What caught my eye this week.
Long-time Monevator readers all know you cannot avoid risk [1] when investing. Indeed, I try to assume that any investment could – conceivably – fail me [2].
Does my maudlin mindset lead me to keep all my money in guns and ammo?
Not at all.
Firstly, a prepper arsenal will prove a lousy investment if there’s no societal breakdown / zombie invasion (though some exposure might still have been a good insurance policy, as discussed in a fun article below.)
All investments can fail me, remember? Heck, maybe my gun will jam.
More seriously, assuming failure is possible with everything I invest in or own helps keep me diversified across different holdings and asset classes.
You regularly hear horror stories of people putting all their life savings into some property scheme or ‘guaranteed’ bond or offshore opportunity.
Madness – even when such schemes are not outright scams.
You have been warned
Many of you will be nodding along here. But I’ve discovered one area where quite a few readers think I’m just too paranoid.
Which is that personally I would never run all my money with one fund manager, nor keep all my funds with one broker or platform.
To me, diversifying against the very unlikely case of major company incompetence or fraud is cheap and simple. Even for the strategically laziest passive investors, monitoring two accounts instead of one should only add 30 minutes or so to your annual workload.
Investor compensation under the FSCS is limited to just £50,000 – and that’s assuming you’re even covered [3].
And while I think the chances of losing money with a huge fund house or one of the biggest platforms is very small, the financial crisis taught me that just not having access to my money is scary.
I wouldn’t whistle contentedly while waiting weeks or months for all my worldly wealth to be recovered in full. I doubt you would, either.
People reply that their assets are legally ring-fenced, so they aren’t too bothered.
Of course I’m well aware of this. However things can and do go wrong, I reply – sounding like an Eeyore.
Well, in the past few months something has and is going wrong, with the demise of a small broker called Beaufort Securities.
As the FT reports [4] [Search result]:
Accountancy firm PwC, which was appointed as administrator by the UK’s Financial Conduct Authority, has faced mounting criticism after it said last week that it could cost as much as £100m to return the cash and assets held by the company, currently valued at £550m, to its thousands of private investor clients.
Some 700 clients with larger portfolios — of more than £150,000 in cash and assets — are expected to bear much of the cost.
“In the absence of any other available resources . . . the overall costs of delivering [returns] to clients has to be shared appropriately by those to whom the assets belong,” said Russell Downs, a joint administrator and partner at PwC, on Wednesday, citing legislation introduced in the wake of the financial crisis.
Repeat: Ring-fenced client money is going to be taken and used, and clients will not get all their money back.
The long-time investor Lord Lee [5] of Trafford has tabled a question in the House of Lords about the basis for PwC’s decision.
Lee told the FT:
“Everyone is of the view — including me — that client funds are ringfenced and protected, and no one can put their hands in and dip into them.”
But PwC has insisted there is a legal and practical case for using clients’ money in the wind-up process.
Repeat: You have been warned
No doubt we can have an informative discussion in the comments about exactly what happened here.
I’m only familiar with what I’ve read in the press, and am far from an expert on the law.
I also expect some will say it couldn’t happen with this or that big fund manager or the platform they frequent (although I’d argue some sophisticated passive investors who chase the lowest fees and express annoyance when anyone makes the case for a big and boring platform could actually be more likely to find themselves on a rickety outfit…)
That said, perhaps people will be more reticent to shout “Never!” now this has happened.
Besides, the specifics of this case aren’t the point. Next time the specifics will be different.
The big reminder is what is important for our purposes: Things fail.
Giant investment banks can’t fail until Lehman Brothers failed. Interest rate can’t go to zero until they did. Company pension schemes were safe until some immoral mogul stuck his fingers in the pot.
Order reigns until a time of crisis, when anything can happen.
Normally we’ll be fine. Virtually always we are.
But not always.
I wouldn’t put all my eggs in any single basket.
- Are you a Beaufort client? Voices on Twitter [6] are urging you to write to your MP.
From Monevator
Annuities: What’s so bad about a guaranteed income for life? – Monevator [7]
(If you’ve already read via email you might still enjoy the many comments – Monevator [8])
From the archive-ator: How to be a capitalist – Monevator [9]
News
Note: 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.1 [10]
NIESR slashes forecast for UK growth in 2018 down to 1.4% – Guardian [11]
George Osborne stands by predictions of Brexit impact [Search result] – FT [12]
HMRC suspends its Making Tax Digital plan to focus on Brexit – The Register [13]
Mortgage prisoners could be handed lifeline as three in 10 borrowers could have found cheaper deal – Telegraph [14]
Beware of ‘push payment’ scams – Guardian [15]
More higher-earners are maxing out their ISAs as pension allowances fall – Telegraph [16]
‘My £1,000 Macbook Air was stolen at airport security and no one cares’ – Guardian [17]
Argentina has raised its interest rate to 40% – BBC [18]
Back to the future: US one-year government bonds are yielding more than US stocks for the first time since the financial crisis – Dr Ed’s Blog [19]
Products and services
UK buyers need more help to find cheap mortgages, says FCA – Guardian [20]
What happens to your credit card debt when you die? – ThisIsMoney [21]
Co-op offers ‘no frills’ cremation service – Guardian [22]
Here’s my CORRECT Thriva affiliate link. It gives you a 50% discount off your first health-tracking blood test. Thanks to reader @Ray for discovering my error last week! Sorry about the confusion. – Thriva [23]
The ‘exclusive world’ of high-end investment clubs [Search result] – FT [24]
An argument for adding crypto to a 60/40 portfolio [PDF] – Bitwise Investments [25]
Hey crypto bros! Journalism ≠ advertising [Search result] – FT Alphaville [26]
Comment and opinion
Why the masses missed the ten-year bull market – Investing Caffeine [27]
Retired accountant fails to understand interest-only mortgage, loses house – Simple Living in Somerset [28]
Why it’s time to sell Beazley shares – UK Value Investor [29]
Schrodinger’s portfolio – A Wealth of Common Sense [30]
Save your goofing off for your 50s – Humble Dollar [31]
Can you become a millionaire on a fireman’s salary? – The Escape Artist [32]
Is annuities’ bad press deserved? – Young F.I. Guy [33]
How the finance industry is being replaced by better robots – Abnormal Returns [34]
Equity factors and inflation [Nerdy] – Factor Research [35]
Value investing isn’t dead, but price-to-book certainly looks comatose [Also nerdy] – Alpha Architect [36]
US equities are not egregiously over-valued – Macro Man [37]
Does higher financial literacy lead to higher returns? – Academic Insights On Investing [38]
Kindle book bargains
Total Competition: Lessons in Strategy from Formula One by Ross Brawn and Adam Parr – £0.99 on Kindle [39]
Tomorrowland: Our Journey from Science Fiction to Science Fact by Steven Kotler – £0.99 on Kindle [40]
Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth – £1.99 on Kindle [41]
The Wisdom of Finance: How the Humanities Can Illuminate and Improve Finance by Mihir Desai – £3.29 on Kindle [42]
Off our beat
The surprisingly solid mathematical case of the tin foil hat gun prepper – Medium [43]
In Japan, old robot dogs donate organs and get a Buddhist send-off – NPR [44]
Tim Hartford: Cheap innovations are often better than magical ones [Search result] – FT [45]
And finally…
“The bottom line is that the victims of crime are denied justice, and people who are not guilty find themselves in prison. And what astounds me is that most people don’t seem to care. Or even know.”
– The Secret Barrister, The Secret Barrister: Stories of the Law and How It’s Broken [46]
Like these links? Subscribe [47] to get them every Friday!
- 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”. [↩ [51]]