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Weekend reading: In practice, basically right is as good as it gets

Good reads from around the Web.

I often joke with my co-blogger The Accumulator about the terrible business model of this website.

“Let’s suggest people set up an automatically topped-up and annually rebalanced passive portfolio – and then go outside to do something less boring instead. That’ll be great for growing a readership!”

It’s funny (-ish) because it’s true. People do seem to read us for a while, get up and running, and then bugger off.

It’s fair to say I’ve never been involved with any other venture that gets as much positive feedback as Monevator.

But it’s a bit like being a splendid funeral director – a one-shot win that doesn’t do much for repeat business!

Go away

Secretly, I hope you will stick around, perhaps for our lame gags or maybe for regular vaccinations against the more misleading investing ‘advice’ out there.

But US researcher and blogger Meb Faber betrayed no such weakness this week, when he told [1] his readers:

If you’re a professional money manager, go spend your time on value added activities like estate planning, insurance, tax harvesting, prospecting, general time with your clients or family, or even golf.

If you’re a retail investor, go do anything that makes you happy.

Either way, stop reading my blog and go live your life.

Wow!

Meb’s mic drop was prompted by an analysis of all the asset allocation models from the leading financial institutions in the US, in terms of how their proposed portfolios would have performed since 1973.

He found that the difference between the most aggressive portfolio and the least amounted to a return differential of just 0.53% a year. Over the long-term, the great mass of them were indistinguishable in return terms.

Meb then pointed out that paying a fee of just 1% a year for such asset allocation advice turned even the best performer into a worse-than-mediocre one:

The difference between the best, worst, and average allocations – and the impact of a fee.

The difference between the best, worst, and average allocations – and the impact of a fee.

From this graph you can see why being average – which is very close to best – is a perfectly good goal, especially as it helps you avoid a poor result.

You can also see how fees drag down returns.

And that there is the entire rationale for pursuing market returns as cheaply as possibly – passive investing, in other words.

On the other hand, you might argue that a graph like this obscures the real money benefits of getting even a mere 0.53% a year extra in returns.

That’s true – it could amount to hundreds of thousands of pounds over a lifetime – and it’s also the entire rationale (and much of the marketing) behind the active investing industry.

But good luck however predicting which of the dozens of barely distinguishable asset allocations will be the single one that delivered the best result in 40 years time…

Same as it ever was

One contrary note I’d make is that Meb’s probably over-selling the similarity of these different suggested portfolios.

After all, they don’t exist in a vacuum. Each bank will have created its model asset allocation from historical returns, and each bank also knows what the bank across the road is selling. So it’s no surprise they’re similar.

Something like the so-called Permanent Portfolio with its 25% allocation to gold would make for a bigger contrast.

Sure enough, Meb himself showed just that in a previous look [2] he took at more diverse asset allocations.

But remember two things.

Firstly, hindsight and survivorship bias both loom large – the lop-sided asset allocations we remember are the ones that worked, not the ones that went nowhere.

Secondly – again – who knows which strongly differentiated allocation will win over the next 40 years?

That unpredictability matters even more when you try to do something very different, because the downside will be greater, too.

Both thoughts will take most people back to wanting to be average instead.

Don’t worry, be happy

To regular readers of this blog, this isn’t really news – it’s just another bit of reinforcement.

We no longer get many readers arguing the toss for an extra 0.75% allocation towards private equity funds or similar in the comments, for example. I think most of us now agree that roughly right is probably as good as it gets in practice.

Do you need to keep reading a blog that tells you to aim high by being roughly right and seeking average?

It’s not an aspirational message. But it’s surely the correct one.

Have a great long weekend!

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Products of the week: Help to Buy ISA rates are very volatile, reports The Telegraph [19]. Santander just cut its rate to 2% – only two months after lifting it to 4%! The Bank is following the lead of Halifax, which just dropped its own rate to 2.5%. Virgin Money and building societies Buckinghamshire and Tipton are still offering 3% though (for now?)

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1 [20]

Passive investing

Active investing

A word from a broker

Other stuff worth reading

Book of the week: As fears about life under our imminent robot overlords intensify, so wet-brained homo sapiens are competing to outdo each other with Prophecies of Doom. The Age of Em: Work, Love and Life when Robots Rule the Earth [40] is generating some buzz as a balanced – yet fantastical – vision of this potential future. I’ll be reading it this Bank Holiday weekend, and letting my robot vacuum cleaner [41] take the strain.

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  1. 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”. [ [46]]