What caught my eye this week.

Like most people, the first time I heard about Robinhood I underestimated the zero-commission pioneer. I put a link in Weekend Reading. But I didn’t write an article predicting it would mean the end of retail dealing fees.

Indeed, the same day I first mentioned it on Monevator – 8 March 2014 – was also the day my co-blogger was on BBC Radio 4’s Money Box to talk platform fees. The Accumulator didn’t bother the middle-classes masses by citing Robinhood over the airwaves, either.

Robinhood was then just a curious side story. And it still seemed that way even as readers started emailing me to ask if there was a UK equivalent.

Seven years later and most US brokers have cut their trading commissions fees to zero. My blog tells me I didn’t see that coming, just as surely as my trading journal reminds me of the dumb reasons I had for selling Tesla.

Perhaps if you weren’t publishing your views back then you did predict Robinhood’s success? I’m sure you’ll let us know in the comments!

Peter pays Paul

One excuse for doubting Robinhood was I knew well the finance industry’s long history of extracting money from its customers. I’ve blogged about that since 2007. So in as much as I thought about Robinhood in those early days, I feared a wolf in revolutionary stockings.

Perhaps those instincts weren’t entirely off.

Robinhood is about to float on the US stock market. It’s had to reveal the workings of its business in an S1 filing. And lots of people have digested the details.

Most striking is that on holding $80bn in assets from 18 million customers, Robinhood generated $522m in sales in the first three months of 2021.

For fun we can crudely1 annualize that to estimate Robinhood might make $2bn of revenues on $80bn of AUM over a full year.

That represents 2.5% generated off its customers’ wealth. Compare that to less than 0.25% levvied by a typical cheap index fund. The real-life Robin Hood’s men had every right to be merry if their economics were anything like this.

I’m not saying Robinhood shouldn’t make this money, necessarily. Crucially (though some would say arguably) much of that $2bn would not be tithed from its customers’ wealth. Much would be so-called ‘payment for order flow’, which comes from third-parties. Many commentators are adamant such payments are against the interests of Robinhood customers, but they won’t directly reduce those customers’ portfolio balances.

Other big income streams for Robinhood include crypto trading – not even Bitcoin, but Dogecoin – and option trading. One can legitimately wonder how well this will take those 18 million customers to riches. But it’s famously a free country.

Still, I’m amused by the picture that emerges from the S1. Similar to how 1970s feminists wouldn’t have imagined a million young women using their liberation to cavort for money on OnlyFans, so Robinhood surely isn’t what Vanguard’s Jack Bogle had in mind when he took the fight to Wall Street.

People gonna people, I guess.

Free share trading in the UK

Remember that as a shareholder in the UK sort-of-rival Freetrade, I’m biased (and that we will both get a free share if you sign up via that link…)

Moreover, as Freetrade co-founder Viktor Nebehaj explained in a podcast interview with Meb Faber this week, its business model is very different.

Payment for order flow is illegal here. Freetrade has also chosen not to support options trading, nor leverage. Instead it mostly makes money from currency conversion fees and – increasingly – from low-cost subscription tiers for ISAs, SIPPs, and enhanced trading features.

Freetrade now has 800,000 customers, so it’s doing something right.

Will it ever mint money like Robinhood?

Probably not.

But as a shareholder who runs an educational blog for private investors, I’m far more comfortable that its business model is aligned with its users. It also seems more sustainable.

This time next year Rodney

What I’m not, sadly, is a genius – no more than I was back in 2014 when I first heard of Robinhood.

Because despite seeing the growth of the US fee-free originator from the ground floor by covering it here, I still dithered when I first got the chance to take a stake in Freetrade.

I did invest a (small) amount of money in its subsequent crowdfunding. But in that podcast Viktor revealed some first-round investors have been made millionaires as the start-up’s valuation has grown.

Sigh. Trading options or punting on crypto on Robinhood might be a quick way to lose money. But investing has a whole panoply of other ways to make you feel like a muppet…

Enjoy the weekend – get your free share if you haven’t – and come on England!

[continue reading…]

1. The exact timings don’t align with respect to those historical numbers, and Robinhood is still growing fast in terms of future numbers. So this is just the gist. [↩]

You’ve probably noticed your portfolio soaring these past few months.

The Slow & Steady portfolio is up more than 5% since last quarter. That’s despite it being 40% bonds.

Property’s 10% quarterly rebound is especially heady. Mind you, I’d estimate my REIT fund is still down around 5% since the eve of the coronavirus crash.

As the world learns to live with Covid, confidence is shooting through equity markets like bubbles in champagne.

What could go wrong?

It’s at moments such as this – with the Slow & Steady’s returns just shy of 10% annualised – that I like to think about how it could all end in tears.

(I’m giving up FIRE, by the way, for a new gig as a professional party-pooper.)

There’s a drumbeat of concern about ‘overheating’ out there. And it’s always better to burst your own bubble than to have someone do it for you.

So let’s scare ourselves silly with some frothy (over-)valuation porn.

But first, let’s bask in this quarter’s lovely numbers. Just for a moment!

Returns brought to you by Don’t-Worry-Be-Happy-O-Vision:

The Slow & Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £985 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and find all the previous passive portfolio posts tucked away in the Monevator vaults.

Valuations of doom

Okay, that’s enough basking. If our returns can’t deliver negativity then we’ll just have to do it ourselves.

Dialling up today’s market valuations and miserly expected returns is a quick way to pee on our fireworks.

One of the few equity valuation indicators thought to have some predictive power is the cyclically-adjusted P/E ratio (aka CAPE, aka P/E10, aka Shiller P/E…).

The Investor has written an excellent piece explaining how CAPE works. He also looked at its limitations and pitfalls.

To cut to the chase, there appears to be some correlation between a stock market’s CAPE measure and future stock returns. How much? You can find material arguing the case either way. But – especially in the US – there’s evidence that a historically high CAPE signals poor market returns ahead.

Right now the US CAPE measure looks lofty.

Brace! Brace! Brace!

CAPE ought to be relevant in other countries, too. But good data is hard to find.

Thankfully, help is at hand from fund manager Research Affiliates.

Donning the cape of data superheroes – look, I’m having fun even if you’re not – Research Affiliates has calculated CAPE ratios for every major world market.

That data is packaged up with Research Affiliates’ 10-year expected returns in a superb CAPE Ratio tool. Thus armed, we can look to see where pockets of opportunity and danger may lie.

++Caveat warning++ This only matters if you lend any credence to CAPE as a metric, you concur with Research Affiliates’ methodology, and you believe passive investors have any business reading such tea leaves. ++Caveat warning ends++

Credit to reader Stephen James for sharing Research Affiliates’s tool. (No sniggering at the back.)

UK stock market valuation

Here’s the CAPE ratio, expected returns, and fair value reading for UK equities according to Research Affiliates:

Squint at the UK’s candlestick (bottom-centre of pic) and you can see that our home CAPE is 13.5. That’s a touch lower than the historical median of 14.3. (Research Affiliates’ UK CAPE time series dates back to 1980).

The black ‘X’ on the red column shows a fair value estimate. It’s bang on the 14.3 median CAPE score, and so just above today’s actual valuation.

(Note: Research Affiliates’ fair value isn’t always the market’s historic CAPE median).

Looming larger than any of that is the 10-year average expected return of 4.9% for UK equities. That’s a real (after-inflation) annualised return.

The green cumulative probability bar (bottom-right) gives only a 50-50 chance of us hitting those heights. There’s a 75% chance of scoring at least 3.4%. There’s only a 25% chance of topping 6.4%.

Still, based on historic data you wouldn’t expect to squeeze more than 5% average return out of UK equities anyway.

The UK looks okay then. But the US does not…

US stock market valuation

After the heroics of the last 12 years, US large cap expected returns are predicted to deliver a median of -0.9%. That’s as bad as today’s negative-yielding bonds!

Research Affiliates believes there’s only a 5% chance of scraping a measly 2.7% annualised over the next decade.

Many Monevator readers will maintain a large allocation to the US. Not least in their global tracker fund.

The Slow & Steady’s allocation to the US is 26%.

(The portfolio is 39.6% allocated to the Vanguard FTSE Developed World ex-UK fund. That fund holds 67% in US equities. 39.6% x 67% = 26.5%.)

Research Affiliate’s median forecast would hurt us if it came to pass.

The US candlestick notches a CAPE of 37. (See the white circle shinnying up to the 98th percentile of the historic range.)

That’s way beyond the CAPE ratio of 30, hit on the eve of the 1929 Wall Street Crash according to this calculation:

The S&P 500’s peak CAPE was 44, just before the dotcom bubble burst.

Look out below

In the US we’re back into nose-bleed territory. Then again, we have been for a long time.

The Investor cited the same US CAPE source back in 2012. It showed CAPE at 23. That seems tepid now, but the US market was considered to be overvalued even then.

Many knowledgeable-sounding commentators warned that US equities were frothy and there was trouble ahead. They’ve been wrong (or just early) for nine years.

I have often doubted the wisdom of sticking to my passive guns when I’ve read about US valuations. But if I’d cut back I’d have missed the main driver of global equity returns for the past decade.

Still, a US CAPE of 38 is scary.

But if you want to see something truly gaga then check out Japan’s CAPE history.

Japan stock market valuation

It’s the historical range of Japan’s P/E10 that makes my eyes bulge.

Beyond the red column, Japan’s slender grey upper shadow extends to an all-time high north of 90.

I’ve read that the Japanese Nikkei index’s P/E ratio reached 70 just before its bubble burst in 1989.1

As super-heated as US valuations are now, Japan’s experience suggests they can keep gathering steam.

High fever

Passive investors aren’t meant to respond to market signals. We avoid action because we know we have no edge.

Despite this I’ve often wondered how I’d react in a market delirium.

If I’d been investing in Japan in the 1980s, would I have scaled back as its CAPE climbed through the 40s and beyond?

I previously told myself: yes. But how easy would that have been? The Japanese economic model was lionised at the time. Some predicted Japan would soon eclipse America.

Now the US CAPE is approaching 40.

I am fully prepared for a decade of low returns. Equities have had a barn-storming run, after all.

But I don’t believe I can use CAPE to predict a bubble and nor should you.

Some like it hot

There’s an internet full of arguments for and against CAPE.

Vanguard research has previously put CAPE’s correlation with future equity returns at around 43%. So there are clearly a lot of other factors in play.

I think that CAPE is a useful indicator. At the very least it helps you gauge what others mean when they mysteriously refer to ‘valuations’.

But so far I haven’t acted on CAPE’s fuzzy signal.

If you want to do something, consider using a systematic technique called overbalancing. I wrote about how it works some years ago.

Even then Monevator’s mail bag was full of worries about markets overheating.

Like frogs in a pan, we just keep on boiling.

New transactions

Every quarter we throw £985 into the global market furnace. Our financial fuel is split between seven funds, as per our predetermined asset allocation.

We rebalance using Larry Swedroe’s 5/25 rule. That hasn’t been activated this quarter.

These are our trades:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.06%

Fund identifier: GB00B3X7QG63

New purchase: £49.25

Buy 0.221 units @ £223.21

Target allocation: 5%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%

Fund identifier: GB00B59G4Q73

New purchase: £364.45

Buy 0.719 units @ £506.90

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.29%

Fund identifier: IE00B3X1NT05

New purchase: £49.25

Buy 0.123 units @ £399.46

Target allocation: 5%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.17%

Fund identifier: GB00B84DY642

New purchase: £78.80

Buy 38.875 units @ £2.03

Target allocation: 8%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.17%

Fund identifier: GB00B5BFJG71

New purchase: £49.25

Buy 20.746 units @ £2.37

Target allocation: 5%

UK gilts

Vanguard UK Government Bond Index – OCF 0.12%

Fund identifier: IE00B1S75374

New purchase: £305.35

Buy 1.69 units @ £180.71

Target allocation: 31%

Global inflation-linked bonds

Royal London Short Duration Global Index-Linked Fund – OCF 0.27%

Fund identifier: GB00BD050F05

New purchase: £88.65

Buy 79.081 units @ £1.12

Target allocation: 9%

New investment = £985

Trading cost = £0

Platform fee = 0.35% per annum.

This model portfolio is notionally held with Fidelity. Take a look at our online broker table for cheaper platform options if you use a different mix of funds. Consider a flat-fee broker if your ISA portfolio is worth substantially more than £25,000. The Slow & Steady portfolio has long since passed that threshold. I’ll explore a move to a flat-fee platform in the next installment.

Average portfolio OCF = 0.15%

If all this seems too much like hard work then you can buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.

Interested in tracking your own portfolio or using the Slow & Steady investment tracking spreadsheet? This piece on portfolio tracking shows you how.

Take it steady,

The Accumulator

1. I’ve also read that differing accounting standards explained some of Japan’s wild P/E ratio, though not all of it. [↩]

This article on comparing the cost of electric car ownership to a traditional option is by The Dink from Team Monevator. Check back every Monday for more fresh perspectives on personal finance and investing from the Team.

With dual incomes and no kids (DINK), you can have more fun selecting a car. We’ve gone through convertible, Italian sports, and ricer cars. (Don’t judge us! We also save into passive funds, just like you do.)

Now on the cusp of our midlife crisis, we’ve gone for a sensible electric car.

To be honest I didn’t actually do my spreadsheet deep dive until after we’d already bought this Nissan Leaf.

I’m an early adopter at heart. And I really wanted an electric car to get a feel for the technology. The Nissan Leaf seemed a much more sensible way to scratch that itch than raiding my portfolio to buy a Tesla.

A dinky diversion

Before we calculate the cost of electric car ownership, a brief detour on the term DINK.

I had been referring to myself as a TWINK – Twin Incomes No Kids – assuming that was the correct term for our demographic.

My colleague pointed out to me that I am indeed a ‘twink’. But also that it means something quite different and not related to an economic group.

If you Google ‘DINK’, it takes you to Investopedia. TWINK takes you to the Urban Dictionary…

So DINK for ‘Dual Income No Kids’ is the right acronym for Monevator purposes. (Or DINKY (DINK Yet). That’s the word for those couples not yet brave enough to tell their parents they’re not getting any grandchildren.)

Back to the cars.

Before I owned an electric car

As I mentioned, we once had an Italian sports car. Unfortunately it lived up to its stereotypes. It needed a lot of maintenance and had an insane service schedule. It felt like constant cam belt replacements.

So one calm, rational Sunday I created a spreadsheet to work out how much that car cost me a month. Turned out that despite being relatively cheap to buy, it was costing hundreds of pounds a month to run.

The spreadsheet also revealed that, by comparison, a stereotypical German sedan – if bought at just the right point in its depreciation curve – was cheaper. Even on PCP!1

That was an eye-opener. The next week I went out and bought a BMW 3 Series. Over the next four years it actually ‘saved’ me money.

The point is I had some experience of running spreadsheets to justify my car purchases.

Even though in the case of our Nissan Leaf I didn’t do the spreadsheet until afterwards.

Settled with a spreadsheet

Having already bought the Nissan Leaf, it’s obviously rather academic for me to create the spreadsheet now.

Still, it’s an interesting exercise that shows the maturity of the electric car market in the UK. Also my article can be a template for anyone else wanting to quantify a car purchase of any kind.

Therefore I’ve performed the comparison of an EV (Electric Vehicle) with a traditional petrol compact car.

What to compare to electric car ownership?

I chose to compare the Nissan Leaf with the Ford Focus. The Focus is about the same size and with the 1.0T EcoBoost model it offers the equivalent 0-62mph performance (in 11 seconds).

Also, the Focus is the fourth most popular car in the UK. It’s easy to find examples with different mileages and ages to compare to electric car ownership.

For its part the Nissan Leaf was the bestselling plug-in electric car until 2020. (It was overtaken by the Tesla Model 3.) So we’re really comparing the top-selling EV and petrol vehicles in the ‘compact’ class.

Based on my experience, I find cars three to four years old have had their initial huge depreciation. But assuming an average 7,000 of mileage a year, they still have lots of miles left in them. Beyond that come big scary services and the psychological barrier around 100,000 miles. That affects their value.

We’ll therefore compare a 2017 Nissan Leaf with a 2017 Ford Focus 1.0T EcoBoost – both with 30,000 miles on the clock.

Comparing two cars from 2017

Remember, we’re not actually buying these cars. We’re purely looking at the market values to quantify any decisions we make. So please don’t get too hung-up on details or minor specs differences.

At the time of writing I found:

• A 2017 Nissan Leaf with 29,000 miles for £8,980.

• A 2017 Ford Focus 1.0T with 30,000 miles for £8,649.

The initial point goes to the Focus for being cheaper to buy.

	Nissan Leaf	Ford Focus
Initial Price	£8,980	£8,649

Depreciation

Most cars aren’t assets. However they do retain some value. To account for this we need to work out depreciation. This gives us a guide as to how much we could get were we to sell the cars after, say, four years.

I looked for similar 2013 models with 60,000 miles on them. This I based on the average 7,000 miles per year that people in the UK drive and also that cars seem to hold a lot of their value until near the 100,000 miles mark, where it drops off a cliff.

My search turned up:

• A 2013 Nissan Leaf for £6,000.

• A 2013 Ford Focus for £4,700.

Both had 60,000 miles on the clock.

Based on this calculation, the Ford Focus will depreciate more over the four years:

	Nissan Leaf	Ford Focus
Initial Price	£8,980	£8,649
After 4 years 30K miles	£6,000	£4,700
Expected Depreciation	£2,980	£3,949

Running costs

Depreciation is not everything. Next we need to consider servicing, road tax, and fuel.

Electric cars are a lot simpler from an engineering perspective. There are fewer moving parts. I’d assumed they would require less servicing.

For example, an electric car obviously doesn’t have have oil and spark plugs to change.

This is actually not the case. The Ford Focus has bigger service intervals. For instance it shocked me to see the cam belt on a Ford Focus is only required to be changed every 150,000 miles.

Over the four years I’ve assumed:

• The Ford Focus will have two major £150 and one minor £75 service.

• The Nissan Leaf will have two 18,000 mile services, each costing £159.

Now we move on to tax. This is a big winner for the Leaf, as it’s tax-free.

The Focus will cost you £155 a year. That’s £620 in total over four years. 

	Nissan Leaf	Ford Focus
Servicing	£318	£375
Tax	£0	£620

Energy costs

To calculate how much fuel is likely to cost over the four years, I took the listed combined economy of 60MPG for the Ford Focus. Having never bought a gallon of petrol in my life, I then converted that to 13 miles per a litre.

With petrol currently at £1.27 per a litre2 and at 13 miles per a litre, our 30,000 miles over four years will cost £2,930 in fuel.

On the Nissan leaf, you get 80 mile range on 22kw of the usable battery. The typical rate we pay at our local fast charging points is 30p/kWh. We use these charging points about half of the time. However we prefer, of course, to charge at free points like my office. So we effectively pay on average 15p/kWh.

That’s roughly what we pay at home, so it could also apply to those charging domestically.

Each mile in the leaf uses 0.275kWh. So at our 15p/kWh, the same 30,000 miles over four years will cost £1,237 to charge.

It’s interesting to see the cost per mile of petrol against electricity. The Nissan Leaf costs 4p a mile. The Ford Focus costs just under 10p a mile.

	Nissan Leaf	Ford Focus
Energy costs per 30,000 miles	£1,237	£2,930

Petrol versus electric car ownership

To recap, we started with a four-year old car and then assume we sell it after four years having put 30,000 miles on the clock.

On these numbers, a Nissan Leaf works out £3,333 cheaper to own than a Ford Focus.

I’m not saying you should go out and buy a Nissan Leaf. It will not be the cheapest car to run in every situation. What I am saying is to work out as best you can what the true cost of different models is likely to be. Include depreciation, too. This way you can quantify your decision to buy a particular model of car.

	Nissan Leaf	Ford Focus
Expected depreciation	£2,980	£3,949
Servicing	£318	£375
Tax	£0	£620
Electricity/petrol 30,000 miles	£1,237	£2,930
Total over four years / per month	£4,535 / £95	£7,874 / £164

Your mileage may vary

In the comments to this article, I expected people will say I have cherry-picked examples of each car. That they can get them cheaper. Or their mate Dave will service the car for £50. The listed fuel economy is wrong.

Maybe. Perhaps my numbers do not apply exactly to your situation.

Charging rates in particular will vary hugely depending on what you have available locally, and whether you can charge more cheaply at home.

However by following the process, you can put in values that you think are more accurate. You’ll then get a different but equally valid outcome. 

Once you know the true cost, you do not even have to buy the cheapest car. You can make a meaningful decision if the extra money is worth what the car gives you.

I would happily pay an extra £200 a year for a BOSE Sound System and 360 parking cameras…

A few final caveats

Other important things I have omitted or glossed over are:

• Insurance. Ignored because it varies so widely. I believe electric cars tend to be slightly more expensive to insure.

• If you have free electricity to charge the car, solar panels or free charging at work, that is a real game-changer.

• Repair cost. If something major breaks I assume the Ford is going to be cheaper to repair. However either car of this age and mileage should be pretty reliable. And the electric car has fewer moving parts to break.

• I have heard rumours that electric cars go through tyres faster than ‘normal’ cars. However, this could be the same nonsense as electric cars not working when the temperature is below-zero.

• The electric charging market is very immature. Charging costs vary massively. It varies from free at one supermarket to 35p per kWh/h plus a £1.50 connection charge at some motorway services. As the market gets more competitive, I would expect charging to get cheaper.

• Over the next four years, it seems inevitable that the government will take measures to encourage electric car ownership. However that might not directly benefit existing EV owners. Imagine the authorities bought in a £2,000 car scrapping scheme. In that scenario the Ford Focus could suddenly be the cheaper car, if it met the criteria of the scheme.

In time you will be able to see all The Dink’s articles in his dedicated archive.

1. Personal Contract Purchase – a form of debt financing. [↩]
2. May 2021. [↩]