global Equites, FTSE 100 (maybe), a job, lower leverage etc etc.

    If you FIRE’d just before the bear market started on a 4% w/r you are looking now at a 5.8% w/r next year (circa 23% S&P 500 fall, 10% inflation – yes appreciate not many will have that portfolio). Good news 4% backtesting has seen all this before. Bad news it’s not a pleasant ride. Makes me sceptical I could manage this vol. Interesting to see the 1999 data at y/e, which will be now tougher to get to 30 years >$0.

    Rather disappointing to see that having had inflation for the first time in quite a while nothing has really worked to-date save the obvious commodity linked assets, which to buy now is a bit like fighting yesterday’s war. I remember reading the Intelligent Investor a long while ago with the narrator eulogising the benefit of how $TIPS could remove any worries about your investments not keeping up with inflation. er no. not when rates go up. These I series bonds look good though if one was a US investor.

  • 36 The Investor June 19, 2022, 9:44 pm

    @Whettam @SeekingFire — I hear you. While early retirees might be okay in the long run (we’re still only a few months into all this, and who knows what will happen — things can go better than expected as well as worse 🙂 ) I wouldn’t like to be starting my drawdown in 2022.

    This was the motivation behind this post I wrote in March:


    I’m glad @TA is mostly still earning, rather than purely leanFIRE-ing it into this (though I can’t speak for him and I believe he’d say he’d be comfortable with the risk if he was.)

  • 37 Al Cam June 20, 2022, 6:22 am

    @Seeking Fire:
    Re: Bad news it’s not a pleasant ride. Makes me sceptical I could manage this vol. Interesting to see the 1999 data at y/e, which will be now tougher to get to 30 years >$0

    I hear you; take a look at: http://howmuchcaniaffordtospendinretirement.blogspot.com/2022/06/the-actuarial-financial-plannerhelping.html

    Not sure if you saw it, but J.P. Greaney published his 2021 update a couple of months back. He usually publishes around April of the following year, so will have to wait until April 2023 to see his update with 2022 portfolio data.

    Agree that prolonged runaway inflation is bad news.

  • 38 Mr Optimistic June 20, 2022, 7:12 am

    Very entertaining article. Thanks. As Dame Edna said, it’s a priceless gift to be born with the ability to laugh at other people’s misfortune.

  • 39 ZXSpectrum48k June 20, 2022, 8:29 am

    @TI. I just wonder if you should be buying option strategies as a hedge. Structurally, just buying options (and thus buying volatility) will typically lose money over the long term, because the implied volatility in the option is higher than realized. So for many it’s a bad idea. Against that though what it can do is provide some level of hedge against very large/fast moves. Moreover, you’re a very active trader so you’ll naturally be trading the gamma on the options.

    Alternatively just buy something that typically is very positive convexity. That’s hard in the retail space but BHMG would have been ideal. Up 40%+ this year, that’s made positive returns in the last 17 out of 20 sizeable equity falls. Yes, the fees are costly, but compared to what? The cost comparison with passive tracker is meaningless since there is no tracker that can replicate what it does. It’s not an equity or bond fund.

    Finally, the best hedge is often just to run less risk! Whatever you do, anything that make you feel that you’re on the front-foot, rather than feeling like you’ve lost the initiative, can be hugely valuable. Feeling like you’ve lost the inititiave, that you can’t add but don’t want to sell, is never a good place to be.

    Anyway all a bit late now!

  • 40 The Accumulator June 20, 2022, 10:11 am

    @ ZX and Vroom – I take both your points that government can raise money at cheaper rates than via retail. But government is responsible for managing the competing interests of different sections of society.

    Providing a simple vehicle that protects people’s savings from the ravages of inflation is, I’d suggest, one responsibility of government – though it may come into conflict with others.

    ZX – it needn’t be about making the rich richer. Index-linked saving certs were capped per individual. By all means limit them to a couple of grand per year person if needs be.

    Vroom – it made me smile with recognition when you referred to certs as ‘granny bonds’. That was apt. The point of these things was to encourage regular folk to set something aside, after all.

    It’s worth noting that the US government maintains I bonds, though I dare say they can raise money more cheaply through TIPs.

    I appreciate you’re both being pragmatic but, as ever, there’s always an other way.

  • 41 Al Cam June 20, 2022, 10:34 am

    I agree with you.
    However, if financial ‘repression’ really is the game then we should not be surprised that new granny bonds are not available.
    AFAICT, both TIPS and I-bonds are inflation linked.
    IIRC, I-bonds are restricted on an annual basis. Granny bonds (or ILSC’s to give them there proper name) were/are limited per issue.

  • 42 Wodger June 20, 2022, 10:48 am

    On the other hand, this downturn is good news for those who are not far into the FIRE accumulation phase, right?

  • 43 The Investor June 20, 2022, 10:57 am

    @ZXSpectrum48k — Yes, I used to own BHMG but sold when it shifted from a persistent discount to a persistent and often high premium (I think I owned a pre-merger incarnation, I can’t recall now). I’d probably look to re-up if it gets in a funk again; I agree it’s a rare asset for UK private investors.

    I should explore options, but it’s been on my To Do list for years. I have US friends/contacts who’ve made good use of them. Yet another reason why I need to try to get an Interactive Brokers account again (they turned me down for reasons unknown a few years ago). As you’re probably aware options are not available with the vast majority of UK retail platforms.

    I do have significantly less risk than at previous times, as I noted, due to that shift I made in February. To be honest that was a bit of a pro-risk shift in a weird sort of way; I wanted to buy more apparently cheap growth/tech, but I also wanted more of a cushion for ex-portfolio return reasons (my big mortgage coming up for renewal). So I shifted a bunch of assets out of my unitized portfolio into this new low-vol affair to enable me to buy more growth haha! So swings and roundabouts, but more ‘bucketed’ and has definitely taken the edge off my concerns (which are 90% about the mortgage renewal).

    Almost all the US/global retail investors and fund managers I tend to read/follow are on the rack, pretty much without exception. From across the spectrum from Cathie Wood to the likes of Terry Smith and Nick Train at the other extreme. I have a few old value favs that are doing okay, but I pivoted away from value c.8-10 years ago as a pragmatic response to how the market (and arguably the economy) was behaving. Maybe it’s not too late to get religion again 😉

    I don’t particularly follow this chap (Howard Lindzon, a high-profile US early stage investor) but this quote of his pretty much sums up nearly everyone I’m reading:

    The wealth destruction has been epic. Even though I have had a high cash allocation, my 30-40 percent allocation to mostly tech stocks has me in my largest stock portfolio drawdown ever. That’s definitely bad on my risk management but I have never seen this many great brands and profitable companies drop this far this fast together.

    Of course that’s not an excuse; I invest actively aspiring to do better than ‘nearly everyone’ (aka the market) and I clearly (re)exposed myself to a crowded trade by re-upping tech. Hence my comment above about my YTD performance being especially galling (I was in a position to sidestep a lot of it — but I walked in front of the out-of-control truck).

    The upside is I believe my equity portfolio is now pregnant with potential, even on a relative basis in a recessionary environment. But I would say that wouldn’t I, etc. 🙂

  • 44 The Investor June 20, 2022, 10:58 am

    @Wodger — It’s great for early accumulators, yes. Best thing for you that could happen would be a long protracted bear market where everyone tells you you’re an idiot for throwing good money after bad at the global stock market for the next decade.

  • 45 DavidV June 20, 2022, 11:32 am

    @Vroom (29) @TA (40) @Al Cam (41) I think there is some confusion with the term ‘granny bonds’ . To my memory, confirmed with a quick search, they were formerly known as Pensioner Bonds, were restricted to over-65s and had a fixed interest rate – not inflation-linked. I have never previously heard of ILSCs being referred to as granny bonds as they had no age limit (other than perhaps over-18?).

  • 46 White Sheep June 20, 2022, 11:43 am

    > other small income streams have dwindled and even this blog is going through something of a post-Covid slump

    I know this is an old topic, but don’t hesitate to let us know how we can pay our subscription fees / sponsorship etc… 🙂

  • 47 DavidV June 20, 2022, 11:57 am

    My comment no. 45: ‘formerly’ should be ‘formally’. Although as they are no longer available, both spellings could be applicable!

  • 48 Naeclue June 20, 2022, 12:20 pm

    I feel somewhat relieved and vindicated that I chose to sell out of bonds 2 years ago and hold cash instead a the “safe” asset. It was this precise scenario of large falls in bonds and equities that our new 90/10 strategy was chosen to guard against. Cash still down in real terms of course.

    In the long term I appreciate that it is more likely that investing in bonds instead of cash deposits will give a better outcome, but I view this in much the same way as saying I will be more likely to get a better outcome by investing our house insurance premiums.

    Across accumulation/decumulation lifetimes large stock market drawdowns can be expected to happen multiple times and we need to get used to it. That is why it is best to have a calmly thought through investment plan to mitigate the risk of acting irrationally at times like this. For those still accumulating, not continuing to invest or worse still, getting out of the market is likely to be a mistake. Likewise with decumulators panicking.

  • 49 The Investor June 20, 2022, 12:33 pm

    @White Sheep — Cheers, and yes I do recall our previous conversations and your supportive input on this. We have been pondering something for a while that I hope many readers might sign-up to, and finally have been putting the bits and bobs in place. More anon! 🙂

  • 50 The Investor June 20, 2022, 12:38 pm

    @Naeclue — Congratulations. I think we’d all agree that the previous situation was untenable indefinitely; the trouble as you know was timing, with many strategtic types first starting to sell out of bonds more than a decade ago.

    Ironically perhaps, for the first time since the GFC I’ve bought government bond (funds) with an eye to more than a short-term trade since around the GFC. I’ve been averaging down into them – and had already started buying down from the highs – and I’m still down more than double digits. Luckily they are still in the very low single digits, net worth wise. I will probably try to add 1-5% a year to this exposure for the foreseeable, but happy to take my time. (And as always could do something totally different if things change or I decide I made a mistake, which as per my comments further up the thread is why I don’t really like talking about any of this allocation to our mostly passive audience).

  • 51 The Accumulator June 20, 2022, 12:42 pm

    @ DavidV – FWIW, I think using the term ‘granny bonds’ in this context is just a short-hand for ‘easily understood, government-backed savings vehicle’ used by regular folks.

    Given individual’s responsibility to save for retirement, the complexities of the linker market, and the UK’s periodic bouts of rampant inflation, it shouldn’t be too much to ask to let people save a limited amount without fear of it going up in smoke.

  • 52 Wodger June 20, 2022, 1:22 pm

    @TA — that’s what I figured. We’re about 20% of the way there. I actually get kind of excited each time I see our portfolio hit a new low!

    How has the current downturn has affected expected returns over the next ten years? Have expectations gone up much?

  • 53 DavidV June 20, 2022, 1:24 pm

    @TA I’m all for bringing back ILSCs or something similar to allow the ordinary person to save modest amounts without fear of those savings being wiped out by inflation. I accept that in the current environment it would be unrealistic to expect the annual limit to be as generous as when these products were last available over ten years ago.

    I still maintain, though, that the term ‘granny bonds’ was only ever used to describe specific NS&I products that were age-restricted to those of state pension age or thereabouts. These products (there have been several over the years) had a higher interest rate than other NS&I products, but have never been inflation-linked. To use the term in any other context, and specifically to describe inflation-linked products, adds confusion IMHO. And don’t get me going about ‘staycation’!

  • 54 The Investor June 20, 2022, 1:31 pm

    @DavidV — Must admit I agree with you. I can see they’re a handy colloquialism for all kinds of ‘good for oldies’ products, but they did have a very specific meaning in terms of limited issue, limited allowance, modestly higher government-issued bonds (from NS&I if I recall correctly) and add my vote to keeping the term specific. 🙂

  • 55 Naeclue June 20, 2022, 1:31 pm

    @TA, I completely agree with you about the provision of ILSCs. I would go further though and create a new ISA (triple lock ISA?) that increases every year by whichever is the highest of inflation, earnings growth or 2.5%. A cap of say 20-30k real with no restrictions on top-ups or withdrawals. There could even be a competetive market in which providers would compete on the 2.5% component, the other components being underwritten by the government.

  • 56 David June 20, 2022, 1:49 pm

    Oh dear, decisions decisions. Having found this site back in 2014 I put some money VLS 40/60. I haven’t looked for 12 months and don’t intend to now as I don’t need it and it may cause sleepiness nights. Now today’s query in 2 months I shall be in receipt of my NHS pension after recently quitting my dilemma whether to tread the same path as I won’t be needing it for 5 or 10 years. Thoughts are not advice I appreciate. Thanks.

  • 57 Naeclue June 20, 2022, 2:10 pm

    @David, hard to be precise but there is a big difference between needing it (ie all of it)and needing to take an income from it. If the latter I would say do nothing assuming the fund provides the right level of risk for your circumstances. VLS funds really are great invest and don’t concern yourself with funds.

  • 58 David June 20, 2022, 2:36 pm

    Thanks, I should have added that part of the pension will be around 6 figures lump sum with a monthly pension which will cover essentials. What to do with the lump sum is giving me a headache. I do appreciate how fortunate I am to be in such a position. I could hold cash but it seems too large, but the markets as they are???

  • 59 The Accumulator June 20, 2022, 3:14 pm

    @ David – these posts might help with some useful ideas re: asset allocation and getting into the market at a difficult time:




  • 60 Jonathan B June 20, 2022, 3:25 pm

    @David, obviously your decision will be based on your particular situation, but when I retired we used part of the lump sum to pound cost average into funds and the rest was kept as cash despite the negative real rates. That was to fund a deliberately higher expenditure in the early years of retirement, partly “treats” in the nature of nice holidays and things for the house, but also in our case because our daughter was going to start university; we had decided that our contribution to her living costs would come out of savings since retirement planning gave our budget for annual income long term. (She had better start supporting herself after graduation!)

  • 61 Al Cam June 20, 2022, 3:29 pm

    Fair comment about granny bonds.
    Also, I have just noticed I used “there” rather than “their” above. Yikes!!

    Re your comment to last weeks weekend reading about windfalls:
    I can see the logic.
    If I may, has your wife’s decision on this matter shaped your own gifting approach?

  • 62 David June 20, 2022, 4:42 pm

    @Naeclue,The Accumulator and Jonathan B. Thanks all for comments.

  • 63 Norman June 20, 2022, 5:07 pm

    @David – I’m not in a dissimilar position (kind of) and in light of the current economic climate, I find myself tempted to invest at a higher level of risk (for me) with a lump sum I won’t need to touch for 12 years or so. From my reading of your post you’re the opposite way inclined.

    Ordinarily I’d be thinking VLS60 but current lower equity prices have me thinking about VWRL/P or similar. “The time to buy is when there’s blood in the streets” comes to mind. As does the question of whether the streets are at their bloodiest yet, which tells me I’m market timing as well as dithering.

    “Catching a falling knife” is another nice bloody saying, but I’m leaning towards going all-in equities (maybe drip fed). I might take a few cuts but hopefully they’ll heal in the 12 year timeframe. Plus I can always re-adjust the risk later if it comes good……

    Still procrastinating though.

  • 64 Naeclue June 20, 2022, 6:13 pm

    @David, I have a relative retiring soon from the NHS and am familiar with the various schemes. When you say you have a lump sum payment, is this the normal automatic lump sum from the 1995 Section, or have you taken the option of receiving a retirement lump sum by exchanging part of your pension? I only ask because for most people the optional lump sum would be an atrocious deal – giving up £1 of index linked income to obtain £12.

    If it is not too late for you to take up the option, for some people the NHS Additional Pension might be good for you. You would not get an index linked annuity anywhere near as good in the market unless you had significantly reduced life expectancy. IMHO unless someone is prepared to invest aggressively in a high equity allocation, the NHS Additional Pension would be money well spent.

  • 65 Naeclue June 20, 2022, 6:18 pm

    @Al Cam, re windfalls, it is the other way round. I persuaded my wife that she would be very unlikely to need her inheritance. After my father died a few years ago I did a letter of variance to pass my share of his estate to our kids.

  • 66 David June 20, 2022, 8:06 pm

    @Naeclue, thanks for your reply. As you probably know I have a choice of a bigger lump sum and smaller pension or vice versa, if you (I) take the bigger pension, smaller lump sum it takes 12-13 years to reach the amount you (I) would have achieved if the bigger lump sum would have been chosen. The received wisdom has always been for the bigger lump sum (bird in the hand I guess) but I don’t need it so a quandary as I’ll be 72 when I reach that stage. Would you mind a brief explanation about poor value as your understanding of it is better than mine.

  • 67 David June 20, 2022, 8:11 pm

    Of course after 12 years you are better financially with the bigger pension smaller lump sum. Thanks

  • 68 David June 20, 2022, 8:16 pm

    Apologies Naeclue, it’s 1995 scheme.

  • 69 David June 20, 2022, 8:43 pm

    Sorry about another post. First of all @Norman, blimey your braver than I am, good luck to you. @ Naeclue I get it (at last) I’m fortunate I don’t need such a large sum to invest, and worry over. I have a lump sum already. You shone a light by taking the bigger pension its a form of investment. That I can only win (as long as I live long enough) so thanks. Much appreciated.

  • 70 Al Cam June 20, 2022, 9:47 pm

    @Naeclue (#65):
    Thanks. I see.
    I was just wondering if such life events had led you to favour giving whilst still living over leaving a legacy on death?

    IMO, 12 for 1 sounds like a dreadful commutation rate – at what age does this rate apply?

  • 71 David June 20, 2022, 10:04 pm

    @AL Cam. The age is whenever you retire. Normal retirement age 60 but you can access at 55. Myself ill be normal retirement age.

  • 72 David June 20, 2022, 10:07 pm

    Why is this a dreadful rate 12 to 1? In which way.?

  • 73 Al Cam June 20, 2022, 10:28 pm

    Often, the rate goes down as you age.
    For years people have talked about 20:1 being a decent target. I suspect this is predicated on retiring at 65 and taking you to break-even at about 85 or approx. life expectancy.
    Scheme I’m in currently offers a tad under 20 at age 60 – so not brilliant either.
    One other thing to consider is your marginal rate of tax as a pensioner. This is because the after tax effective commutation rate for a higher rate tax payer is better than for a basic rate tax payer all else being the same.
    IMO ‘bird in the hand argument’ only normally applies if you see the PCLS as a risk mitigation activity – although I cannot see how the NHS pension scheme can fail into the PPF.
    Lastly, if you have private information to suggest a limited lifespan then that is a whole other story. And in this scenario it is essential that you check what, if anything, taking a PCLS does to any survivor benefit.

  • 74 The Investor June 20, 2022, 10:29 pm

    @David — Glad you’re finding the discussion helpful, but could you please try to keep as many of your questions/replies as possible contained in one single post as possible? You can always include multiple @s in one reply (as I have done above).

    Thanks for understanding, we have a very old school style of discussion here on Monevator (unthreaded) for various reasons, and an abundance of short one line comments quickly gets cumbersome. 🙂

  • 75 Naeclue June 21, 2022, 8:30 am

    @David, “received wisdom” in this instance really is crazy. A number of my relatives colleagues have been telling her she should take a bigger lump sum, which is very sad. £1 of inflation linked income for £12 is equivalent to an SWR of 8.3%. A very risky SWR. Those desperate for a lump sum to splurge would likely be better off taking out personal loans rather than converting their pension.

  • 76 Naeclue June 21, 2022, 8:46 am

    @Al Cam, the NHS 12 to 1 commutation is at normal retirement age. I don’t think it is age adjusted either, but i have not investigated this aspect, just told my relative not to take it. Thankfully she trusts me more than her peers.

    Yes it really is that bad and purely from hearsay, is popular. NHS workers do not appear to get any proper guidance and the literature available is overcomplicated.

  • 77 ZXSpectrum48k June 21, 2022, 10:21 am

    @TA. “protecting people’s savings from the ravages of inflation is, I’d suggest, one responsibility of government”

    Not really. We have an independent central bank with an inflation targeting mandate, exactly because the govt isn’t allowed to interfere. Inflation is often not under their control, as it is supply driven. For sustained inflation to occur you typically need high wage growth, so people should not be asking for wage rises.

    Moreover, the govt transferred hundreds of billions in wealth over to households and the private sector during the COVID crisis. Saving rates exploded higher, so the UK population is now sitting on much higher aggregate savings and wealth than a couple of years ago. They are rich. That wealth transfer clearly drove prices higher.

    You seem to saying the public should be able to have their cake and eat it. Do you work for Boris?

  • 78 Jonathan B June 21, 2022, 10:53 am

    @ZX, is the Bank of England really independent, given it is owned by the government? The best one can say is that its management is arms-length.

    And the BoE only really has one tool at its disposal, the setting of interest rates. Are interest rates the right tool to deal with inflation that is caused by external events* like a war in Ukraine, nothing to do with the ease of borrowing money in the UK? Other tools, like taxation and the amount of public spending are entirely controlled by the Treasury.

    [*Not just war, there are elements due to supply chain shortages particularly from China, the adjustment from a lockdown economy, and Brexit – but all events not much affected by UK interest rates].

  • 79 No Free Lunch June 21, 2022, 12:30 pm

    Does it even matter whether or not the BOE is independent? It is a pointless debate.

    Central banking has been a blunt tool since at least the 1950s. Ever since so called monetary aggregates deviated from reality, due to off balance sheet money and the Eurodollar system, these policymakers have deluded themselves into thinking they are powerful.

    They are not. It is now purely an expectations based policy system. Its just one big manipulation of the general public after another. Just look at how many people still believe QE is printing money. Even Mervyn King thinks so and he should know better.

    The only meaningful creators of money is the private banking system. Monetary systems are evolving over time, mostly it has been to the benefit of society at large, but interim periods (such as today perhaps) might create societal issues.

    Milton Friedman’s definition of inflation is spot on. It is a monetary phenomenon. The inflation we see today is only temporary because the monetary impulse from the government to public redistribution is just a one-off.

    We are run by a bunch of incompetent buffoons. Think where our economy would be if it was designed and crafted in a smarter way. That is why the UK will likely forever be a sh!thole.

  • 80 CJ June 21, 2022, 7:37 pm

    For a 60/40 investor, purchasing world equities is a very good long term bet. However buying UK gilts for the 40% part in the face of 10% inflation and climbing, with the BOE governor saying he cannot control inflation, is just not a good use of your money.

  • 81 David June 22, 2022, 9:22 am

    I will give a brief outline why in my experience NHS staff overwhelmingly opt for the big lump sum /smaller pension option. 1.lump sum on average between 80 – 100k is very enticing. 2. The L/S is tax free while normal tax rules apply for the pension 3.on average 12-13 years until you break even on the bigger pension option by which time most members would be 72 and in receipt of their state pensions for approx 7 past years and finally at that age concerns over health and not able /wanting the money as much. @Naeclue your absolute ly right it is not age adjusted and there is very little literature /understanding of financial matters. That is why I beat the drum to my colleagues to read this site so often. Thanks.

  • 82 The Investor June 22, 2022, 1:40 pm

    @Neverland — Hmm, I didn’t get around to auto-deleting your comment (not that it’s at all unreasonable in itself. New readers might need to know it’s your long, long tail of trolling that *uniquely* warrants your deletion on sight, regardless of content).

    But as it’s still there, I’ll just respond by saying it’s the worst first half for US markets since the Nixon years, and the worst for bonds – arguably – since the 19th Century.

    So worthy of comment IMHO.

    I think most of us understand markets went up too far too fast last year, especially in hindsight. I’ve written about it extensively here, including before Christmas when you were saying the same ‘nothing to see here’ comments — right ahead of the aforementioned worse six months for US markets since Nixon.

    Most of us believe markets will go up again in the future, too.

    You’re stating the obvious today, attacking straw men tomorrow. Whatever. Your shapeshifting troll tricks don’t work on me I’m afraid.

  • 83 Wodger June 22, 2022, 2:07 pm

    @TI — while we’re on the subject of the recent dreadful performance of bonds, is it reasonable to expect them to *eventually* rebound in the way that equities almost certainly will? I’m guessing this depends on the direction of travel of interest rates over the next few years.

    With this in mind, I’ve cancelled our monthly purchases of bonds. At this point we don’t need them as a psychological crutch, and it seems like the money would be better spent on buying more equities, given their relatively low valuations and greater expectation of an eventual rebound.

  • 84 The Investor June 22, 2022, 2:38 pm

    @Wodger — Bond maths is different to equity maths. Remember you (typically) have a fixed capital repayment at the end of your term (especially with presumed CREDIT risk-free UK government bonds) and a known regular income stream until that capital repayment. This means if you buy, say, a 10-year gilt today you can work out precisely the return you will get if you hold for 10 years. No uncertainty at all.

    That is a very different situation with equities. We do not know what income stream we’ll get over the next 10 years; the best we can do is look at history and estimate. And we never know what value the market will put on that income stream — last year a lot, this year not so much. This means we cannot calculate with any precision our return over the next ten years from equities; we must basically guess.

    On the other hand, equities are REAL assets. Their income streams can rise over time, and share prices (and the stuff owned by the companies behind those share prices) can respond to inflation and rise over time (or vice-versa). Over the very long-term, this plus history makes it reasonable to assume that given that both inflation and GDP tend to rise over the long term, equities will eventually see new highs. However we cannot know when.

    With UK government bonds, it’s different. There’s no uncertainty in theory.

    Now the reality is we tend to own government bonds *funds* where that income stream / capital repayment mechanic is hidden. However there’s no magical transformation going on here. We simply own a basket of (many) individual bonds that do what bonds do. The other complicating factor is that the bond fund manager will typically recycle holdings to match the stated duration of the bond fund (i.e. sell short bonds and buy new long bonds to maintain duration). Again, this isn’t magic — the underlying market is the same.

    As bonds sell off, their yield rises, which means a new purchaser of that bond today gets more income until redemption. (Remember that redemption might be at a lower price then you bought the bond for. This is why ‘yield to maturity’ (YTM) calculations total all income due and the final capital gain/loss).

    To that extent, the more bonds sell off, the higher their expected return. You can pretty much assume you’d get the starting yield to maturity if you held that bond to maturity. So if a 10-year gilt today has a YTM of 2.5% (which it does) then that’s going to be your return over the next 10 years. (The actual coupon — the annual income — is 4.5% but there will be a capital loss when the bond is redeemed, because the price you’re buying at today is still very elevated over the issue price). This same thing goes on, disguised, inside a bond fund.

    A lot of waffle but you can see to some extent you’re not asking a question that makes sense in bond world. They don’t ‘rebound’ as such. Certainly prices can rise, but yields would fall.

    What will ultimately drive REAL returns is inflation and as you say interest rates. Over time, new bonds will be issued at higher rates than a few years ago. Ultimately the yield curve should steepen accordingly.

    I’m not sure if I’ve been clear above, but most people don’t really understand bonds, so at the least I’m trying to show the areas to look. We’ve a lot of bond articles on this site alone, have a search. 🙂

  • 85 E&G June 22, 2022, 2:38 pm

    £1 for £12 doesn’t sound great value surely you need to consider the tax hit as well, if your annual pension is above the tax threshold. It’s actually 80p you’re foregoing for £12 so the payback period (presuming lower rate taxpayer) is effectively 15 years. Throw in all the other benefits – cash when young, fun money if your basic needs are met, that it can form part of an estate (what would you be spending on life insurance for an equivalent sum at 60/65/68?) – then it looks a decent deal, particularly if your pension age is closer to 68 than 60.

  • 86 The Investor June 22, 2022, 2:41 pm

    p.s. Just to be clearer for the uninitiated, a bond’s YTM is an annualized return over the remaining life of the bond including redemption — so it’d be 2.5% a year in the case of the 10-year gilt.

  • 87 Naeclue June 22, 2022, 5:38 pm

    @E&G, you are right tax needs to be taken into consideration. Exchanging after tax income of £1 for £15 is equivalent to giving up a guaranteed SWR of 6.7%. I get the appeal of doing this. It provides the opportunity for a holiday of a lifetime, your own yacht, etc. which might not be available if the reiree has insufficient savings and/or inability to borrow cheaply. Financially though it is still not good value for money.

    For higher rate taxpayers the commutation works out at 1 to 20, or an SWR of 5%. Financially still not great (I would love to take the other side of that trade), but not outrageously bad either and quite possibly not the most expensive way to fund a splurge. I suspect though that NHS retirees who end up as higher rate taxpayers have other things to consider, such as the LTA and inheritance tax.

  • 88 David June 22, 2022, 8:29 pm

    Unfortunately on my side of the NHS fence higher rate retirees are an extinct species.

  • 89 E&G June 23, 2022, 12:56 am

    @naeclue, going by your name you are from my neck of the woods where the average male would be doing well to get 15 years, in any state of health, after their NPA so irrespective of the SWR calculations and the like it looks a decent deal to a lay punter like myself.

  • 90 Naeclue June 23, 2022, 1:00 pm

    @E&G, it depends. Sure, for someone with reduced life expectency it might be a very good deal. If you have average life expectency and want to take the cash, invest it with a view to drawing an income that rises with inflation, not so good, better to take the income. Do you want to take the cash and spend it over a few years on cruises, etc? It might be the best deal available, but that would depend on alternatives such as running down other savings instead or the rate you can borrow at.

  • 91 Wodger June 23, 2022, 1:56 pm

    @TI — thanks for your in-depth explanation. I was familiar (more or less) with the fundamental principles you outlined, but I hadn’t connected the dots quite like that.

    From my perspective, I want to hold bonds not so much for the income (although that’s obviously important) but rather for the negative correlation with equities that is supposed to diminish volatility. Do you think they still serve that purpose currently? Do you think I’m being foolish for pausing my regular bond purchases in order to buy more equities on the cheap? (Obviously you can’t give out specific investment advice, but I’m curious to hear your take.)

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