What caught my eye this week.
Last week the major US exchanges went bananas on a strong signal that US inflation might be turning.
And that was very good news.
You know that old adage about it being important to remain invested at all times – because if you miss a handful of days you will miss most of the return?
Here’s what that looks like in practice:
These look like somewhat mediocre returns for a whole year. But they happened in 16 hours of trading.
Admittedly, I have a love/hate relationship with the old “don’t miss the best days” schtick. As a very active investor who watches the markets like most people follow their favourite football team, I feel the rollercoaster ride of a year like 2022 in my guts.
So I sometimes ponder how missing out on the best days might be worth it if you miss the worst days too. The optimal – but to be clear, hugely inadvisable – thing to do this year was to sit out the whole shebang out in cash.
(Inadvisable, sadly, because the books about successful investors who have consistently got in and out of markets wholesale for a profit would be welcome on any ultra-minimalist’s bookcase.)
Begone foul pestilence
Anyway, the inflation news is a big deal. Much bigger for markets than the US mid-term elections, which dominated the US media for fortnight.
From CNBC:
The consumer price index rose less than expected in October, an indication that while inflation is still a threat to the U.S. economy, pressures could be starting to cool. The index, a broad-based measure of goods and services costs, increased 0.4% for the month and 7.7% from a year ago, according to a Bureau of Labor Statistics release Thursday.
Respective estimates from Dow Jones were for rises of 0.6% and 7.9%.
Excluding volatile food and energy costs, so-called core CPI increased 0.3% for the month and 6.3% on an annual basis, compared with respective estimates of 0.5% and 6.5%.
Regular readers will recall I’ve been expecting inflation to ease for months. It didn’t happen. Indeed rates have gone higher than almost anyone predicted this time last year, as market expectations have been repeatedly confounded.
The result has been a brutal 12 months for pretty much everything. Stock-picking has been brutal. Some of the car crash US growth shares already down 80%-90% this year found it in themselves to drop another 10% in a day earlier this week. The proximate cause was yet another crypto crash (see the links below). But it is inflation and rates that have driven most of the de-rating in shares and the crushing of bonds this year.
And so if – and we still can’t be sure – US inflation really has turned, then we could have seen the bottom of this bear market.
US rates lever the (un)attractiveness of US markets. That sets the tone for markets around the world. The rapid pace of US rate rises also sent the dollar to lofty levels, dragging up rates around the world. All this could unwind if the threat of ever-higher inflation has been defeated.
Markets – which look forward – could move more than you’d think in response.
Leave your chickens uncounted
None of this means the interest rate rises are over – in the US or anywhere else.
Market interest rates moved far faster than official rates, as traders bet on the direction of travel. Higher rates from central banks still playing catch-up are baked-in, over there and over here.
But again, the top for rate expectations would be in if inflation is rolling over.
Mortgage rates – much higher than I believe central bankers would prefer – should start to ease too.
On the other hand something dumb1 could happen again and throw this all off course. Or the CPI numbers could get revised. It’s an unpredictable world, and investing is all about uncertainty.
Which is why, despite everything, it’s best to stay mostly invested.
Have a great weekend all.
From Monevator
Our updated guide to help you find the best online broker – Monevator
Rich friends, poor friends – Monevator
From the archive-ator: Gagadom and the Grim Reaper – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Jeremy Hunt expected to lower the threshold for the top 45% tax rate – Guardian
Recession looms as UK economy starts to shrink – BBC
House price rises ‘grind to a halt’ as lettings market grows, says RICS – Housing Today
UK interest rates predicted to peak next year at lower-than-expected 4.5% – This Is Money
Treasury discussing raising the energy price cap from April – Guardian
London’s new lord mayor calls for UK wealth fund to back businesses [Search result] – FT
Stolen $3bn Bitcoin mystery ends with a discovery in a popcorn tin – BBC
Couple on £84,000-a-year benefits let girl sleep covered in poo next to dead dog – Metro
Looking for alternatives: the investment trust route [Search result] – FT
Products and services
Gifts, food, and travel budgeting tips for Christmas 2022 – Which
How to join Mastodon, the open-source Twitter replacement – Cnet
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Is now a good time to buy your first home? – Which
Regular savings accounts explained – Be Clever With Your Cash
Why are so many energy smart meters in Britain turning dumb? – Guardian
Eco-homes built for biodiversity for sale, in pictures – Guardian
Comment and opinion
Vanguard: the alpha disrupter [Podcast] – Business Breakdowns via Apple
Three excuses editors give for not featuring index funds – Evidence-based Investor
How should you choose your asset allocation? – A Wealth of Common Sense
Is now the time to rebalance? – Vanguard
Yield is for farmers [Note: Fund tax stuff is only US relevant] – Fortunes & Frictions
Sequence of returns risk and retirement – Evidence-based Investor
A reminder of the virtues of A Random Walk Down Wall Street – CityWire
There’s method to the madness – The Motley Fool
Are bonds a better bet than stocks right now? [US but relevant] – Morningstar
Stealth wealth – Financial Imagineer
Crypt o’ crypto, aka crypto is FTX-ed mini-special
Cryptocurrency giant FTX collapses into bankruptcy – BBC
FTX collapse is looking a lot like crypto’s Lehman moment – Felix Salmon
…as Coinbase reiterates why it believes its customers are safe – Coinbase
The FTX collapse is an incredibly stupid catastrophe for crypto – Slate
FTX, RIP [Binance takeover since failed, but it’s a great take] – The Diff
Another good [pre-deal failure] take on how FTX failed – Amy Castor
Crypto prices plummet as the FTX contagion spreads – Kitco
Naughty corner: Active antics
When the moat is in your mind – Intrinsic Investing
Do the cheapest active funds beat index funds? – Humble Dollar
Growth may be ephemeral. Profitability is not – Verdad
Varied valuations for TikTok owner ByteDance [US but Scottish Mortgage also owns] – Morningstar
RM is not a good stock for dividend investors – UK Dividend Stocks
Kindle book bargains
No Rules: Netflix and the Culture of Reinvention by Reed Hastings – £1.99 on Kindle
How Will You Measure Your Life? by Clayton Christensen – £0.99 on Kindle
Why the Germans Do it Better: Notes From a Grown-up Country by John Kampfner – £1.19 on Kindle
Your Next Five Moves: Master the Art of Business Strategy by Patrick Bet-David – £0.99 on Kindle
Environmental factors
Visualizing changes in CO2 emissions since 1900 – Visual Capitalist
Coastal dwellers not being warned of risk to property prices of rising sea levels – Sky
Greenland’s melting ice sheet brings an unexpected flow of wealth potential – Hakai
Mild with a chance of catastrophe – Klement on Investing
10 reasons why ESG won’t be stopped – Morningstar
Off our beat
Twitter is cigarettes – The Reformed Broker
Where we’re at with macroeconomic forecasting – Noahpinion
Andor is what Star Wars is meant to be – Wired
Will Amazon’s huge HQ2 office in the US prove to be a white elephant? – Protocol
There’s an awful lot going on at Elon Musk’s Twitter – The Scoop
Warnings over the rise of 3D printed firearms – BBC
Using your tickets – Seth’s Blog
And finally…
“Spending money to show people how much money you have is the fastest way to have less money.”
– Morgan Housel, The Psychology of Money
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- Like the war in Europe. [↩]
If the rumours are true and the additional rate threshold is to be lowered (presumably from April), but higher and additional rate tax relief on on pension contributions remains, then the obvious move for the well paid is to stop contributing after the autumn statement and plow more back in next year using carry-forward.
Seems like a good way to ensure lower tax receipts from that segment in 2023/24.
If you overlay a usd/gbp chart it looks strikingly similar. It wipes out 1/2 the gains unless hedged.
Still a good week for a global tracker though.
Good article, thank you. A few things struck me.
First, in all the advice I read about what approach you should take to investing, one piece is that you should be truthful about your own risk tolerance. So if losses cause you to lie awake at night, tilt the asset allocation more towards bonds. If that’s the case, finding the rollercoaster equity marker ride gut wrenching would indicate a tilt away from equities wouldn’t it ?
Then there is how to deal with the length and depth of the widely anticipated recession and, finally, the strength of the dollar.
You could throw in an invasion of Taiwan if you want to.
Have a good nights sleep.
Would agree that passive investors who have worn the pain all the way down to here should probably keep clinging on and focusing on the pound-cost averaging.
For active investors it’s less clear to me. Good inflation news for sure, but not yet a pivot from the Fed and there’s another CPI print and lots more data before their next meeting. Plus Powell is pretty much explicitly targeting the S&P and the ‘Shelter’ bit of US CPI is sticky and lagged.
As and when they do finally pivot, will markets go only north as the BTFD crowd expect? Maybe, but history isn’t on their side.
With the GFC the Fed pivoted in August 2007 and the S&P went… down until February 2009 (18 months).
With the dotcom crash, the Fed pivoted in December 2000 and the S&P went… down until September 2002 (21 months).
When Volcker finally relented in June 1981, the S&P went… down until July 1982 (13 months).
After the Yom Kippur war/ OPEC oil shock pivot in 1973, the S&P breathed a sigh of relief and went… down until September 1974 (11 months).
Who knows. Maybe it really is different this time?
Agreed on potential for USD/GBP change – I moved about half my Nasdaq ETF into GBP hedged version this week. Could probably go more as some ETFs don’t have that option.
A quote from Warren Buffet sometime ago to his investors “We continue to make more money snoring than being active”
For amateur investors attempted market timing is a true disaster just waiting to happen
I think all amateur investors probably have to do it once to learn the lesson-hopefully early on in their investing career and with not too much capital at stake
Of course if they have been reading Monevator then maybe this first lesson in investing can be learnt without making any financial losses
Stay invested through thick and thin
However it’s truly counterintuitive and boring to the average human psyche
Some advise a small “play”portfolio for fun
Personally watching my portfolio rising and falling from hour to hour and day to day like some live thing provides me with enough excitement and constantly reinforces the discipline/lesson of not meddling-ie “stay the course!”
Also it’s quite fun!
Now ancient (76)- “snoring” seems to have worked for me-so far!
xxd09
“Which is why, despite everything, it’s best to stay mostly invested”.
As I always have done, I have remained invested throughout and this is what’s happened: my total portfolio went up by 5.5% compared to last week when valued in USD, but only by 1% when valued in Sterling, as Cable went up substantially this week. I’m now 2.5% below my all time peak valuation in Sterling which was in August this year.
I try to keep in mind that, being a retail investor, one of my main disadvantages is the enormous trading friction I experience (low speed, high fees, etc) and poor access to information (most important things you won’t even get know and the few things you hear about are already old news). So it’s useless to try to time the market or do anything that depends on being fast and agile.
On the other hand, one big advantage of being a retail investor is that you can afford to be contrarian.
I wonder what they will lower the additional rate threshold to, £125k?
Any lower and the marginal tax rate will be 67% unless they fiddle with the personal allowance taper. But they wouldn’t do that if the aim is to increase tax take.
I’m resigned to all this fiscal drag now, but it makes the decision to jack up my pension contributions very easy now there is a new salary sacrifice scheme at work.
I’ve finally decided to refuse to pay a penny of income tax at 40% (42% inc NI), so Rishi & Hunt’s fiscal drag is actually a good incentive for me to save.
I would like them to at least increase the personal allowance though, for when I start drawing down.
Regarding the other articles, bonds are looking up. I’ve already got an adequate allocation to equity income trusts and ETFs, and alts (infrastructure, green energy, a little bit of commercial property) investment trusts.
The big advantage of those over bonds is at least some inflation protection over the longer term.
That said, I’m steadily going to increase bond allocation to around 30-35% over the next few years. And drip feeding in over the next year or two seems to be a very low risk way to pick up short to intermediate investment grade corporate bonds with near 6% yields.
The low volatilty of shorter dated stuff means you can also sell down in an emergency without crystalling big losses. 2022 would have been the worst year ever, but now that is out of the way and yields are up hugely the risk/reward is looking much better.
This also means not needing to require as big a cash bucket as part of a drawdown strategy to avoid sequence of returns risk, especially with a natural yield biased portfolio.
@SemiPassive My guess would be £125K as well. For someone on £150K this would roughly claw back the 1.25% NI saving that has just been restored from 6th Nov. (1.25% of £100K and 5% of £25K are both £1.25K)
Portfolio now down only 4.5 percent from top.
I even saw the big jump this week live and didn’t actually believe it was happening. Managed to buy a few more shares in my best stock and ten minutes later I was in profit. That’s never happened to me before. Will it last .
What a rally indeed! Did you see my post published on Nov 2, 2022 talking about why inflation would come in below expectations? I think you’d approve!
https://www.financialsamurai.com/most-bullish-economic-indicator-lower-i-bond-rate/
Inflation momentum on the downside is our friend. Worst is over.
Sam
Shares Portfolio – down 8% in Oct, up 6% in November. Down compared to same time last year but that was a weird time (pre arrival of dumb (Putin) & dumber (Truss/Kwartang)).
Broke a Fixed rate ISA – loss of £500 interest. New fixed rate ISA will give me £3,500 interest in next year – no brainer! Still nowhere near inflation of course but better than spit in the eye.
Doubled my regular contribution last month. Whenever the price looks cheaper than usual on the HSBC global strategy fund I just double the buy that month. That’s about as far as I go for market timing now but I’m early in the game
They should put the 45% rate at earnings > 100k and drop the ghastly 60% stealth tax.
@marco
But that’s a tax reduction for everyone who earns less than £200k – not sure that seems appropriate
@Marco
If they did that, someone on £150K would pay *less* tax. 15% (60% -> 45%) saving on £100K thru £125K = £3.75K, vs cost of 5% more on £100 thru £150K = £2.5K.
Laura K. at the BBC is now indicating it’s going to be £125K – https://www.bbc.com/news/uk-63599465
@ Marco /Andrew
I think the break even point would be just over £200k in earnings – (possibly some double counting in your 5% extra from £100 thru 150k)
I seem to have been moderated last night.
>> So if losses cause you to lie awake at night, tilt the asset allocation more towards bonds.
New Decumulator here. I re-balanced at the start of the year and for the first time invested significantly in bonds (VGOV). Even after the recent recovery these are still 23.5% down year-to-date. Never again!
Agreed valiant – way to soon for a comment like that . Let’s not pretend any more that bonds help you sleep at night. That said, I do get the point that there a much more attractive proposition now than a year ago. I have no money any more though so it’s moot.
Andrew et al – it’s entirely possible the additional rate threshold is reduced but this would be politic at large given its acknowledged it would probably raise less than a billion at best and potentially (no real evidence) be a revenue reducer. It’s more likely a Trojan horse to soften you up for the fact that tax thresholds will be unchanged for several more years. The only way to really raise tax revenue from earners is to hit those who earn around 40-60k as that is a significant number of people and relative to the general population are high earners. But who knows…
More generally we appear to have now reverted to managed decline a trend since the financial crisis which shows no sign of changing and, broadly speaking, is partly because we’re somewhat boxed in by the bond market currently and also by the electorates addiction to benefits – 5m on universal credit at the moment.
Weird how our economy isn’t growing isn’t it……can’t think why that could be…..roost, home, coming, to, chicken – reorder as you like.
Recent equity market moves suggests those timing the market are largely doomed to failure. Time in the market not timing the markets. I’ve not really got any clue what will happen to markets albeit they seem fairly well valued to me but who knows of course. Stay the course and hope your path dependency at least matches average returns!
@SF (#20):
Re: “Stay the course and hope your path dependency at least matches average returns!”
Have you seen ERN’s latest posting about 2022 vs 2000/01?
Cheers for the comments all.
I thought Jeremy Hunt was fairly impressive on the BBC on Sunday, but I’m sure that’s partly relief at any sidestep back towards reality from the Tory party / ruling government. But at least he seems to be talking about something approximating the real state the country is in, rather than the fantasies of his backbenchers.
Even Brexit got a brief acknowledgement as a negative. Still, Truss sounded more realistic than Johnson and that didn’t end well so time will tell.
Taxes are definitely going up a share of GDP one way or another, which is not ideal given the size of the tax take already but inevitable given our national finances and the debacle of the Mini Budget / LDI debacle; we’ve lost the benefit of the doubt, at least for now. I don’t love an excessive welfare state (I even stuck a horrible story in about people who shouldn’t be receiving one penny of benefits nor looking after a goldfish, let alone children, into the links this week, which I do strive to avoid doing) but it’s hard to argue that average and decent benefit claimants are living high on the hog as a group. I agree it’d be far better if they were working for all concerned, but we voted for a less vibrant and poorer economy with Brexit, so that bill has come due unfortunately.
So it’s probably managed (relative) decline for the foreseeable, but perhaps like a sine wave with peaks and troughs exaggerated versus our peers and times when we seem to be doing a bit better. (I don’t think the country will get overall poorer, it just won’t grow like it should or as well as most of its peers over time, unless as I said earlier some sort of tech/productivity miracle or similar — a North Sea oil equivalent).
Regarding bonds and so on, @TA and I are kicking this back and forth a lot.
I’m fairly concerned by all the comments saying ‘never again’ for bonds when they haven’t looked so attractive for at least a decade. Yet I’m torn by wishing we’d written *even* more about the risks beforehand, or at least more stridently seeing as there are regular readers here who don’t seem to have understood the message.
TA isn’t sure how to best approach the subject, and as a nod to you guys who are fearful of bonds he is also worried by historical patterns of long-term secular advances and declines in bond returns.
I’ll probably try and post on it soon, but it’s tricky for me to write entirely from a traditional passive perspective or come across as empathetic because with my active ways I have basically held no bonds for years until Spring 2022. (Don’t worry I found plenty of other ways to lose money in 2022! 😉 )
Just be aware that you’re living through perhaps the worst bond market in 100 years, and ask yourself whether that is the best time to be saying words like “never again” given your knowledge of how things come and go in markets, and how we’re affected by recency bias. If you were going to avoid bonds (which I understand classic passive investing doctrine suggested you probably shouldn’t) then the time to do it was when yields were negative, not now.
Personally I never say never again:
https://monevator.com/never-say-never-again/
It’s Dec 2021. I know this guy. He wants to retire in a few years. He started the year with about £1mm, split 70% in VWRL and 30% in IGLT (UK Gilts). For his retirement, he ideally wants the safety of an annuity providing about £60k of income/annum. Single life level annuity rates were only 5% so an annuity would only buy him £50k/annum of income. He was about £10k/annum short.
Any way right now his portfolio is worth about £886k. He’s only lost about 6% on VWRL due to the weakness in Sterling but 24% on IGLT due much higher Gilt yields. Anyway he’s 100% in VWRL now. Gilts are rubbish. Never will touch a bond again.
Odd thing is though, he also tells me that his £886k will now buy him about £66k of income since annuity rates at now around 7.5%. Despite losing all that money on Gilts, he seems to be better off in terms of his retirement income.
Fast forward to Nov 2023. VWRL has regained all the losses of 2022. It’s up 6% and his portfolio is worth £940k. Fantastic. He was right about selling those rubbish Gilts. True, yields have gone back down to where they were at the end of 2021 but who cares. Stocks are so much better to own.
Problem is he still can’t see how he will retire. For some reason annuity rates are back at 5% again. He can only get £47k/annum. Why did the annuity income drop so much? It’s really odd. When his portfolio is higher he seems further away from his goal than when his portfolio is lower.
@A.D.O. — This isn’t so much a comment about whether gilts are good or rubbish I feel, as to a comment about people wanting more than their money can buy.
Your friend wanted 50% higher than the widely-cited 4% SWR in retirement from his £1m. So he stayed invested and took the risks and has suffered in a bad year. (He might be happy he’s at least not a US investor with a 60/40 portfolio in USD. Those have been truly shellacked!)
As for the end of 2023, you’re assuming bonds and equities continue to move in tandem. Personally I think it’s more likely equities will modestly recover while bond yields stay at least somewhat elevated, versus 2021 rates anyway. Of course it’s all a crapshoot, especially over the short-term. 🙂
(I’m not saying you’re disagreeing with this but…) I’ll keep saying it until I’m blue in the face, the time to get scared of bonds was 2020/2021.
The trouble is that most people who would have timed-the-market themselves out of bonds for the reason of low yield in those years though would also have done so many years before. Now as it’s turned out even that might not have been too bad, given how terrible bonds have been in 2022, but (a) that was not guaranteed and (b) it wasn’t guaranteed that stocks would do better than bonds (and isn’t in the future).
But basically, ‘negative yields’, the clue is in the phrase. As @TA warned several times over the past few years, bond returns were certain to be at least low. We’ve had a lot of the ‘low’ upfront, IMHO.
Bonds are no longer on anything like negative yields (in nominal terms). Even a long duration UK government bond tracker (IGLT) is paying about 3.4%. This is very different.
@The Investor: ingenue’s question: is IGLT considered “long term” at 9.5y average maturity? My VGOV was almost double that I think.
@Valiant — Hmm, yes fair comment. I guess it’s getting into intermediate-long border range now. The duration has come down a lot as gilt yields have risen.
A 20-year duration is big/long for sure. That’s the same thing that made things so painful for INXG (the index-linked gilt tracker). Just had a look and it is down to duration 17, but quite a way down from its peak, from memory.
@TA who has looked into this all from a passive perspective has always mostly plumped for intermediates as the best compromise between duration risk, hoped-for buffering, and some return.
Well, for the bond portion of my portfolio I want stability. Return can come from equities. So I went short.
I also got lucky and picked Global Inflation Bonds. Wasn’t sure whether to hedge or not so went 50/50 GISG/GIST. Not UK inflation, but better than nothing. (At 4.5 years duration, not that short either but best I could find.)
@Brod how has that worked out for you?
For the more amateur amongst us (which includes me) it has been quite a visceral lesson in bond school.
Possibly the bond portion is harder to get right than the equity portion? I guess it’s all good learning, painful lessons being the ones you tend to remember for future use..
@TI – No doubt everyone has learnt a lot about the mechanics of bonds over the last few weeks. I think there has been complacency in terms of the perception of the low interest rate era – another new paradigm that hit the rocks somewhat. Michael Saylor was alert to it in one of his interviews with the point that near zero interest don’t make sense historically or from an efficient use of capital. If I lend you my cow for a year I expect something back for it..
The simplification of bonds into one medium term fund also appears to carry more risk of the extreme downside event that we’ve had- carrying short and long separately at least a proportion can be used without so much capital loss to rebalance or withdraw. Or add some cash and gold. Ive also ended up with some corporate bonds which have taken a bit of capital loss but then again 8% yield.
if interest rates go up, the bond yield follows so the price drops fair enough, I think. But it has been a foregone conclusion that interest rates are going higher and they have further to go so why not move out of gilts now. In the background I see a lot of articles saying now is the time to get back in or stay invested etc but why.Any replies keep it very very simple please. Just as a foot note I commented on here a year or so back that I had read somewhere that it was time to move away from bonds can’t remember the reply from the hosts. Push come to shove I stayed invested. Just wished I had come up with an alternative.
@The Rhino – how did that work out for me? Luckily, that’s how!
A year ago I was still in AGBP/AGGG and GLTL which I had held for a couple of years. AGBP/AGGG has a Duration about double of GISG/GIST and GLTL about three times. Inflation was beginning to be a “thing” again and I wasn’t comfortable, so I sold out in September ’21 just before things started going south. Took some annoying losses, though not the more recent carnage.
I then sat in cash for quite a while and had a think about what I wanted from my Portfolio. Essentially low volatility so I can reliably supplement my SP and (small!) CS Pension. Global equities to provide growth and long term inflation protection. So short duration seemed to be that way to go (plus cash and gold) and everyone was talking about inflation at that point I think, so I plumped for linkers.
I’m planning on doing RE in March, so my fixed income and gold will be mostly consumed in the 10 years until I get my pensions. Hopefully by then (10 years, not March!) we’ll be through QT, inflation and entering the sunny uplands where we can frolic in the meadows.
My SP and CS pension will provide a comfortable, but not luxury, floor. I could, I guess, be then 100% equities (or close) but I wouldn’t be able to stomach the volatility, so I’ll probably re-create more or less what I’m holding now (60% Global equities, 15% gold, 20% short linkers and 5% cash). I won’t shoot the lights out, but I’m comfortable with it.
In figures, I’m about 2.5% down in the unhedged fund and 5% in the hedged variety. So pretty happy. The thing is, they’re short enough duration that I’m confident to hold them (GISG/GIST) until the higher coupon payments recover price losses. Though there was a worrying article in Portfolio Charts suggesting linkers are not a slam dunk.
Anyway, long story!
@Griff — I presume you mean this comment from 2021, and you received a long (freely given) reply from @TA including the words ‘the expected return from bonds over the next decade are negative’ and ‘there are no easy answers’.
https://monevator.com/the-slow-and-steady-passive-portfolio-update-q3-2021/comment-page-1/#comment-1365490
Remember we are not financial advisors and anything we say can never be personal advice, for a whole host of reasons. I often urge @TA to be more cautious about this, but he has an admirable desire to try to help people out.
@all — This whole episode is making it very clear to me why proper regulated financial firms give such woolly and vague sounding advice.
Again, the future expected returns from bonds were negative. This was known.
We have been hit by a once in a generation (if not once in a 100 years) smash-up for bonds. Now it’s happened it looks ‘obvious’ that it could have been avoided.
It wasn’t obvious, which is why it happened. (If it was obvious then yields would never have got to negative). I write this as someone who has had the majority of his net worth invested in various active stances for 15 years… it’s not easy.
It *was* a decent bet that the returns from bonds would be pretty rubbish, however that was a bet (or, perhaps better, a ‘position’). It was a bet I made for a decade (but then I’d still lost a ton at the worst point in 2022 from US shares!) but for most of that time it was *wrong* to avoid bonds (in that bonds continued to do better than cash, for starters).
If we’d just lived through the dotcom crash when shares fell 50-60% would the sensible thing to be nodding sagely and writing ‘never again’ when it came to investing in shares?
Plenty did do that of course. It wasn’t a sensible move and I strongly doubt bonds are done as an asset class.
That said, I’ve long had a soft spot for cash as a simpler asset class for most private investors:
https://monevator.com/what-should-a-new-investor-do/
Historically it’d have delivered lower returns than a 60/40 with bonds though, at times by a wide margin.
Believe it or not I actually have some sympathy with the view that the warnings about bonds might have been more strident, but @TA has pointed out to me we’ve written at least half a dozen articles full of warnings.
What they don’t say is “sell all your bonds because a once in 100 year crash will happen next year” or similar. They are a balanced look at the possible futures. A very bad one has happened, but others might have. We have never claimed to predict the future, and are skeptical of those who say they can. (I want to see consistency not one-off calls to be persuaded).
Perhaps the risks of negative rates could have been amped up, but let’s not kid ourselves, they’ve been around for years. Generally passive investors — including readers of this site — reveled in how they were steadily keeping on, what’s the worry? I think it’s important to be consistent about this.
Here’s an article on the strangeness and perhaps danger of negative rates from summer 2020. Note that nobody in the comments mentions a risk to a balanced equity / bond portfolio:
https://monevator.com/negative-interest-rates/
Beware of hindsight bias, it’s a killer.
We’re going to do a series of articles over Christmas debating this in more detail, so you can look forward to wading in then! 🙂
Finally, again, I say again I feel too many people are being too pessimistic (but add again I might be wrong…)
Central bank rates continuing to rise doesn’t mean bonds will continue to do badly (bonds already fell far in advance of rates). Of course if they rise ABOVE what is currently expected then bonds will have to fall some more. Yields will rise and they’ll pay more income.
This is an interesting Tweet showing how the 60/40 has recovered from previous setbacks:
https://twitter.com/MstarBenJohnson/status/1592305299733487617
Again, not personal financial advice. Hope we don’t have to keep adding that to any comment we write, it’ll get very dull. 🙁
Cheers again for your reply.
I do appreciate they work you must put in just to answer the comments.
It was not my intention to lay blame on anybody or to insinuate that your 2021 reply was incorrect. Its not easy this investing lark. Griff.
Seems that you’ve missed the point in my post on the hypothetical investor. All these people who think they’ve lost money are looking at it wrong (as usual) because they just look at the capital value of their assets. Not how those assets cover their future liabilities.
Yes, you’ve lost money on bonds but annuity rates have gone up 50% in less than a year. So while your capital is lower, the amount of (pseudo) risk free income you can buy with that capital is up 50%. That’s equivalent to your future liabilities having fallen by a third.
Annuity rates are a function of 15-20 year Gilt yields. So if your duration is less than that your bond portfolio will have outperformed your liabilities.
The risk here is so obvious. If Gilt yields fall, annuity rates fall. So that risk free income / reduction in future liabilities will evaporate. Bonds are your only hedge for that.
Of course all you “passive” types know that bond yields are only going up. It’s obvious right? There is no inconsistency at all between saying you are passive but having a macro view on global bond yields! You guys really need to learn what a passive portfolio really means. Just a clue: passive is not buying trackers.
Imagine this scenario: we get a global deflationary bust. Inflation falls, rates are cut, bond yields collapse (so annuity rates collapse) and equities drop another 25%+. There is a technical term for that position: completely f**ked.
@A Disinterested Observer — Aha, I get your point. Sorry, subtlety can get lost in Internet discussion (as I often find to my own detriment). I pretty much agree with all your points I think.
@all — I may have come over a bit sensitive in my long comment just above. Remember I read all the comments on all the articles, so have probably read about 200-300 comments variously cursing bonds in 2022. Most are fine in themselves (pretty much fine are fair enough if that is how someone feels) but I guess it all adds up for this moderator! 😉
@Griff — Thanks for coming back, apols if I seemed a bit hair-trigger as above.
@A Disinterested Observer (#34) – “Imagine this scenario: we get a global deflationary bust. Inflation falls, rates are cut, bond yields collapse (so annuity rates collapse) and equities drop another 25%+. There is a technical term for that position: completely f**ked.”
The real possibility of deflation is the main reason why everyone who has stayed away from long duration bonds so far must start adding enough duration at some point in the future. Nobody knows what is the optimum time for doing so. It doesn’t seem to be a bad idea to start drip feeding into long duration bonds right now though. Who knows anything anyway? BTW if you’ve got some gold, it usually performs well in deflationary scenarios.
@21 AL Cam – Yes I read the ERN blog post and indeed his other posts. By and large, I think his posts are excellent, including this one. My one critique, is that there isn’t enough, imho, caution that the data in which the conclusions are based on historic and particularly where you are forecasting 40 / 50 years in the future – the number of data points is really limited. But that’s the issue with all SWR analysis.
@34 – A disinterested observer….sounds a lot like ZX Spectrum in disguise :). This is one way in which I have mentally got pretty comfortable with portfolio volatility – if equities / bonds have fallen then my ability to cover liabilities hasn’t necessarily changed or got worse.
Per the other comments – bonds have a place in most people’s portfolio and are just now better value than they were. Presumably people are more aware of duration now than they were.
I think one issue, going back to the SWR point, is that some people just look at their portfolio, multiply it by 4% and go that’s my annual spending. Without thinking about things such as conditional probability for example.
@SF:
I thought of you when I was reading that ERN post – as you have always been keen to point people at the 2000 experience and, if nothing else, it is great to have a reference other than good old JPG!
Personally, I still think the whole SWR thesis is a bit of nonsense because the so-called safe withdrawal rate it is unknown and unknowable in advance – but it is interesting, nonetheless.
Any news of an ‘escape plan’?
Al Cam
Agreed with that
Escape plan in very early gestation / no quick resolution but now actively looking at opportunities which could take months if not longer.
@ Al Cam (#40) – The 2000 test case inspired me to choose my asset allocation back in 2016. For some reason, back then I compared a 60/40 and a 100% Equities portfolios with a 45% Equities 15% Gold 40% Bonds portfolio. Both starting to withdraw 4% at the end of 1999. I remember being impressed that the portfolio with 15% Gold was far ahead of the other two even after more than a decade. Until 2019, I was repeating this analysis every year to include another year’s worth of data. The result never ceased to impress me. It’s a bit like the Hare and the Tortoise: slow and steady wins the race 😉
@T-BDW — Is that with global equities? I see merits in your portfolio, but I’d be surprised if it beats 100% equities over the long-term. You’ll surely enjoy the ride a lot more though! 😉
Of course with gold anything is possible in a lifetime.
@T-BDW (#42):
Interesting, the 2000 test case is a really tough one!
@TI (#43):
The referenced ERN post shows just how bad a choice 100% Equities would have been in 2000: “That portfolio with a current 25% withdrawal rate ($40k annually out of a $159,839 portfolio) will likely not survive for another 8 years.”
@Al Cam — Yes, but that’s with withdrawals. My understanding (and the basis of my comment) is @T-BDW is still accumulating? (I might be wrong in that recollection though…)
@ TI (#45) – No, my analysis back in 2016 was for 4% annual withdrawals. If you re-read my comment you’ll see that is what I wrote there 🙂
@T-BDW — Yes, I see that now. The perils of moderating comments on a mobile phone on the move after drinks. 🙂 Cheers!
@T-BDW – yes, that 15% Gold does wonders, doesn’t it?
What you’re describing is more or less my portfolio though I’m 60% Global equities, 15% gold, 20% short linkers and 5% cash. I settled on this via the fab portfoliocharts.com and every time I tinkers, I come back to this as it has the low volatility and decent returns I desire.
Let’s hope history rhymes!
@Brod – could I ask what products you use for this portfolio? Particularly gold and short linkers?