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Weekend reading: Mo’ money, mo’ problems

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What caught my eye this week.

A few readers have suggested I’ve been taking this stock market downturn pretty badly.

To which I’ve made some overly defensive replies.

Such as that it proved right to be gloomy. The growth sell-off was a canary in the coal mine. There has been a regime change. Bonds have cratered like none of us have ever seen. And the US stock market just ended its worst first-half for 50 years.

And to turn the tables, some of those apparently more upbeat readers appear to me to have been going through several stages of grief – or at least self-rationalisation – without being aware of it.

“My portfolio is barely down”  followed a couple of months later by “Okay, we’re down a bit but that’s normal” then “Right, we’re down a lot but everyone knew everything was expensive and so it’s healthy” to “Of course we’re down but I don’t care because there’s nothing I can do about it.”

Which is all fair enough. Whatever keeps you investing! And changing your emotional response to the market’s rises and falls will likely be more profitable than remixing your portfolio whenever your mood swings.

Still, I think it’s helpful if we pay attention to our shifting thinking, rather than waking up every day presuming that – like yesterday, last week, and last month too – we’re omnipotent.

As Richard Feynman said: “The first principle is that you must not fool yourself and you are the easiest person to fool.”

Bona fide hustler making my name

Continuing in that spirit, perhaps readers who’ve detected more angst than usual in my missives have a point, too.

Sometimes our thinking is revealed in our writing before we fully understand ourselves.

I remember that when blogger @ermine flagged up my talk of turbulence in December 2021, it prompted me to re-read my own article for myself.

And on reflection I probably have been gloomier in 2022 than I’ve allowed myself to dwell on.

My net worth more than halved for a few months in the 2008 bear market. Yet on Monevator I was writing about how I was selling my possessions to buy more shares.

In 2022 I’m down by far less, and yet I’ve been posting videos of Tom Hardy beating rivals to a pulp.

Did I change, or did the market?

Money money money, must be funny

Two posts this week helped me admit to Mr Market that it’s not him it’s me that has a problem.

You’ll immediately see the relevance.

Firstly, Morgan Housel wrote that:

What feels great is being on an upward path. That’s when dopamine takes over. That’s when you can extrapolate it and assume it goes on forever, and compare yourself to where you were before, and feel like nothing can stop you.

When that path declines – even if it happens when you have a level of wealth you couldn’t fathom a few years ago – the whole sensation shatters.

Somewhere along the line my fun game of trying to beat the market grew to dwarf whatever aims I had when I started investing.

Change is fine, if it’s in the direction you want. I’m not even saying this change isn’t right for me. But I need to reflect on it more, if I’m to avoid mixing up my goalposts.

I shouldn’t feel excessively down on a six-month view, when I’m doing fine on a five-year one.

The other timely article came from Lawrence Yeo, who asked:

If your basic necessities are covered, how is it that money can still trigger a survival instinct that is indistinguishable from that biological fear?

Why is it that having enough money doesn’t just alleviate this fear, but often has the opposite effect of strengthening it?

It’s true – I’m far more attuned to my net worth than when my savings amounted to just a couple of months rent.

Even after this year’s steep losses I could pay off my mortgage tomorrow and still be financially independent. Certainly by my old Bohemian standards.

Yet I’ve grown more cautious in my portfolio – and apparently I sound grumpier on the Internet.

Perhaps I am more afraid than I realize?

When you’ve got nothing you’ve got nothing to lose

I’d summarize the difference between the 2008 crash and this one for me as:

  • In 2008 I was a moderate high-earner, just into the higher-rate tax bracket, but saving and investing well beyond what you’d expect for my means. I’d been investing for half-a-dozen years, and writing about it for a couple. My portfolio was shellacked but I had no debt or obligations and I planned for many years of investing ahead.
  • In 2022 I am earning much less. But as the year started my portfolio was well beyond ‘my number’ and I was in no rush to boost my income. I’d been investing for two decades and writing about it for 15. My portfolio is down but nothing like as bad as in 2008. I’m many times wealthier now – but I also have a big mortgage, and 15 fewer years to recover from setbacks.

There are clearly big financial shifts to unpick here.

I’ve got more to lose in gross money terms, most obviously. I’ve fewer years left to compound my portfolio, and less fresh income to help. I’m vulnerable to a bad sequence of returns. My mortgage adds risk.

All factors we’ve covered on Monevator, I know. But even a nodding acquaintance with the personal lives of famous novelists, say, tells us self-knowledge is not a vaccination against human frailty.

Knowing the symptoms is only part of the battle. You have to turn the lens on yourself.

Alongside this rise and fall of my net worth, there’s also the change in my self-identity.

In 2008 I was only a few years into investing. I made my living in an unrelated field. I was just starting to become a fully active investor.

Today I should feel far more secure – except that my identity is now wrapped up in my investing lifestyle. That makes it as vulnerable to portfolio shocks as if investing were my full-time job.

In the years since 2008 investing became an obsession. One that delivered financial independence many decades sooner than if I’d kept my savings in a current account.

But it is also an obsession that has co-mingled my sense of self – and perhaps of achievement and even ‘worth’ – with the short-term, random, and always febrile stock market.

No wonder if I feel more discombobulated that I used to when the market falls.

Turn and face the strain

The truth is I’ve seemingly become a walking, blogging hunk of loss aversion made flesh.

Indeed it’s sort of humbling how universal and ever-tricky this psychological stuff is.

I often see such blind spots in readers, too (just to put you guys back on the hook…)

For instance, someone will explain they can’t retire early until they hit £5m, because of a long list of logical reasons that starkly contrast with the fact that my co-blogger did it on barely a tenth as much.

Of course he FIRE-ed into different circumstances, and with different expectations.

But equally, you strongly suspect that the £5m would-be retiree will soon need £10m.

Or consider my married friends who are from Mars and Venus when talking about their finances.

One of them has never acknowledged how childhood shaped their money beliefs.

The other can’t see how now having made more money than they once expected to earn over several lifetimes should prompt them to revisit their stance on spending.

There are also the regular Monevator commentators who predict one market outcome adamantly, and then a few months later apparently always thought the opposite.

They change their past to fit the now-likely future.

I don’t believe they are deceitful – except in as much as Feynman says we all fool ourselves.

But it does seem a bit like a way to feel good about yourself, whatever happens.

I’m certainly not immune to fooling myself, but I can (sometimes!) admit when I was wrong – and I’m also happy to feel bad now and then.

I’m sure those are more profitable mental habits to cultivate in the long run.

That ain’t workin’, that’s the way you do it

On the same score, it seems 2022 is telling me too to do a wetware update on my mental attitudes, if I want to better enjoy the pros and cons of where investing has got me.

Unlike many people who needed to change a spend-y mindset to get to financial security, I was born with the saving gene. For me that was easy.

But I don’t think I know how to feel secure about having financial assets, now I’ve got them.

The market will bounce back one day. So will my portfolio. Despite a gloomier 2022, my belief in that hasn’t changed.

And of course for the majority of readers still in accumulation mode, cheaper shares and bonds due to a correction are the windfall they’ve always been.

But this is the first bear market when I’ve been as mindful of wealth preservation as of growth (which I’ve certainly not given up on…)

I made some changes, such as in February when I ring-fenced a big chunk of my net worth from the quixotic pursuit of outperformance – by moving it into a duller and lower-volatility basket that I track separately from my unitized return-seeking portfolio.

But I may need to do more to disentangle my money in my mind.

Do you? Let us know below, and have a great weekend!

From Monevator

Bear markets: what they are, how long they last, and how to invest during them – Monevator

From the archive-ator: Thoughts on a very British banking crisis at Northern Rock – 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 balance of payments gap hits record 8.3% of GDP, but ONS urges caution over data – Reuters

The US stock market just posted its worst first-half since 1970 – CNBC

Two million more people are paying higher-rate tax in the UK since 2019 – BBC

UK pension schemes confronted by growing liquidity strains [Search result]FT

No. 10 considers 50-year mortgages that could pass down the generations – Guardian

Monthly house price growth slows to lowest level since 2019 – Your Money

​Ryanair chief warns fares will rise for five years because flying is ‘too cheap’ [Search result]FT​

Only hard-to-access managed futures have diversified in 2022 [US investor perspective but relevant]Factor Research

Products and services

Could you save money by taking out a ‘green’ mortgage? – Which

Halifax slashes minimum deposit to buy a new build home to just 5% – ThisIsMoney

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

Is it time to ditch your Curve card as new limits come in? – Be Clever With Your Cash

Beware of cheap car insurance that’s too good to be true – Which

The best homes for eating al fresco, in pictures – Guardian

Comment and opinion

Skimpflation: the hidden curse of 2022- Guardian

When should you hire a financial advisor? – Of Dollars and Data

A harsh reminder for a should-be passive investor – Humble Dollar

Investing as a lifestyle choice – Morningstar

How CNBC’s Jim Cramer invested $100 a month in his 20s, even while living in his car – CNBC

The three levels of conviction – Validea

In the mushy middle of the stock market crash – The Reformed Broker

Making decisions is exhausting. Automate your finances [US tax details but relevant]Flow FP

Is your imposter syndrome costing you money? – Refinery 29

Five areas to focus on that actually move the needle – Thomas Kopelman

US market valuation reset mini-special

A mental model for the stock market – Banker on FIRE

The S&P 500 CAPE ratio says the crash has much further to go – UK Dividend Stocks

Crypt o’ crypto

Have the crypto bosses learned anything at all from the collapse? – The Atlantic via MSN

Grayscale sues SEC after rejection of bid to turn the largest bitcoin fund into an ETF – CNBC

BlockFi set to be acquired by FTX at a 99% haircut to its last valuation – CNBC

TedX Talk: the future of digital money – via YouTube

Down big, Microstrategy, the largest corporate holder of Bitcoin, is still buying – CoinTelegraph

Naughty corner: Active antics

Beware thematic funds’ siren song – Morningstar

US financial conditions have tightened incredibly fast [See graph]San Francisco Fed

Metals haven’t crashed this hard since the Great Recession – Yahoo Finance

Is the overnight drift the grandmother of all market anomalies? – Elm Wealth

Kindle book bargains

Superfast: Lead at Speed by Sophie Devonshire – £0.99 on Kindle

Find Your Voice: The Secret to Talking with Confidence by Caroline Goyder – £0.99 on Kindle

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

Environmental factors

This could be the coolest summer of the rest of your life – Vox

When Extinction Rebellion met BP [Sort of]Prospect

Electric vehicle share is finally taking off in US, now 5.1% of total cars sold – Axios

Off our beat

The various ways Wimbledon makes money – Huddle Up

Roll your own DALL-E-style AI images [Interactive tool] – via Hugging Face

How flowers are ‘put to sleep’ for long sea voyages – BBC

The golden age of the aging actor – The Ringer

When offered the chance to do some work remotely, 87% of US workers take it – McKinsey

There are more two trillion galaxies in the universe: the maths – Big Think

And finally…

“The cost of not revisiting your allocation of time is great, leading to massive regret at having spent too much time on a startup, marriage, friendship, or investment that is destined to disappoint you or destroy your soul.”
– Jason Calacanis, Angel: How to Invest in Technology Startups

Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Interactive Investor. We may be compensated if you pursue these offers, but that will not affect the price you pay.

  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”. []
{ 79 comments… add one }
  • 1 Feeling it too July 2, 2022, 5:48 am

    Morning TI

    I just love your Saturday email and often wake early just to read it, and all the interesting articles you have found – so thank you.

    I haven’t noticed that you have been taking it badly – maybe I have been ‘there with you’ as I have been thinking ‘yeh tell me about it’ and glad someone out there is feeling the pain too. I think people who have felt no pain recently must be super human or super rich – far more stoic than me anyway those lucky people.

    Personally I have been gutted – I do expect markets to go down and that’s the price of the returns, but I am reasonably close to FI (I was a few years out) so it represents V V hard earned money (not a high earner) and effort evaporated overnight, with nothing to show for it. Plus it will now be close on another year that I will have to work….oh why I cry….but I know why!

    I have been forced to change my mindset recently before all the fun in saving has gone for good, and I press the mental eject button.

    I have tried everything but the only thing that is working is my ‘imaginary pension portfolio’. I started with my Jan 1st figure, added in monthly what I have put in and plan to, plus 5% uplift over the course of a year and project that out to now 3 years.

    I pretend I still have my money, keep investing, and have my head firmly in the sand. I don’t plan to come back out until my actual portfolio matches the imaginary one 🙂

    If I had a a site like yours and had my identity weaved in also…..well let’s just say we are lucky to be getting any articles at all!! 🙂

  • 2 JimJim July 2, 2022, 7:03 am

    Weirdly, I had not picked up the gloom in your commentary. The majority of your writing seems as tailored to the present circumstances as it always was. Perhaps the perma-bulls see it, a few years back the perma-bears probably saw unwarranted optimism. ( I never believed the us market was priced attractively and didn’t buy when others did – my bear won and I lost) Your track record so far seems fine. (or very, very lucky – it could be, probability allows for all outcomes).
    Even on the cusp of retirement and watching the demise of the stocks and shares part of as my portfolio plummets I am still not worrying too much. My number had this scenario included and the basics covered with FS pensions. I wrote in I think late December or early January that I was accidentally cash heavy until at least March – That was luck. I still find myself in this position and it will not resolve until August now for some of it and next year for the rest.
    With the tone of this piece I don’t know if you will be producing another -I’m Buying- piece anytime soon or with the timing you had last time so I will continue drip feeding the cash into ISA protected passive investments and harvest whats doing best.
    All the best,

  • 3 Gentleman's Family Finances July 2, 2022, 7:45 am

    The position that many of us are in where we are nursing 5 digit monthly drops in net worth is quite scary (if you think about it and let it scare you).
    But I don’t feel any fear compared to the people who are facing double digit inflationary pressures and £2 petrol/diesel who are genuinely needing to cut back on the basics to make it through the summer (and they don’t even want to think about making it through the winter yet!)

    I can stomach the drops and I see them as a genuine buying opportunity since I am still earning more than I spend.
    Try not to get emotional and don’t let the headlines sink in – there’s more important things than money!

  • 4 Warren July 2, 2022, 8:23 am

    If you can’t deal with the volatility you shouldn’t own equities. The positive is that you can buy more now for less, so keep buying if you can but do not sell.
    As you have demonstrated many times, timing the market is a fools errand.

  • 5 diy investor (uk) July 2, 2022, 8:46 am

    A very honest post TI and I share your pessimism…debt build-up, inflation, war and possibility of escalation, cost of living, climate crisis…anyone who isn’t concerned right now is probably in denial.

    Who was it who said markets always bounce back…until they don’t? I too am very much looking more to capital preservation these days.

  • 6 Neverland July 2, 2022, 8:50 am

    Why don’t you just do a bit more work and a bit less time investing actively?

    With a bigger business income you would be a lot less worried about portfolio movements

    Originally you wrote ad naseum about how you would never fully retire through most of the first decade of the blog

  • 7 ZXSpectrum48k July 2, 2022, 9:17 am

    @TI. As an aside: this is worst 1H performance in real terms for US stocks since 1872. Worst 1H performance for US Treasuries in nominal terms since 1865. Best performance for commodities since 1946. What does this mean for 2H22? Nothing. Just take this month. The US 10-year yield ended the month … lower. Ok by just 2bp. The US 1y1y has rallied a rather impressive 110bp in the last two weeks. It’s just damned volatile. Good, let’s play.

    The points about your mental attitudes are important. Just don’t expect it to change. I’ve noticed that most people cannot simply scale risk up (I’m the perfect example). The ability to do so is a rare talent. You may need to accept that you just need to run less risk as you become older and wealthier. There is a reason why cash allocations by clients at most private banks are always well well over 10%. It does not follow that the richer you are, the more comfortable you are with losses. If anything, the exact opposite.

  • 8 random coder July 2, 2022, 9:20 am

    As someone so heavily in cash savings, I am more immune to stock and bond losses as my percentage in each is still relatively small. I do have similar losses as a percentage to a few months ago. I guess you could say being hugely in cash means I am just the same fool I have always been making worse losses after inflation than I have previously been 😉

    The only reason I could start and continue moving from cash to equities/bonds was the tax breaks (I can use salary sacrifice) and employer matches etc. Psychological trickery is the only way I can invest in anything. After all tax and NI benefits of salary sacrifice, as well as employer match, I would need to be down a lot more still than I am today before I would have been better off taking the money as income from pay in nominal terms. My investment strategy has in-build psychological defences!

    The above trickery allowed me to transition into more equities and bonds, and I don’t regret it. My transition plan is also unchanged in terms of money I am moving out of cash. I suppose I am saying the psychological trickery I employ was a calculated one from the outset, I have not became a greater fool, just the same as before.

    If I used ‘Lean FIRE’ and dumped all my cash into equities and bonds tomorrow, I am probably done at 4% swr, but my risk aversion and cash bias means I am not even Lean FIRE. It means I can sleep at night. My transition plan goes for another 5 years of pension/LISA/ISA contributions, and the rate of transfer of cash only slowly depletes my cash savings, so risk aversion on my part and positioning my savings so my portfolio losses can be allocated to employer/tax+NI salary sacrifice savings is not a new psychological trick. I likely will still be working all the way through, although I might take a sabbatical to concentrate on finishing an OU degree I have nearly completed.

    Your honesty and reflections in some of your posts are a hallmark of someone who accepts that they might not be right all the time. This brings reasonable trust. The first glaring warning sign from anyone talking about money is complete absence of any mention of the possibility that they may turn out being wrong!

  • 9 Brod July 2, 2022, 9:37 am

    After two decades of 100% equities, in November ’19, convinced by ERN, I was happy to give up some potential upside and went to 45% equities, 25% cash, 20% gold and 10% bonds. Boy was I feeling smug 6 months later.

    The idea was to glide path slowly back to equities, but, applying ERN’s observation that not buying within 3% of the top means I spent the over two yeas doing nothing but feeling like an idiot. Now I can drip in regularly, I don’t want to because I feel the market will decline further… Market timing, I know. Damn inflation has cost me dearly with that cash allocation.

    The other side of me thinks just buy my long term target AA and get it over with, the low-level, frictional stress of constantly monitoring my portfolio isn’t worth it… I could have 20% gains, isn’t that enough?

  • 10 xxd09 July 2, 2022, 10:26 am

    We can forget that as large apes (animals) we are hardwired to feel losses very much worse than gains
    Having a “loss” or making an error likely got you killed on the Great Plains of Africa
    To be avoided if possible -because it was a terminal event!
    A “gain” or finding a new food source on the other hand is important but was a fleeting moment in the great scheme of things
    New food sources always come along
    Investors have to be aware of this fundamental fact which can be very detrimental and inimical to successful investing by causing a possible disproportionate overreaction by the investor to losses
    Equally gains can be often taken for granted!

  • 11 Laurene July 2, 2022, 10:32 am

    Thank you for your honesty. I had not seen you being negative, simply realistic.
    COVID forced us both into retirement before the time planned. We have been living on savings and my small teacher’s pension. The planned renovation of our doer upper has slowed down to DIY snail’s pace. BUT, we have no mortgage, enough to help the kids and put money away for the grandkids.
    With any luck, we won’t live too much longer and therefore will not run out if money…

  • 12 Ben July 2, 2022, 11:10 am

    “My mortgage adds risk”

    It could be your best investment. I suspect the UK govt and Bank of England are pursuing a deliberate policy of maintaining negative real rates to inflate away debt. The base rate is 1.25%, inflation 9.1%. They have no intention of closing the gap. They have too many buy-to-let properties or offspring getting onto the London property ladder to ever think differently.

  • 13 Brooksy July 2, 2022, 11:11 am

    On the plus side, annuity rates are up for the first time in forever on the back of increasing bond yields. A sliver of silver lining perhaps for those of an appropriate age who want to buy some GI.

  • 14 MrBatch July 2, 2022, 11:50 am

    What actions did you take in Feb as below – is it noted in the slow and steady portfolio or in another post for reference please?

    I made some changes, such as in February when I ring-fenced a big chunk of my net worth from the quixotic pursuit of outperformance – by moving it into a duller and lower-volatility basket that I track separately from my unitized return-seeking portfolio.

  • 15 MonkeysOnARock July 2, 2022, 12:29 pm

    For what it’s worth, I enjoy the intros to Weekend Reading mainly because I really like your writing style – the particular feelings or thoughts you’re writing about in any given week aren’t the focus for me. The quality of the curated links is also a big part of the draw of course.

    As a completely passive investor since day 1 (thanks to this blog among others), any hopes or fears put out there about the direction of the market over the next few years shouldn’t be actionable information for me. It’s still interesting to hear how you and others are feeling and your reflections on those feelings over time, but since I won’t be doing anything in response there’s less temptation to evaluate things in terms of their ‘reasonableness’.

  • 16 BBlimp July 2, 2022, 12:57 pm

    @TI I’m so glad to see you are so close to diagnosing your current emotional state as regards the market… and you even hint at the real issue… which isn’t about how much you’ve saved or how secure you are or you aren’t or even your investment horizon… but that worry you might not be able to outperform the market. I’d call it a realisation rather than worry, and be happy you’ve realised now rather than after thirty years of investing… you could probably remove all your angst by getting a repayment mortgage, investing in low cost well diversified funds with a bond allocation suited to your risk tolerance/ investment horizon and take up other interests…

  • 17 Griff July 2, 2022, 1:41 pm

    Reading the Telegraph this morning it says the average portfolio is down about 12 %, which is about right for my pension which is on Glide path pension with a retirement date 8 months from today. Now, my colleague, is 10 years younger and his pension is managed by a IFA similar sum of money and his fund mirrors mine from its peak down approx 12%. My point, are these IFAs, glide path managers pension fund managers etc getting good money for old rope. If even the hosts of monevator are down dare I say a similar amount what’s the point of any of this. I dunno, bit miffed really. Flogged my final salary pension 20 years ago with the intention of retirement at 55.
    Well that bday came and went alonnnng time ago. My Mrs worked for the NHS for button’s for 40 odd years and retired last year at 60. I have been paying 40 % of my salary into my pension for about 5 years and 10 % prior to that every now and then I would throw in my bonus. If I was to bottle it and buy an annuity, it wouldn’t get me 2/3 of her pension. Quite depressing really.

  • 18 The Investor July 2, 2022, 1:47 pm

    Thanks for the comments all. And also for the encouraging words — to be clear I’m not super gloomy, I’m just becoming aware that maybe I am more discouraged/downbeat than I am consciously appreciating.

    A few inevitably quick replies:

    @Feeling It Too — Wow, amazing to think you’d wake up early for my email, thanks so much! The imaginary pension concept is an interesting one. Many years ago when I began investing I was very income focused, and my strategy had been to replace my salary with growing income streams (dividends, passive income, etc). There are some very old posts in the archives in this vein. I switched when it became clear that growth was the place to be in the low-rate era, and more specifically that the cheaper end of those income producers were lagging horribly on a total return basis. But I always liked the mental abstraction of thinking about income not capital and as I’ve said before would probably return to it in drawdown.

    @JimJim — I am a bit shell-shocked re: “I’m buying”, even if I had a strong view right now (I don’t!). As I might get into in a later comment (or perhaps a later post) I really blew this end of cycle… E.g. I’d sold my single largest holding, Amazon, which was over 10% of my portfolio, plus big positions in a certain tech trust, near all-time highs, because they’d sat outside of tax shelters for years, ballooned, the multiples on tech and the euphoria made me almost physically shiver by early 2021, and yet I felt I couldn’t sell them because of the CGT hit. Finally when it looked like Sunak was going to hike CGT I did sell on that excuse and took my tax pain (and finally ended over 10 years of defusing ex-shelter capital gains!) The CGT hike never came, but luckily for me a crash did… anyway this and other trades had me able to be extremely overweight in UK equity income trusts by the end of 2021. So all good. But then I got greedy when others weren’t even fearful but just a bit mildly miffed about disruptive US growth. I saw companies I had either sold earlier in the year or never thought I could own down 30% in a few months, and I started buying. Most fell by another 30-70%! It’s been a horror show. Position sizing, moving in slowly, and active shenanigans has taken the edge off (even my hammered and now extremely growthy active portfolio is ‘only’ down about 25% depending on the day YTD, and if I was to factor back all the money I’d moved to ‘safer stuff’ in Feb I’d overall be down much less than 20% — having a combined view at a glance is on my To Do list!) but either way it’s still well behind the market, and worse it is well behind where I would have been if I’d sat on the equity income. Of course one will get some of these right and some wrong (my big move into tech in March/April 2020 is cushioning a lot of these later sins) but this one is especially gutting and making me second guess myself I suppose.

    @GFF @Neverland — Yes, I think the lack of much new money coming in is a factor here, emotionally. I’m still trickling money into my SIPP but if I want to fill this year’s ISA allowance I’m probably going to have to raid some of the safety-first buffer, such as my Premium Bonds. It’s true I didn’t intend to stop earning, and indeed I still don’t, but there are complicating factors here. Anyway, something to think about.

    @Warren — I can deal with the volatility, life goes on, I’m off to a BBQ this evening. 🙂 However this bout of it — and the extreme nature of it versus my particular exposure as above, and my own bungling — has I think made me feel the pain. I think feeling pain is not incompatible with dealing with the volatility. I’m a human being — an animal as someone else has said. 😉 The wake up call for me is that I ran 95-100% equities on and off for years and felt pretty happy and relaxed throughout. Now here I am with much reduced exposure and holding a basket of what I think are now very nicely-priced stocks and yet I’m not feeling greedy and full of beans. Hence the soul searching. 🙂

    @DIY Investor (UK) — It could indeed get a lot worse, and it’s hard not to let some of the political/macro gloom seep in. You and I both agree (climate emergency) and disagree (Brexit) on the big troubles facing this country, but either way it’s not the sunny-side up 1990s anymore that’s for sure!

  • 19 The Investor July 2, 2022, 2:11 pm

    @ZXSpectrum48K — You could well be right about scaling up and risk and so on. If I think back I was also more nervous around the top (March or November 2021 for me) than I usually am, rightly enough as it turns out but I wouldn’t say I was sanguine. When I spun up my (for me) big interest-only mortgage et cetera it was on the back of a different mental posture it seems — no doubt because of the lifestyle factors I detail in the post. Perhaps I need to look at my ego here…

    @Random Coder — Interesting thoughts and thanks for the kind words. Yes, investing is a psychological as much as a procedural game. See also dollar-cost averaging, and even preferring to use income producing securities versus selling down capital, or deciding to buy a theoretically (perhaps) sub-optimal annuity, to name just two others. People who dismiss the psychological factors think they know better but these days I’d argue they are revealing they know less.

    @Brod — Was it Napoleon who said he’d rather have a lucky general over a skillful general? Being lucky is underrated, and it’s even better when you appreciate the breaks too. I’ve definitely had a couple. Regarding your future, as I’ve often written does it have to be one or the other? Can’t you do 50/50? Perhaps that would be enough to ratchet up the security and dial down the stress?

    @xxdo9 — Very wise comments, if you don’t mind me saying so as an ignorant son of an ape 😉 Also thanks again for chipping in on the various threads over the months with your perspective from the far end of the racetrack as a 70+ something who has long been in retirement. It adds a valuable perspective for sure.

    @Laurene — Cheers, and I don’t know from your last line whether to wish you luck or not! 😉

    @Ben — I’m still inclined to agree, although perhaps for slightly different reasons (more macro possibilities than personal stakes, though no doubt the latter is in the mix somewhere). If push comes to shove I think they’d run inflation a bit hotter than ramp up interest rates off the charts. The interaction with the gilt market is another complicating factor. Worth reading that FT article in the links about the interest bill spiking.

    @Brooksy — Indeed, it’d be great if retirees could weigh up annuities without feeling they were juggling a hot potato primed to explode, as in the low-rate era.

    @Mr Batch — Remember we are two writers on Monevator. The Slow and Steady is a passive *model* portfolio, which is updated by my co-blogger. I am a crazy active investor who doesn’t detail my moves on here so much these days because I think most people should be passive. (https://monevator.com/passive-vs-active-investing-episode-1/) The shift into safer assets was meant to be the follow-up post to my “Quantitative Tightening And You” post I wrote in February. But as I mentioned in the comments last week or the week before, I kept revising the draft, not least because I kept trading these newly acquired assets! In the end I decided it would be too risky to give Monevator’s passive investors reason to believe / the confused idea that our site was telling them that they should own, say, infrastructure trusts, especially when as the author of that article I had sold half of them again six weeks later. If you wanted to follow the breadcrumbs read the various comment threads on Weekend Readings. But really it’s another active portfolio of pseudo-safer stuff (pseudo because solar energy trusts, say, could just blow up with a regulatory blow or whatnot) that I’ve been tweaking into owning more IGLT and INXG as those ETFs have cratered and yields risen. If things continued on the trajectory of the first six months of the year for a year or two, I think it would end up being a 30% (say) allocation of my total non-housing wealth just in those two ETFs. But along the way I’ll be trading about the place. I even trade in and out of different high-yield bond ETFs to scalp 1-2% on illiquidity, for instance. It’s all very non-replicable and not advised for viewers at home. 😉

    @MonkeysonaRock — Thanks, that’s very nice of you to share! The links do take a lot of time to compile these days, so it’s always great to hear they’re useful. 🙂

    @BBlimp — Yes, I’d agree that’s in the mix. Since I began tracking in 2013 I am still ahead of my benchmarks, most narrowly VRWL, but the gap has been squeezed in the past six months and I dread the next time I do a multi-year update. (This is one of my few portfolio metrics I refuse to see in real-time, because the anxiety on a YTD basis is bad — and perhaps behaviour-distorting — enough). The thought of moving everything into LifeStrategy 80/20 and going to work for London Zoo or similar has occurred to me, albeit in daydream mode. At that point I’d have to also hand Monevator over to @TA because I’d have very little to say. Active investing is what has kept investing so interesting for me. Currently my plan is to erect some sort of member wall and then get truly active behind it (hmm, sounds furtive…) but we’ll see. But anyway, yes I think it’s in the mix. An ego check, again.

    @Griff — Indeed, I couldn’t stand not having access / control over my pension assets though. Even if it just meant having it in Hargreaves Lansdown or whoever in an 80/20 Lifestrategy that I sometimes shifted to 60/40 if I was feeling frisky. All these things look much worse in a bear market, of course. In early 2021 everyone was full of beans, including me and Monevator readers. Different structural arrangements look more attractive as much as different asset allocations do as the landscape changes, right? 🙂

  • 20 Snowman July 2, 2022, 2:24 pm

    In terms of recent equity market falls to date, then it is worth remembering that most UK domiciled passive equity investors will have received good real returns over the past decade or so and all that has happened this year, so far, is that investors have given up some of those past above inflation returns.

    I keep an ongoing chart of calendar year equity returns (that includes the 6 months of the current year) based on some of the (accumulation unit) funds I hold or have held (chosen to cover a range of geographic areas). Here is a link to that chart.


    You can see that considered over the longest period there, the 10.5 year annualised average return data-points (1st Jan 2012 to now) have been well above the black dotted RPI line. So reasonable real returns. If some seer had told me 10.5 years ago that I would achieve on average 3.5% real returns over the next 10 and a bit years, I would have been happy with that.

    The future is another thing of course; we live in very strange times. And anything could happen going forward. I’m not going to change my investment strategy or lose any sleep over it; que sera sera and all that. But many of us who thought we were financially secure based on past historical stock market movements, may or may not have to revisit that assumption in time.

  • 21 Rob B July 2, 2022, 2:34 pm

    A brilliantly reflective and honest view, TI. Thank you. We’re surrounded by so much hype, hyperbole and general BS nowadays. To read this was very refreshing.

    It’s like the gambler who always tells you about their winners. You seldom (if ever) hear about the losers.

    I’m down this year. I’m thinking worse is to come. I have fewer years left until retirement. It is worrying. But worry is a behaviour. My plan is like Spock – what are feelings?

    During times like this I pretend I’m managing someone else’s investments instead of my own…. Kinda works ….

  • 22 Tom Newton July 2, 2022, 3:06 pm

    My greatest disappointment this week is not my PF’s performance but having to resort to Google for the provenance of one of the lyrical referenced headlines.

  • 23 The Investor July 2, 2022, 3:22 pm

    @Tom Newton — Haha, I’m disappointed nobody has named them all yet. 😉

  • 24 Tom Newton July 2, 2022, 3:30 pm

    @The Investor – for any muso over 50, I’d suggest there’s 4 easy ones, then for the other 2 it just depends on whether you’ve got kids and what they play. Hence one tripped me up. I’ll blame the kids, obvs.

  • 25 Norman July 2, 2022, 3:35 pm

    @Brod – I did something similar around the same time but went to 100% cash. Perfectly placed to take full advantage when Covid hit and markets slumped, but I was convinced it would go lower and before I knew it markets soared. The speed of the recovery completely caught me out. Regrettably I’m still all in cash but now presented with another opportunity.

    “The other side of me thinks just buy my long term target AA and get it over with, the low-level, frictional stress of constantly monitoring my portfolio isn’t worth it… I could have 20% gains, isn’t that enough?”

    That’s my thinking and yet I’m still dithering. I’m also contemplating taking more risk, but slowly convincing myself that 60/40 will do. I’m telling myself I’ll go 50% in when markets take their next leg downwards, but of course who says they’ll go downwards……

    Q2 earnings season starts in a few weeks, so the market timing quandary is whether to wait for that or not. My inclination is to make two lump sum purchases slightly spread out, then be done with it. Decisions, decisions……

  • 26 far_wide July 2, 2022, 4:38 pm

    Well, unlike the other kind souls here, I personally did notice a significant shift in tone over the last few months so I appreciate the self-realisation in this post.
    I think the thing is that for the last few years we’ve all been doing well to greater or lesser extents, active participants probably way more than passive, so the mood has felt ‘in sync’ at least in direction if not in size, and I think that’s hidden the divergence of mindset.
    Now, however, I’d describe the market for almost any active picker as truly completely historically brutal.
    Meanwhile, Vanguard lifestrategy 80 is 10% off the top. So, a correction. That’s even with the historic bond horribleness. It went down 10% in 2018 too, and 20% in 2020. Nothing to see here.

    We’re now in 2 different worlds, and I feel talking across purposes a little. I know you’re saying it as you genuinely see it, but in my case at least, I feel you’re off-beam here talking about stages of grief, and still seem a bit defensive.

    First, the passive market was only down 3%, so people like me said it’s barely even moved. Then it was 7%, and now it’s 10% (11% if 100% equities) and I observed that too. That is just the reality now, nothing more or less.

    On my part at least, that’s not stages of grief or rationalisation or denying reality. I’m just sitting here watching broad equity markets do what they do and going ‘ho-hum, that’s a shame’. I’m not trying to be billy big balls with that attitude; it’s only down 10%. How do you feel I should be feeling as a passive investor? Despairing? Where would that leave me when it goes down 30%?

    I’m sorry if this all sounds mean, but it just feels to me that the reality of the situation is that your active portfolio has taken far more of a hit than you hoped it would and you’re a bit sore about it. As a result, I still think you’re overestimating how much pain/adjustment passive investors are feeling alongside you (though obviously some will be, depending on mindset/exact portfolios).

    But broadly speaking, people like me didn’t share in your huge gains and what we get for that is not sharing in your potential huge losses (yet!).

    As you’ve alluded to though, in reality your portfolio when properly assessed in the long run is probably still soaring above the likes of my humdrum affair. Perhaps you didn’t celebrate your outperformance enough previously, to allow yourself mental slack later on for underperformance, just assuming it could continue? Or indeed rebalance to something more boring earlier?

    Anyway, as I’m perhaps sounding smug about passive investing, my major failing has been to have way way to high a cash allocation over the last 5-7 years, which has cost me hugely. It wouldn’t have been much better in bonds as it turns out, but it certainly should have been invested to a greater extent in equities. So I probably have a journey to make in the other direction of risk tolerance, I think.

    But, hey, plenty of time yet to buy, surely the market will keep getting cheaper – or will it? 😉

  • 27 tom_grlla July 2, 2022, 5:06 pm

    1) A very honest self-appraisal – stuff like this will clearly help in you being a ‘better investor’.

    2) I wish I could find a pithy quote from someone like Buffett on the subject, but I think it’s quite well-known that paradoxically the richer people get, the more risk-averse they become, so what you’re experiencing is entirely normal.

    3) My commiserations on your recent experiences – it sounds a little like Druckenmiller piling back in, early 2000, so at least you’re in esteemed company!

    4) Anyway, I think it’s good to worry somewhat about our abilities – Only the Paranoid Survive and all that…

    5) The next 5 years will be, as ever, fascinating. Will we return to the past 10+ years, with FAANGs etc. at the forefront, and Tiger Global ruling the waves again? Will there be a Commodity super cycle which further destroys the tech bros and ARK enthusiasts? Will we enter a 70s style period of low stockmarket returns for a longer period than almost all of us have ever experienced?

    Obviously I have no idea & I continue to attempt to construct a truly diversified ‘all-weather’ portfolio on this basis, though of course I also continue to make many mistakes.

  • 28 Frank July 2, 2022, 5:17 pm

    As a passive investor, I realised last year that I wasn’t properly diversified, home bias, etc. so performed a clean-up . Given the market performance since, my rebalancing has turned out not to be the best move. However, I know it’s right for the long term, so point having thoughts that verge on market timing & active investing.

    I’m a FIRE-ee, with only a few years living costs in cash (I really hate comments about “great buying opportunities”!), so I’d always much rather see the market going up rather than down, however, my current position is no worse than it was 18-24 months ago when I was perfectly happy with my portfolio value, so try not to fret about recent ‘losses’.

  • 29 Tom-Baker Dr Who July 2, 2022, 5:19 pm

    @TI – Great post. Being a physicist, I’ve particularly enjoyed the references to Richard Feynman.

    I’ve just got back from holiday a couple of days ago. Not daring to log into my investment accounts from abroad for security reasons, I have now got a two-weak gap in the records on my manual portfolio valuation spreadsheet. I haven’t bothered to automate that yet.

    Anyway, I have just checked it a few minutes ago and I definitely agree with you that this is probably the beginning of a bear market. I’m now down 2.95% in Sterling from my previous peak at the end of April and in USD I’m down 5.15% from that latest peak.

  • 30 far_wide July 2, 2022, 6:31 pm

    Reflecting further, I’m wondering whether my relative indifference at the moment reflects the fact that I already have (perhaps too much of) a wealth preservation mindset.

    Whilst I diligently record it, I don’t actually often think of my (not particularly impressive) net wealth in terms of itself, but only as a nominal amount that swings up and down, affording me the ability to withdraw a fairly static/stable income over the long term.

    When the market was high, I considered my income as being about 2.5% of that number. Now that it’s being beaten up, I suppose I’d consider it at about 3.25% of a smaller number. Both giving the same income in £.

    If things get really bad, then I’ll consider that I can probably withdrawal 4% (though I probably won’t want to). And when markets rise up again, I’ll just go in reverse with the withdrawal rate. I suppose if it got to the point that I was having to withdraw well over 4% for a year or more, alarm bells would be ringing, but then rightly so I think.

    As I said above, I probably am too much in this mindset given my age (late 30’s), and I should probably try and be a bit more greedy. But on the other hand I don’t need more than I have and so why load up with risk?

  • 31 ermine July 2, 2022, 7:01 pm

    > Did I change, or did the market?

    It is you, though you’ve clearly discovered that anyway 😉 I think the story of the young blade taking on all comers, making his fortune, and settling down a little bit as he progresses through the life arc is as old as humanity itself.

    This is the opportunity for some new young bright-eyed hero to start making his bid for freedom against the odds 😉 Stocks are on sale, and a fellow who has aught in the market is better placed to benefit than old lags. He can’t sell what he hasn’t got at a loss, and he will buy his future income stream at a lower price than last year. Valuation matters, I am glad that it is still true, even as one of the old lags 😉

    It’s not unheard of for investors’ portfolios to shift towards wealth preservation as they get older. It’s the only way I can tolerate the pedestrian returns of the increasing passive component of my portfolio. I don’t need to shoot the lights out, and for me some of the passion for investing fades as I got older. It bought me my ticket out of the world of work, there are other things to focus attention on once you have enough.

    The self-reflection has great value and I congratulate you on that. The Delphic Oracle’s injunction to Know thyself has stood the test of time. You change across the years, and what was true in the morning of life may become a lie in the afternoon. If you are not different after 15 years than your former self you haven’t been using your time well, and I highly doubt it’s the case for you.

  • 32 JABA July 2, 2022, 7:06 pm

    Reader since 2014, first time commenting.

    Echoing others, can’t say that recent posts have come across as being excessively gloomy, given whats happened in markets over the last six months.

    As an active investor I completely identify with how you feel.

    When playing the outperformance game it’s almost unavoidable that it affects our psychology. When the markets validate decisions it feels good, not so much otherwise. Think both Warren and Charlie have talked about temperament being more important than brains in this game.

    From starting on this road and until relatively recently, I was a true believer. Equity prices will always go up in the long run, buy the dips, just be patient. What other kind of idiot would have a portfolio of 130% equities (using margin debt) in March 2020. Looking back, I was a lucky f*** to have caught the faith at the right time.

    As a result, all these years have made “investor” part of my identity, even though that wasn’t my original goal. I just wanted freedom.

    However, at the point clips of NBA games started selling for thousands of dollars, I lost the faith, which led to a greater focus on capital preservation. Can’t remember which racing driver said it, to finish first, you first have to finish.

  • 33 Vroom July 2, 2022, 7:41 pm

    @TI Doesn’t sound like you’ve done too badly at all. Cut a chunk of risk nearish the top and added some back quite a bit lower, pretty much active trading 101?

    The key now might be to listen out for that nice Mr Powell’s bell and in the meantime size accordingly? Be sized to be able to add or at least not have to cut if it pukes further – the pound-cost averaging passive crew are surely right on this one.

    As you’ve suggested, he rang the big bell loud and clear at the bottom of the market in Covid, then rang it again as hard as he dared at the top (imminent rate hikes, QT etc). So where are we now? To me he’s resolutely avoiding even a warm-up tinkle despite numerous hints and prods and Ukraines and snafus and whatever else.

    As and when he’s next giving it the full town crier my own target is not to be too punch drunk to size up accordingly. (Easier said than done..)

  • 34 London a long time ago July 2, 2022, 10:00 pm

    I do this too – I track gains accurately (even outsized ones), but overrule reality with a 7% imaginary rate in negative years. To date, pretence/reality have realigned in due course. If reality completely derailed itself from my happy spreadsheet, I would of course adjust my rates of return, but it would prompt some careful re-thinking of life/strategic choices. 7% plus is my bare minimum (realistic given my country’s economy and tax structure) …

    I worked on MM, equity and future/derivatives desks 1998-2010 before changing careers (following a half decade break of travel and new degree). I burned out in 2009-2010 on reflection. The unrelenting misery of a bear market when you’re in the job is unfathomable.

    This no doubt influenced my sanguine approach (I truly find it effortless to ignore both hype and despondency), but I’m still accumulating and hold quality assets !

    Prices will fall as rates rise, but I also know that risk rewards AND I’m positioned to benefit from the reverse later on (when I’ll need the funds)!

    My buckets are deliberately boring and passive. AND I relish the equanimity! I too wake up early to read weekend Monevator for the curated feed and honest perspective. It’s a terrific site. THANK YOU!

  • 35 Tom-Baker Dr Who July 2, 2022, 10:25 pm

    far_wide (#30)-“When the market was high, I considered my income as being about 2.5% of that number. Now that it’s being beaten up, I suppose I’d consider it at about 3.25% of a smaller number. Both giving the same income in £.”

    I’m just curious about this, please ignore me if I’m being too intrusive:
    2.5x=3.25y => (y/x)-1~-23%
    This is roughly about what the S&P500 lost recently, isn’t it. Are you 100% US large cap stocks or is it just a coincidence?

  • 36 Hariseldon July 2, 2022, 10:27 pm

    Interesting post and comments, I find market timing and predictions about market direction are pretty much impossible to do reliably, glad some commenting can achieve this.

    You can take the mood and a sense of direction and make small regular adjustments but big changes are very tough to time and get right twice!

    For those of us who use the money to live then we need to cover our liabilities, once that’s done you can be quite cool with market declines and perhaps take advantages of opportunities.

    For those accumulating it’s a good thing !!

    Oddly, I have dropped a substantial 6 figure sum and it has left me pretty unfazed but I have been absolutely delighted to get an unexpected £20k ( sold our Motorhome for more than we paid for, after buying new in the Covid period)

    There’s some odd psychological narrative going on where a small unexpected bonus outweighs a far larger investment loss, (whilst not anticipated, it was clearly on the cards)

  • 37 G July 3, 2022, 6:40 am

    Pension is down around a hundred K from it’s peak, but I’m unconcerned – providing I have enough to eat and live comfortably all is good. My current contributions will simply buy more.

  • 38 Martin T July 3, 2022, 7:54 am

    @TI to quote that well known investment guru, Bob Dylan: ‘if you ain’t got nothing, you’ve got nothing to lose’

  • 39 Martin T July 3, 2022, 8:39 am

    Interesting article on the 60/40 portfolio here via Banker on Wheels, which I haven’t seen linked elsewhere:

  • 40 Jim McG July 3, 2022, 9:26 am

    Ah, the psychology of money! I sympathise with many of the sentiments expressed in this post. In 2008 the chill winds didn’t bother me and I just kept investing out my wage packet every month, telling myself that this too would pass. Which it did. Now, in retirement, with no income and only outgoings from a shrinking pot, I try to keep the same mindset. This too will pass and things will sort themselves out. Still, I’m just not looking at my investments on a daily or even weekly basis which is a change for me. “Just do nothing”, I tell myself and get on with living. Also stay away from TV news, Twitter and newspapers would be another good idea, I think. But I would admit I’m feeling and fretting about this downturn more than I think I rationally should, and it’s good to know I’m not the only one!

  • 41 The Investor July 3, 2022, 9:49 am

    @everyone — Thanks again for the further reflections, thoughts, encouragement, and challenges. I feel like this thread might make useful reading for many readers with market declines on their mind 🙂

    I really do have to be quick this time as I’m set to get a train for the countryside where I’m meeting none other than The Accumulator for a lunch/modest hike. He may be passive about his portfolio, but he’s nothing of the sort when it comes to being late for his roast potatoes.

    So aside from Martin T’s subtle hint that I misquoted Dylan in my article (the shame) I’ll just quick address this idea that I’m somehow maligning investors — particularly passive investors — for not feeling more miserable. 🙂

    I’m not. If someone feels great or at least sanguine about this year, that’s good news not a problem to be addressed — assuming it’s not a consequence of longer-term problems being stored up down the line (e.g a huge cash buffer and no plans to deploy it that means their portfolio won’t grow sufficiently to eventually meet their long-term goals).

    What I have been pushing back at is that as I explored the narrative/signs that markets were headed towards a rough patch in late 2021/early 2022, such investors pushed back on the grounds that either they felt fine or their portfolio wasn’t down much. Aside from the fact that people’s portfolios vary a lot (as indeed has been helpfully revealed in this thread) and hence will see different levels of losses, I was mostly talking about market structure / direction / levels, not whether people should feel bad about it.

    Now 100% I conflated all this with my feelings along the way (posts about brutal markets etc) and I wouldn’t argue with anyone who came back and said “well what do you expect if you talk about feeling down, and they felt up?” That’s fair. It’s partly down to the need to write colourful/personal posts that someone would want to read (rather than dry statistical reports!) and partly because, yes, my risk portfolio was mildly reeling.

    But as I said above (and the comment from @ZX offering real-term returns amplifies) this *was* developing into the worst first half for US markets for 50 years (/a couple of centuries it seems in real terms) and the worst for many many decades for US government bonds too, not to mention UK bonds.

    i.e. Anyone who said “nothing to see here” was completely wrong. There has been everything to see here, as it turned out. 🙂

    Now that may have been a lucky guess on my part, I’m not making the case for my crystal balls. I’m just saying that if you don’t think markets have been in tumult because your portfolio allocation doesn’t show it / you don’t care for other (totally fair) reasons — that doesn’t mean they haven’t been. 🙂

    The comment about me not celebrating the wins as much as the losses is astute. But it’s also in part a deliberate approach to this subject on Monevator.

    I had a whole section in the first draft of this post explaining why I’ll talk about being on the market’s rack or selling Tesla like an idiot when I did, but I seldom celebrate the wins. I didn’t even written the obligatory “I’m financial free” post when that day came. Partly this is because I’m superstitious haha, but it’s more because as others have noted there is plenty of that about. I do drop the oblique hint (especially in comments rather than posts) but I feel it’s more helpful overall to focus on the downside. (And not just on this blog — my accountant asked me in April if ANY of my EIS investments had made money, for instance, as he has written down a few losers but we’ve not yet started banking the winners 😉 )

    It’s a fair point that perhaps I should talk about upside a bit more as well as downside, or at least think about it more in my real-life. It is striking how when one goes over a key ’round number’ in a steady upmarket you note it with a smile (or I do anyway) but when you go back through it in the other direction it feels far worse. Loss aversion, again, writ large.

    Finally, I think some of the crossed wires (which have not been anything terrible, to be clear, and I welcome/d all constructive feedback/pushback along the way 🙂 ) is our usual passive/active dichotomy problem.

    It makes a lot of sense for passive investors who vow not to take action with their portfolios to develop a mental mindset of stoic indifference. To such people, harping on about market’s being feverish is not part of the daily mantras to keep the investing show on the road — versus my co-blogger @TA sighing, opening the graph to a 10-year view for a reassuring perspective, and then making a cup of tea.

    For active investors, however they do it (even if stock specific ‘bottom up’ investors) you can’t ignore what the market is doing, potentially telling you, and how it’s repricing the assets you own and those you might buy. Therefore a market rout is something to pay attention to.

    I don’t really see this as reconcilable. Even with the mooted membership content wall for active I’ll still give market commentary now and then in Weekend Reading, and if I’m reading it correctly even those who think I’ve got over-heated aren’t saying I shouldn’t (as opposed to having a different view on the appropriateness of that emotion/view). So I guess this will happen from time to time.

    But anyway, I’m fine thanks to those who’ve offered kind words (including several over email) and this post is as much about me digging into what might be going on beneath the surface as to any doubts or other feelings I have on a daily basis.

    There’s no hand wringing here, or from you guys in the comments. All good. Our heads are more or less in the right places — this is about fine tuning and keep learning.

    Happy Sunday!

  • 42 mattwb July 3, 2022, 10:18 am

    In downturns like this I like to stop looking at the falling value of my funds and do something both cheap/free and good for you. I’m going on a nice dog walk. I’ve packed my raincoat in my rucksack. I suggest everyone does the same and doesn’t sell.

  • 43 Feeling it too July 3, 2022, 11:24 am

    @ London a long time ago – it’s great to learn that your imaginary rate has ended up realigning over time and I have a kindred spirit!

    @ TI – re your links – thanks for remembering the ladies in these – apart from the finance links I do like the house/garden flowers and coral ones you include sometimes 🙂 ….would be curious to know the ratio of male/female readers btw….just out of pure interest

  • 44 Nebilon July 3, 2022, 12:03 pm

    I find myself surprisingly unconcerned about the drop in value of my SIPP and ISA holdings. I haven’t even really worked out how far down I am in percentage terms. This is in spite of my having started my retirement on 1 July. I have wondered at times while working out my notice whether I’m making a big mistake. But I have faith that the market will recover in time, and also I’m insulated from being unduly worried by some dumb luck (or maybe chance is a better word): following my father’s death last year I now have a bit of as yet uninvested cash to live on for a bit, and we are about to sign the contract for sale of his house (my share of the net proceeds is about the same as the small bit of mortgage we have left, and I plan to pay it off which will reduce outgoings). Longer term I have some FS pensions which kick in in 4 and 9 years time, and we may decide to downsize and move from the southeast to the northwest where the kids are. But I do wonder if I’m being irresponsibly complacent and may live to regret it. On the other hand I can’t control the gyrations of the market, and I’m tired of worrying about things I can’t control.

  • 45 SemiPassive July 3, 2022, 12:14 pm

    John Kingham’s article on the S&P 500 CAPE that you link to sums up where we are and how I view things.
    I’d read a few articles similar to that in late 2021 from various sources, which cemented my moves to an income/dividend biased portfolio last year with little to no US tech. Global equity income with a heavy UK bias and a lot of green energy infrastructure trusts. Any bond fund holdings were all sub 5 year. It was no surprise whatsoever to see bonds and equities, particularly tech stocks, drop in tandem as interest rates rose.

    My only tactical moves during 2022 were to sell out of an EM $ bond ETF early in the year taking a 10% loss on that. Said fund is now down 20% YTD. As we end H1 I am still up 2.5% YTD overall including dividends received, although I was up a little over 6% about a month ago. So I haven’t had to go through the normal bear market emotional rollercoaster.

    Yes, I would have done better to be sat in US$ cash, but the key thing is I don’t view what I’ve done as market timing. In the sense that I intend holding my current investments essentially forever, and just pooling/directing new contributions and dividend cash to make any new purchases of anything I don’t currently hold. It’s not like I’m out of the market and having to decide when to move back in, which is the dilemma if you go to cash.

    In the meantime I am set for my best ever year in terms of income received, and seeing how such a portfolio can provide a sustainable withdrawal rate virtually on autopilot.
    While I’m still in the accumulation phase for the next few years, I don’t have decades over which to buy, so valuations matter.

    I’m not adding to my UK equity or renewable energy infrastructure positions now as they are already weighty, so my shopping list includes european and asian equity income ETF/trusts, shorter dated investment grade £ bond ETF (as an example iShares IS15 is now yielding close to 4%), and at the other end of the bond risk spectrum something like one of iShares EM $ bond ETFs is yielding a tempting 7.5+%. Although the weak pound may tilt to picking the GBP hedged version of that (ticker EMHG vs SEMB – always keen to hear ZX Spectrum’s opinion on this – albeit dumbed down to a level I can understand 😉

    Anyway I just thought I’d share to say that maybe there is an audience for TI’s active tactical asset allocation discussions, even if it disgusts TA 🙂

  • 46 Tom-Baker Dr Who July 3, 2022, 12:47 pm

    Nebilon (#44)- I’m sorry for your loss. Despite not knowing you personally, I do empathise with you. No amount of money can make up for the loss of a loved one. I lost my last surviving grandmother about three years ago and those feelings of grief are still with me.

    @ Martin T (#39) – Thanks for the link. Being a fellow cyclist, I read Banker on Wheels occasionally but I somehow seem to have missed this bit on the 60/40 portfolio.

  • 47 Nebilon July 3, 2022, 2:54 pm

    @ Tom-Baker DrWho. Thank you.
    I would be much happier to have my dad still with us rather than a bit more cash. Which is why it’s chance not luck. But it is what it is…

  • 48 far_wide July 3, 2022, 4:32 pm

    @Tom-Baker Dr Who

    No problem at all. That is just a coincidence as I’m largely in just a global tracker (ok, with a few tweaks) , cash, and a sprinkling of gold/bonds.

    I just very roughly adjust my permitted notional withdrawal rate in my head based upon my perception of markets being high/medium/low. It’s an adaptation of the usual fixed % FIRE approach as advocated by EarlyRetirementNow (great site). The main point is that one shouldn’t use a bullish withdrawal rate in an overvalued market, as whilst no-one has a crystal ball there’s going to be a higher potential there for near term underperformance.

  • 49 Mr Optimistic July 3, 2022, 4:44 pm

    The article on overnight drift was interesting. Often noticed that 10.30am is a good time to buy if the market is falling as there seems to be a trough between 10 to 11am. First thing Monday is also odd, presumably the over weekend trades being executed. Who does that ?
    In terms of your unravelling psychology and general moral collapse, perhaps time is taking it’s toll. Cumulative effect of brexit, politics, state of the world etc undermining hope for the future ?

  • 50 Tom-Baker Dr Who July 3, 2022, 5:10 pm

    @far_wide(#48)- Thanks for satisfying my curiosity. I guess it doesn’t help that bonds went down a lot recently because of the rise in interest rates. I’ve got a very small amount in a Vanguard’s Long Duration Guilts ETF that has gone down by about 24% year to date! Even another small amount I’ve got in a Vanguard’s US government bonds fund, which has a less extreme effective duration of 8 years, has gone down by about 12%.

    @Nebilon (#47)- That’s exactly what I understood when I read chance rather than luck in your previous comment. You have my sympathies.

  • 51 hosimpson July 3, 2022, 7:38 pm

    I’m not worried about the correction in the financial markets. Not really. It’s a normal response to real + expected monetary tightening. If anything, Warren Buffett was right in … was it 2016? 2017? … when he said the stocks looked cheap assuming the monetary policy in effect at that time were to continue for a few more years. Long live the discounted cash flow! 😉
    What really bothers me (honestly) is that I think a housing market correction is being artificially delayed by stupid measures (e.g. the brain farts about 50 year mortgages that people would continue paying in retirement, e.g. ditching of affordability tests leading to such nonsense as Habito’s lending of 7x salary). That shit has real potential to usher in another financial crisis. Although this time it’s likely to be local to the UK, it’s not going to be any less painful to those impacted.

  • 52 London a long time ago July 3, 2022, 10:46 pm

    @ Feeling it too
    I didn’t realise you were my gender, but i shouldn’t be surprised? It tends to explain why after 5 years of reading Monevator, I felt drawn to reply to your comment! I think Monevator’s audience is mostly male? @TI?

    Gender has had such a big impact in my life. I acquired my million pound seat on my first trading floor bc I was pretty. I was one of three women in a sea of mostly young Caucasian guys. The desk assistants were stunning! I certainly didn’t bring anything else to the table.

    I remember being a deer in the headlights in the vivid, technicolor, whirlwind. The credit lines and inherent trust involved were thrilling – and the naked simplicity – you’re profitable or not-profitable. I LOVED the beauty and elegance in trading MM risk … supposedly every party could satisfy their individual needs.

    Risk on, risk off … London (playful and gentle), New York (hostile), Sydney (cocaine-ridden toxic below the glitter) and Melbourne (male violence barely masked).

    London was a glorious world back then. I arrived as a backpacker but thanks to my job, I straddled worlds – Mossimans, Conran restaurants and Bollinger in city bars on the one hand while singing along to Men at Work with my people in shepherd bush on weekends. It was lonelier when I moved into my own flat in Holland park – I remember that the real estate agent wanted £10,000 upfront but I could shrug my shoulders and hand it over. Trading opened the world up …

    @TI, your enduring devotion and musings evoke bitter sweet feelings.

    I slammed the door behind me in the GFC. I worked at one of the banks that broke the system. I was so angry and contemptuous!!

    As mentioned, i changed careers. I found it difficult to endure the blunt stupidity of law enforcement after my clever (but amoral) former career. In 2018, a criminal we were monitoring killed members of the public.

    Money and financial independence buys defences and strength. A sense of economic control offers a ballast in times of grief. I could comfort my inner animal while the winds howled beyond reach. And again, make choices free from economic necessity.

    Anyway, my point is that I feel it too …

  • 53 Jim McG July 4, 2022, 8:43 am

    Just to note that by sheer luck of timing I took about two year’s living expenses in cash back in October from my pension (after mulling over a withdrawal strategy for retirement for almost a year, I had finally decided this was the cash buffer I wanted and duly took it.) Therefore I have about eighteen months before I need to take any more out of my funds. The vast majority of my money is in an 80/20 Vanguard fund and I’m not about to change that, but I still feel the downside much more acutely than the months of upside we’ve experienced over the last few years. Loss aversion indeed.

  • 54 miner2049er July 4, 2022, 8:49 am

    @Jim McG would be fascinating to get updates from you on it’s progress and how it pans out!

  • 55 Dazzle July 4, 2022, 11:23 am

    I hit my number in Nov 2021 but I’m in OMY for a while. Partly because I was never convinced that touching my number meant I was good to go, partly because I’m not entirely convinced that my number is quite enough and partly because I wanted to avoid a big drop just as I walked away.
    I’m still reasonably relaxed about the drops. I don’t check as frequently as I did on the way up. Nothing is that much different for me yet, I’m still earning. I don’t have the safety from redundancy that I felt when above my number but the fact that colleagues are moving on all around means I’m not so worried about redundancy.
    Emotionally I’m checked out of working, just treading water waiting and hoping for this market to reverse. There is a lingering “this time it’s different” feeling going on but I’ve seen that before.

  • 56 Naeclue July 4, 2022, 12:22 pm

    For most of us financial independence is hard won. The thought of losing and having to reacquire it is therefore horrific and we should probably readjust our asset allocation as we get older to mitigate that risk. Many of us do not though and only recognise the risk once a bear market comes along.

    I wouldn’t take much notice about the worst first half for hundreds of years by the way. That is just hyperbole. There have been far worse 6 monthly periods, just not ending in June. 6 months to Feb 2009 for example, the US market was down over 40%.

    So far, I confess that I am not the least bit concerned about the bear market, helped by having a big cushion as a result of the last 10 years bull market and underspending. We sold some equities at the beginning of the year, following the long term strategy, reducing the allocation to 60 years spending. Now, by a back of the envelope estimate, we have around 53 years spending, plus over 5 years in cash. Not a change to be concerned about. To put that into historical perspective in May 2020, when we reallocated from 60/40 to 90/10 we had 50 years spending in equities, 5 in cash and we have given away a substantial amount over that period.

    I would say that the risk of inflation and civil disruption was a bigger concern, especially with the most incompetent government we have had in decades. From what I have read food prices have a lot further to go, which may of course feed through to everything else. As a country, it is hard to imagine a worse time to implement a hard Brexit.

    To end on a positive note, there is a 50% chance that by the end of the year the equity markets will have risen from here!

  • 57 mattwb July 4, 2022, 1:07 pm

    @ London a long time ago – wow, there is at least one book in you! Have you thought of writing something for JL Collins’ new book? https://harriman.house/pathfinders-sign-up/

  • 58 The Investor July 4, 2022, 3:34 pm

    @mattwb — I agree with the dog walking as anti-bear market meds. One drawback with getting so enmeshed with all this (e.g. reading 100+ articles a week on the way to compiling Weekend Reading, let alone just as part of my active investing antics) is there’s not really an Off switch. That’s by choice! 🙂 But it has a downside.

    @FeelingItToo @LondonALongTimeAgo — Thanks for the recollections! And for the empathy. Re: The audience, I wouldn’t like to go into detail on demographics here, but I will say there are more women reading than you would think going by commentators handles. Most of the women who comment use a gender-neutral pseudonym. Not sure if that’s shyness or a response to previous unhappy issues with being visible as a woman online, and in a more male forum. In any event, I try hard not to blow anyone’s cover, and am glad to have you all reading!

    @Nebilon — Sorry for you loss. I don’t know your situation at all and obviously can’t give personal advice, but it does sound like you have a lot going on and those aren’t the best times to be making big decisions anyway. I can see why you’d choose to just rest up and rebuild now you’ve made your choices in brighter days, perhaps?

    @SemiPassive — Thanks for the extended thoughts. Yes, I’d be disappointed if a few readers like yourself don’t want to sign up for the active stuff. On the other hand it’s going to be a modest paywall most likely (I intend to do deep pieces etc) so maybe it’ll just be half a dozen of us! 😉 The connoisseurs club haha.

    @Mr Optimistic — Hang about, I think ‘unraveling’ is a bit much? 😉 I’m basically trying to do some introspection here, based on reader feedback and a few signs I’ve overlooked in my own Keeping On Keeping On. I suppose unraveling is a how long is a piece of string type word though. Perhaps I’ve unspooled a half a layer…and yes, I’ve had a lot on (including personal stuff unrelated to any of this and not detailed on the blog, which was exhausting too).

    @hosimpson — There could be a house price crash, but I’ve long ago moved into the camp that thinks they’ll do all they can to prevent it. Doesn’t mean they will succeed of course, but when you’ve levered everything up one a handful of aspects of the economy — of which housing looms large — then they don’t really have a choice anymore. Soft landings and stagnant prices for many decades is probably the best we can helpful, presuming no other kinds of big positive or negative shocks.

    @JimMcG — Come on stop teasing us all. Fire up the old Wordpress and have at it. 😉

    @Dazzle — I’d be exactly the same. Me and @TA had a big debate about this (not an argument, that was about other stuff haha) but I think given what we know right now (likely big declines in one’s portfolio, economic uncertainty, and high inflation) it’s a bit dogmatic to stick to the line that a well-chosen SWR will see you through, and you’re just effectively burning your safety buffer early (by drawing down on a lower portfolio in the early years). I understand the argument, I think reasonable minds can disagree, but I come down on your side.

    @Naeclue — Very little to disagree with in any of that post. I do think the decline is marked, if we’re ever going to talk about declines than this is one we can talk about (or is the rule that we can’t consider them meaningful if they’re not the worst on record? I don’t think so 🙂 ) But I agree life goes on and it’s nothing we’ve not seen before. Politically we are in sympatico.

  • 59 Naeclue July 4, 2022, 5:09 pm

    @TI, I did not mean to say that the decline in stock markets was not meaningful, or worthy of comment. It certainly is as this is the first “proper” bear market since the GFC. Just that statements about the worst half year for hundreds of years, etc. exagerates how bad this particular bear market is. So far anyway!

    I have just looked at the S&P 500 and over the last 40 years there have been 13 6 monthly periods showing declines of more than 20% (nominal, excluding dividends) as at month end. The claim for half yearly returns is also incorrect by the way, with the 6 months to end June 1932 showing a decline over 50%.

  • 60 The Investor July 4, 2022, 5:33 pm

    @Naeclue — Cheers for extra info. I can’t remember if the claim got mutated in the comments (I know @ZX brought in real returns, by which measure the first half is really terrible) but my understanding is it’s the worst first half for the S&P 500 for 50 years. That’s how the US media was widely reporting it last week, anyway. I have occasionally used ‘US markets’ interchangeably for accessible writing reasons.

    I take the point about rolling six month periods, of course. Though humans being humans, we do pay attention to calendar effects as markers. 🙂

  • 61 Naeclue July 4, 2022, 7:10 pm

    I cannot argue with the US media – spot on with first halves. The latest half does come after 3 positive halves of 20%, 17% and 9% though (53% total, including dividends) and if we are talking “halves”, maybe we should look at second halves for completeness? The second half of 2008 saw a 40% decline. 😉

    Its interesting how looking at individual halves or full years can distort the picture. First half of 2020, with the Covid-19 crash in it, the S&P 500 was down only 2%, including dividends.

    Best practice for easy sleeping is to look as infrequently as possible. I would suggest no more than once each half decade. Do that, with automatic dividend reinvestment, and you will not have seen a single half decade nominal loss* even with the S&P 500 artificially extended back to 1870. You would have missed the Wall Street crash, World Wars, dot-com crash, 1987, and the GFC. Since we are up about 15% since the end of 2020 I would not mind betting the current half decade turns out ok as well.

    * Ok, some nominal gains were quite small 🙂

  • 62 Naeclue July 4, 2022, 7:21 pm

    ps I should probably add that picking half decades shows a very rosy picture compared with rolling 5 year periods. There were months in the 1930s where the 5 year total return was down more than 60%.

  • 63 Seeking Fire July 4, 2022, 7:30 pm

    Very interesting debate and useful comments by everyone particularly the last few. It’s somewhat a contradiction that it’s right that we should look at the market as infrequently as possible but as we’re all interested in markets no doubt most people take a look most days thus you can’t help thinking about it. There goes the apocryphal story from Fidelity that the best performing broking accounts were those of people who had left the land of the living (which I know is not a real story).

    Real returns is what interests me given that’s what you can eat. The first half has therefore been a total shocker for anyone who started applying the SWR at the end of the last year – your portfolio is roughly 3o% down in real terms if you were largely in the S&P500. It will be interesting to see if 4% busts the SWR for the 1999 cohort.

    I’ve mentally lopped another 25% of the value of my equity portfolio. Not that I’ve a clue where things are going but given this smells like a bear market rally (or pause) if we do fall another 25% I will have mentally helped cushion the fall. The S&P 500 doesn’t look cheap does it.

    I have felt comforted by the $TIPS / Gold and £ cash element, which provides necessary the liquidity or safety margin albeit they’ve not hedged inflation that much.

    I suspect one of the reason why The Investor and perhaps others are feeling a little queasy is the environment we’re in. How to say it – we always have no idea what’s coming next – the pandemic / ukraine / inflation – the possibilities were all there but I didn’t see many people predicting them s0 that’s pretty much unknown unknown’s. But where we stand today – we know from whats happening economically & politically now that the range of outcomes in 12 – 24 months is pretty wide – could be positive but could also get very negative – known unknowns. I would suggest the extent of where we know events could take us is fairly unusual and somewhat unprecedented for the last few decades except for perhaps the global financial crisis in 2008. The central case for the UK being a slow decline in living standards relative to others, the upside being something unexpected turns up, the downside being the wheels fall off. Global diversification feels key here.

  • 64 The Investor July 4, 2022, 7:58 pm

    @Naeclue — You write:

    Best practice for easy sleeping is to look as infrequently as possible. I would suggest no more than once each half decade.

    This is an excellent idea 🙂 Unless… you write a weekly investing blog (with 30-50+ investing links curated every week from 200 or so) let alone invest actively. 😉

    I think 2020 was the best illustration ever for the Rip Van Winkle approach to investing. Check your numbers 1 January, come back 31 December, market is up a little over 10% as you’d hope for, nothing to see here!

  • 65 Naeclue July 4, 2022, 8:15 pm

    25% looks a bit pesimistic, but depends how you are invested and what currency you are measuring in. I invest by FTSE World weighting but across multiple geographic trackers. VWRL, a good proxy, was down about 12% excluding dividends in the first half of this year. RPI from November 2021 to May (June not out yet) is up about 7.3%, CPI 5.5%, CPIH 4.9%. Taking RPI as the worst case that makes VWRL down about 18% real, excluding dividends. That’s measured in pounds. GBP/USD is down about 10%, so the loss would look worse in dollars, although US inflation might be lower. The dollar loss would be somewhere around 23-25%, excluding dividends.

    First time I have calculated that – wish I hadn’t now 🙁

  • 66 ZXSpectrum48k July 4, 2022, 10:08 pm

    @TI. It’s been a bad few months for conventional assets but when looked at over last few years we really haven’t moved. The S&P went into COVID in early 2020 at 3400, dropped within a month to 2300 (30% drop). On the back of a vast QE and fiscal transfer program, it went up to 4800 (110%) in just 18 months. Now on the back of monetary tightening and QT, we’re back at 3700-3800. So still 10% up. Meanwhile 10-year USTs have gone from 0.5% back to 3% which is where they were in 2018, during the last Fed tightening cycle.

    What people need to recalibrate is their expectations for short-term (multi-month) volatility. Market structure changes post 2008 removed most faders and mean-reverting traders, the vast majority are short volatiliity trend followers now. So everything overshoots to the topside and then undershoots to the downside but much quicker than it used to since there is no one to fade it.

    It’s also totally unreasonable to think that something that has just doubled (100% up) cannot halve (50% down). Or that something that has gone up 500% cannot fall 80%. If, as an active trader, that is not in your risk management framework then you urgently need to reevaluate your trading style.

    It’s not in any way a bad environment for active trading. The exact opposite: it’s phenomenal. Alpha scales with your win rate, the square root of volatility and the frequency of trading. You’ve just got to be sure that you’re generating alpha and that you haven’t morphed into a long beta trader. That’s always the risk. Most alpha eventually turns into systematic beta. You need to constantly tweak your style to keep generating alpha over the long-term.

  • 67 The Investor July 5, 2022, 12:47 am

    @ZXSpectrum48K — Thanks for the interesting thoughts, always something to chew on. That said, I do not see myself as a trader. As I’ve discussed before, I am basically a long-only stock picking investor of the old school, with the big difference that I don’t buy-and-hold but rather (within limits of humility, sanity, and trading costs) try to shuffle around what I own according to my perception of value vs medium term growth potential. I end up with high annual turnover figures, but I tend to trade a subset of stuff, and I tend to pick from the same shelves in the stock market store. Currently (and very possibly wrongly!) I believe I own a bunch of good stuff that’s now looking cheap. We’ll see.

    I absolutely understand that something that can go up 500% can fall 80%. I absolutely understand there’s case for selling it as momentum changes, not catching knives all the rest of it. I think this stuff is much easier to write than to do, at least for mere mortals like me, but I try my best within my framework.

    My chagrin is tempered by knowing that by the time the year is done I’m pretty sure that as for most of the past decade I’ll be beating the returns on a majority of hedge funds who all know this stuff too but fail to execute, because it’s hard! 😉 I doubt I can come back for the full year against the index-based benchmarks now, but they’re a far harder target.

    Of course there will be some minority of hedge funds that out-perform, that you may well have access to etc, and I understand there are many different kinds of hedge funds with different strategies and risk-return profiles. I can’t declare that every time I comment on this. 😉

    You write:

    You’ve just got to be sure that you’re generating alpha and that you haven’t morphed into a long beta trader. That’s always the risk. Most alpha eventually turns into systematic beta. You need to constantly tweak your style to keep generating alpha over the long-term.

    Agreed, this is the key insight that led me into my mercurial antics and shook me off the path of my old-school stockpicking heroes. 😉 When I came closest to thinking about doing FM professionally a few years ago, the conversations I had were along the lines of “what box are you in” and my reply was “I absolutely understand this looks like I’m an idiot who doesn’t so much have style drift as a style landslide, but…” and well here we are.

    It was working okay. I intend finding out if it does in the future, but this is the closest I’ve come for a while to feeling like a dumb schmuck who’d hitherto been lucky after all. We’ll see. 🙂

  • 68 SemiPassive July 5, 2022, 9:37 am

    Naeclue, regarding half decades, the S&P500 had a nominal loss, even with reinvested dividends, from 2000 to 2005 according to this:
    It was even worse with inflation factored in, as the link shows.

    I admit you’d have to have been unlucky to only pile your money in on 1st Jan 2000, and everything would have looked much better if you’d dollar cost averaged through the same period.
    Going back to John Kinghams’s article, it is entirely feasible for the next 5 years to be very weak given the exceptional gains in the previous decade or so.

  • 69 Naeclue July 5, 2022, 2:02 pm

    @SemiPassive, that had me scratching my head for a while, until I spotted he is looking at the start of 2000 to the end of 2005 (6 year period!). Change that to 2001 to 2005 and you get +3.76% nominal! Still slightly different to what I got, but then I noticed this line: “Note that data shown is the monthly average closing price.” So to get the 5 year change he compounds up all those monthly averages. I simply compared the closing value of the TR index at the start and end of each 5 year period. That gives a nominal return of 5.7% for 5 years ending 31/12/2005.

    Not sure why he has done that monthly average price thing as it seems convoluted and inaccurate to me. I have also noticed his monthly data table is a little odd. The -2.48% change for January 2000 is actually calculated from the change between the average closing price for February and the average closing price for January. If I was looking at changes in monthly averages I would have compared the December 1999 average with the January 2000 average. No more puzzles please 🙂

    Agree about inflation. There are quite a few half decade periods that would show negative real returns.

    With respect to future returns, yes it is entirely feasible for the next 5 years to be very weak, but it is also it is entirely feasible that they will be strong. CAPE now is at about 29.5, not far from where it was at the start of 2017 when it was about 28. The S&P 500 is up 87% since then, including dividends. If someone had avoided the S&P 500 back in 2017 due to the high CAPE, the chances are they would not be happy now. World ex US up 33% including dividends.

    Not something I spend much time on, but which market do you think will have higher earnings growth, US or non-US? Looking from where we are now, with the Ukraine war and other major World problems. I think I would bet on the US earnings outstripping non-US. However, that’s just guesswork. So too would be my estimate of where the US CAPE would be. What I do know is that the World index is very likely to outperform cash and bonds in the long term (40+ years). I invest for the long term, taking profits systematically for income and I don’t try to guess the path.

  • 70 ZXSpectrum48k July 5, 2022, 3:46 pm

    @TI. My issue with your view on hedge funds is that you lump them all together like they are a homogeneous asset class. You wouldn’t lump together the performance of cash with equities or bonds. They have different risk-return profiles so it would make no sense. It’s the same with hedge funds. You cannot put say Bluecrest, with a core competance in trading the shape of yield curves, in the bucket as Pershing Square where Ackman is some activist equity punter. It simply makes no sense at all. You cannot compare Pershing which can lose 50% in a bad year with a fund like Millennium where every PM has a 1% VAR limit and 5% high to low stop. They are just totally different. It makes no sense to measure them against each other or against the S&P.

  • 71 Mr Optimistic July 5, 2022, 5:31 pm

    Everything seems to chip away at your psyche these days but really I have only one concern……Can someone just please tell me when I should venture back into sovereign bonds please, I am too old for all this overweight equity stuff.

  • 72 The Investor July 5, 2022, 6:48 pm

    @ZXSpectrum48K — I accept for reasons I stated above (and will restate below) that I use hedge funds as a catch-all, which must come across as crude to someone in the thick of that industry.

    However from many years of interest and reading I’m fairly familiar with the top-line figures for the sector as a whole, and I do not believe I am doing hedge fund managers in aggregate a shocking disservice.

    I am certain there are exceptions, just like Warren Buffett can outperform the market but the vast majority of his legions of followers generally do not.

    You have to admit you’ve written some mean things about stock picking / long-only investors over the years, or at the least you’ve been as bluntly categorical as I have. I accept it as an artifact of language, and of time constraints.

    e.g. You write: “where Ackman is some activist equity punter” … 😉

    Beyond this, I think we go back and forth on this because you write statements implying that one just has to do this or that to enjoy straightforward returns and potentially alpha, with the general tone that anyone who doesn’t isn’t a numptie. 🙂

    And yet from the FT this weekend:

    US long-short equity funds are down 14.1 per cent on average this year.


    I do take the nuance about different kinds of funds, which you have outlined well several times. But as I said in my comment above, I can’t do a long list specifying this or that kind fund in this or that circumstance every time.

    I was just using hedge funds as a short hand for extremely well-paid and amply motivated individuals who clearly don’t find it easy to do the things you state traders should be doing, because if they were then hedge funds’ golden days, as a group, wouldn’t be two decades ago.

    And in the case of long-short equity funds they wouldn’t be down an average of 14.1% this year!

    (I am not questioning your view of the market opportunity or even the strategy to employ at all. I am saying it’s more difficult than your comment implies, IMHO).

    I would also note that this specificity you seem to demand from my comments about trading/funds is not something that you bring to your own comments. 🙂

    My concern is slightly that a reader could see what you wrote and think the author of this blog is an investing moron (hey, I’m only human, with an ego) but MUCH more that they could think “oh, okay, why am I a mug with these index funds when I could be cavorting in this volatile market as @ZXSpectrum48K suggests”, when the data shows it is very hard for even deeply resourced hedge funds to generate alpha despite them knowing all this (which you do concede in your point about diminishing alpha in what was, I say again, an interesting comment! 🙂 )

    Yes a few funds do very well, by various metrics, and more if you’re not just looking for outperformance against an equity benchmark (e.g. risk-adjusted or minimal drawdown). I don’t dispute that. But I would emphasize it’s a minority, not a majority, from everything I’ve read.

  • 73 Vic Mackey July 6, 2022, 10:05 am


    I suspect the monthly calculation will be a proxy for time-weighted rate of return, which is used to compare returns and tries to reduce the distortionary effect inherent in money weighted rates of return. If you added money to your portfolio during that period, you cannot use the start and end prices to approximate your return.

  • 74 Tom-Baker Dr Who July 6, 2022, 1:19 pm

    @TI (#72)- One of the reasons I avoid hedge funds is the unknown risk inherent in them. The details of the investment and trading strategies are all secret; otherwise, competitors overtake them. Often they involve dynamic strategies where they need to trade constantly. All this amounts to a lot of complexity and hidden unknown risk that can hit you any time in the most unexpected ways. IMHO this is the worst type of risk. You think you are safe, totally protected with very low volatility, and suddenly everything collapses and you won’t even know what hit you.

    As an analogy, you can think of one of those old-technology nuclear power stations where the safety was almost entirely reliant on active power devices, such as Fukushima in Japan or Chernobyl in the Ukraine. Without power, the safety devices stop working and it becomes really hard to avoid a nuclear disaster. Modern nuclear power stations implement passive safety devices that are triggered whenever there is a problem even with no power.

    IMHO dynamic strategies carry much the same sort of risk as those posed by active safety devices in old nuclear power stations. Moreover this risk is really hard to quantify and can come from multiple sources.

  • 75 ZXSpectrum48k July 6, 2022, 2:31 pm

    @TI. It’s unfair on every other form of hedge fund to choose the worst performing subset i.e. equity long-short! The other issue is you seem to see performance only from the lens of a cash constrained investor. There is simply no risk-adjustment. Clearly, over the long term, whoever takes the most risk makes the most money.

    Take macro funds as an example. Since 2000, the S&P has had 18% annual volatility. The worst calendar drawdown was almost 40%. By comparison, the macro hedge fund index has only 5% volatility and a worst calender drawdown of 4%. It’s also totally uncorrelated with S&P and bond markets. Yes, it’s underperformed the S&P by 1.5% per annum. If you volatility adjust, however, the macro fund index is massively outperforming the S&P. A 3x levered position would give you double the S&P performance for less volatility and still only have a 30% of the max drawdown.

    Really though: does it even make any sense to compare the two? They are totally different creatures which have very different purposes in a portfolio. Plus it’s not as though you can replicate a macro HF with bonds or equities.

    By comparison, equity long-short has performed terribly over the last two decades, generating about half the returns of the S&P (albeit with half the volatility and drawdowns). It’s highly correlated with broader equity performance. As an aggregage it offers nothing, and can be replicated by just buying 50% of an index and putting the rest in cash.

    I understand why you focus on them since 90% of hedge funds by number (but not AUM) are equity long-short. That’s simply because any idiot can set up that sort of fund even with $100mm. It’s requires virtually no infrastructure. Try setting up a macro fund trading IR derivatives with $100mm. Not going to work. The barriers to entry are so much higher.

  • 76 Gadgetmind July 6, 2022, 2:39 pm

    I retired four years ago after starting investing in pensions and ISAs (nee PEPs) during the 80s. We’re now totally reliant on pension income as no work and no DB pensions.

    I’m taking 6% from my pension PA and my wife 8%. But we’re not drawing on our ISAs or other savings so overall we’re at a 3.5% drawdown.

    Our pensions have been up and down, but as of July 1st mine is down 4.5% over the four years and my wife’s 11.7%. I can live with this.

    Of course, I’m reporting our results in things called “pounds” and these aren’t worth what they once were. I guess we should be increasing our drawdown in line with inflation, but I’m trying to avoid 40% tax and my wife any tax, and the tax bands have been frozen to increase tax by stealth.

    I’d prefer to be in a better position, but this is the only game in town with annuity rates still pretty rubbish, and I can still sleep soundly at night.

  • 77 ZXSpectrum48k July 6, 2022, 2:41 pm

    @Tom-Baker. I’m deeply risk averse as an individual. Yet I have more in hedge funds than anything else. Why? Because they are far safer. Most of the HFs I own are around 90% in unencumbered cash (so US T-bills). They are long volatility and long convexity (and short carry). Every position is collateralized daily vs. clearing houses like LCH and CME so counterparty risk is negligible. Everything is executed on a forward basis, so little or no actual cashflows occur. So they own virtually no assets on their balance sheet so they cannot be squeezed in repo like LTCM. My private bank agrees since they offer me far lower margin rates on my HF positions than on equity or bond funds. Why? Because it’s less risky.

    Frankly, I feel far safer in a HF with 90% unencumbered cash than in a Vanguard equity or bond tracker which is loaning out a large amount of it’s positions to reduces the fees by 5-10bp. Talk about picking up pennies in front of steamroller! I might lose money due to market moves on my HF but at least I won’t be killed by counterparty risk when markets freeze over.

  • 78 The Investor July 6, 2022, 5:16 pm

    @TBDW — Indeed, that’s another problem. Even if a typical person could access and invest from a range of somehow well-selected hedge funds of various flavours, they would have to diversify to reduce that black-box risk (and related systemic risks) — which would be far harder for a layman versus an industry insider like @ZXSpectrum48K. I can quite see why @ZX makes the decisions they do and have no argument with it, but their situation is extremely right tail.

    @ZXSpecrtrum48k — I’ve enjoyed the conversation but feel we’re going around in circles so will draw a line on this post with this final comment I think. I’m sure we’ll be back discussing it again sooner or later. 🙂

    I tend to by thinking about about long-short equity funds generally — and here specifically — because the comment I made mentioning hedge funds above was related to my own investing and performance.

    This very short comment about hedge funds seems to have been sort of triggering (not meant offensively, just for want of a better word) but we’d both agree they closest thing in the hedge fund world to a keen equity punter in his home office (i.e. moi!)

    I’d love to have the resources of a globe/asset spanning macro hedge fund and consider myself comparable to them, but I don’t. (I don’t even have your $100mn minimum for a long-short equity fund… 😉 )

    Hence the world of long-short equity hedge funds is the one I look to when thinking about — as that comment did — my own performance.

    Specifically, I said in that comment that I would comfort myself by the fact that they’ll all do as poorly as me, likely worse, or something to that effect. This underperformance has been going on for years, as you note in comment #77. In contrast, I’ve (post H1 now ‘modestly’) outperformed by my benchmarks, and hope to do so in the future.

    If we are arguing about whether *macro hedge funds* can play a different role in a portfolio or have a different and possibly superior return profile, then we shouldn’t be because I agree. 🙂

    You may recall on other threads I’ve agreed with you about the case for BHMG, for instance, albeit I don’t like the idea of buying it here with its premium to NAV. (Please do remind me if you ever happen to see it on a discount!)

    Equally, we’ve both agreed in the past that BHMG is one of the very few ways the average person reading this board can get access to a reasonable macro hedge fund (even if they could get access to good ones, which as I understand it they mostly can’t, and they had the resources to pick good ones that would deliver over the next decade, which I am confident most of us don’t, then the minimum investment amounts would be high and either still effectively make them either uninvestable or imprudent from a diversification standpoint for the typical better well-off reader in their 30s/40s with say £200K invested and £20-50K cashflow being invested a year across ISAs and SIPPs).

    Hence they are moot as an asset class around here anyway.

    Again, your points about volatility, reducing drawdowns, perspectives of a risk-averse well-off individual investor etc are all well taken and quite welcome nonetheless.


  • 79 TheFIJourney July 10, 2022, 2:51 pm

    Thanks TI. I love your writing style and how honest and open you are about things. It really is a fascinating read as usual. In terms of how this recent patch has affected me and similar to how Covid did.

    I must admit that every time it comes round to investing monthly now, I really do feel like I am getting cheap prices so to speak. I feel like DCA (dollar cost averaging) is working it’s charm. I won’t need it to reach the same high to make the money back in the future. I am essentially buying the dip and lowering my average cost which is a very crypto/Wall street bets type of saying but when it applies to investing in the world economy as a whole, I am very confident it will indeed rise again (if it doesn’t, we are all buggered!). If I chose to invest in certain sectors only, individual stocks or things such as crypto then I feel I have no guarantee at all it will bounce back and even worse, I could be feeling pain when something crashes but it would have no impact on the majority of people – If Dogecoin crashed for example and I had my life savings in it, most would be unaffected but my life would be turned upside down…I think that my investing approach has again been justified and validated for myself personally similar to like it did the last time when Covid caused a crash.

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