What caught my eye this week.

I was delighted to welcome a first post from blogger Finumus to Team Monevator this week. What a coup!

I’m hoping for many great posts from Finumus in the months (dare I say years) ahead. Trademark hot takes from the eyes of a seasoned operator.

That, however, is the rub. Like all of us around here, Finumus is no newbie. Everybody writing for Monevator has to some degree already won the game.

The Accumulator declared himself financial independent six months ago.

I’m the same, the way most readers measure it. (I’ve my own perspective on things so… not quite yet. But nearly!)

Lars Kroijer is a former hedge fund manager. Let’s just say he didn’t lose it all in Vegas.

The Greybeard and The Details Man – should we ever see them again – are notoriously in de-accumulation mode.

As for Finumus, well, when you make £1 million on a single stock you’re presumably not pinning your hopes on the State Pension.

The point is myself, TA, and our other semi-regulars are no longer hard-scrabbling up the slopes. Our snowballs have been rolling for years.

It could be you

This means we’re vaguely looking for a new, regular contributor. Possibly even two.

Are you a Monevator fan who can write a witty-ish and informative article every couple of weeks or so?

Are you pursuing financial freedom? Will you never miss a deadline?

Do people say you’re funny, in a good way?

Then we would like to hear from you.

As a potential contributor to the site, it would be ideal if:

(1) You’re nearer the start of your financial journey. We don’t want Monevator to lose touch as we retire to our superyachts (/dinghies).

(2) You’re a maven for personal finance. You’re shuffling cash around the best savings accounts, amassing huge tallies of credit card points – all that. It’s a blind spot for Monevator, and I’d love to correct it.

(3) You’re not a man. I welcome approaches from all genders and I certainly won’t be selecting on this criteria. But Monevator hasn’t got an all-male writing lineup by choice, so at the least please don’t let that dissuade you if you’re not.

(4) You’re very familiar with our style and content. A regular reader!

That’s ideally, not a list of must-haves. And anyway, for a variety of reasons many excellent would-be contributors won’t prove right for us. So please don’t take any rejection to heart.

I get half-a-dozen firms a day asking to submit guest articles (or asking what we charge for paid posts). Sorry, we’re not looking for promotional stuff. We want a fresh independent voice to bring value to our readers.

If this sounds appealing then please contact me via this form with a short explanation of what you’re about – preferably with some links to your previous work – and we can take it from there.

Have a great weekend!

[continue reading…]

This post on the cult of the ISA millionaires is from our newest contributor, Finumus! Look forward to more unmistakable articles in the months ahead from our latest star signing.

Once again ISA season is upon us – it’s a use-it-or-lose-it allowance with a sell-by date of 5 April – and so all the platforms are trying to attract inflows.

This means a stream of puff pieces about how to join the ranks of the ISA millionaires.

All these articles are in pretty much the same style. The author finds some clients who have more than one million pounds in their ISA – with that one platform – and then asks them about:

1. How long they’ve been investing
2. How much they saved
3. What they’re invested in

The writer will then make some blasé assumptions about savings and returns, in order to persuade readers that a £1m ISA is within the reach of an ordinary investor.

They would say that though, wouldn’t they?

Leaving aside that it might be a bad idea to draw attention to these ISA oligarchs (hands up if you want an ISA Lifetime Allowance?), there’s a lot wrong with this kind of article.

Because aside from time, they don’t mention the real reasons people achieve ISA millionaire-dom: luck, poor risk management, and survivorship bias.

Luck

I don’t mean the picking-the-right stocks sort of luck. I mean the ‘having enough disposable income to save tens of thousands of pounds every year’ sort of luck.

If you’re going to max out your ISA contributions, you’re going to need £20,000 of post-tax excess income.

That’s a lot. You’ve probably got to be approaching a six-figure pre-tax income.

Of course, you’ve achieved that because of all your own hard work, right? Not because you were born into the right sort of family, went to the right sort of school, scraped into a posh university, and then got recruited on the fast-track to upper management?

No, all your own hard work. Luck has got nothing to do with it.

ISA millionaires do need to get lucky picking assets or stocks, too.

• Started in 1999 and prone to a bit of home bias? You’ve probably not made a million in the FTSE 100.

• Started a couple of years ago and went all-in on the Scottish Mortgage Trust (Ticker: SMT). That is to say: you made a big bet on Tesla? You’re probably well on your way.

So, one way to get there is to take an inappropriate amount of risk. Just put all of your £20,000 of savings into your ISA, buy a 50-bagger, and you’re done.

Which brings us to….

Poor risk management

There’s a famous and often-quoted study by Fidelity, which supposedly found that the best-performing investment accounts were those whose owners had either:

1. Forgotten they had the account
2. Died

Now as far as I know it’s apocryphal – there was no such study. But nonetheless the point is well-made.

What do these people have in common? Sure, they don’t over-trade. But also they exercise no risk management.

Let’s say you invest your whole twenty-grand into the (imaginary) Finumatic Inc. It’s a SPAC ¹ that’s buying an electric-spaceship-crypto-mining-NFT start-up.

Now of course this thing can go up 50-fold, which is exactly what you want if you’re to join the ranks of the ISA millionaires.

But it’s not going to do it all in one day. And while it’s going up, it’s becoming a bigger-and-bigger fraction of your wealth, asymptotically approaching 100%.

Is this exciting?

Yes.

Is this sensible?

No.

The sensible thing is to sell some on the way up, and then diversify into less exciting assets.

The dangerous thing is to just cling on with ‘diamond-hands’ and not sleep very well at night.

But of course, some people will do just that – or forget they have an account – and some of these dodgy stocks will actually go up and stay up.

(This, incidentally, is why the ‘if your great-grandad had bought $100 of Berkshire Hathaway stock you’d be a billionaire’ trope is also ridiculous. A relative would have sold some along the way.)

There’s another indicator that these people are poor risk managers, which is that they leave all their money with Hargreaves Lansdown or whomever.

Now, I’ve nothing against Hargreaves Lansdown (apart from the obvious) but the FSCS scheme for compensating investors in the event of a platform failure only covers the first £85,000 of your money.

At best, these all-in clients are being naive about how robust the so-called ‘segregation’ of client assets is when the shit-hits-the-fan.

More likely, they haven’t even thought about the worst kinds of failure.

(Either that, or they’ve got several million squirreled away across multiple platforms. But certainly not all of them).

Survivorship bias

If you’re a big DIY investment platform, you have millions of clients.

Some of them behave sensibly. Some of them behave recklessly.

Most of the reckless ones won’t get rich, but a few will become ISA millionaires! Just by chance!

Okay, they probably don’t review the lucky randoms for these articles. Still, if you take a large enough sample, and then you only talk to and about the ones who got lucky, it does give the appearance that ISA millionaire-dom is within reach of the regular punter.

When really, it’s not.

The real secret of the ISA millionaires

Source: xkcd

1. Special Purpose Acquisition Company. Also known as a blank cheque with big fees attached.[↩]

Experts have warned us to prepare for low returns from investing for years now.

Count me as skeptical about the value of such predictions.

You may recall in 2012 the UK regulator dropping a bomb on pension forecasts.

The FSA ¹ told financial providers to project low returns into the future, compared to the higher gains enjoyed in the past.

But as I opined at the time:

… here we have the regulator rolling up to the scene of the crime not long after the worst decade for equities relative to bonds (the worst two decades, even) to warn us – wait for it – to temper our expectations.

As far as useful advice goes, this is a bit like Eva Braun showing up in London in the middle of the Blitz to warn Churchill that her boyfriend seems a bit obsessed with guns.

The Investor, Monevator, November 2012

I suggested returns would likely be healthy going forward. Happily, that optimistic view has been borne out so far.

• Government bonds have done very well since November 2012.

• Global equities have returned more than 130% for British investors.

• We have seen relatively low returns from UK shares since 2012, but I don’t believe the FCA foresaw Brexit. Besides, the FTSE All-Share still gave you 70%, with dividends, since November 2012. Hardly a disaster.

To be fair, regulators must err on the side of caution. It’s their role. If you go to a job interview at a regulator, you should get extra marks if you sniff suspiciously over the biscuits.

Nobody should want a regulator to be mad for it.

Low returns for Generation Z

However when academics like the number-crunchers behind the Credit Suisse Global Investment Yearbook warn us to prepare for low returns in the future, you have pay some attention.

The respected trio of Dimson, Staunton, and Marsh are not a 1960s folk outfit who sang about sandals, but rather three London-based academics. And they dropped their prophecy of doom in the latest edition of their Yearbook.

The threesome point out that expected real returns (that is, returns after adjusting for inflation) from safe government bonds are very low these days. Negative, even. Not very enticing.

They then provide evidence that low real yields have previously correlated to lower returns from other asset classes, too.

Finally, they reveal the horror-graph below.

Warning! If you’re under-35 and you’ve just started investing, make sure you’re sitting down.

Source: Credit Suisse Equity Yearbook 2021

Previous generations – led by those blessed Boomers, naturally – have enjoyed many bountiful decades as investors.

Crashes have come and gone. But global equities have still delivered on average 5% or more in real terms on an annualized basis.

Bonds also did great, particularly recently. Notable given their lower risks.

However if you were born after Nirvana’s Curt Cobain shuffled off this mortal coil then you’re twice cursed.

Dimson, Staunton, and Marsh have run the numbers. They think Generation Z – those born in the mid-1990s or later – can reasonably expect to earn 3% in real terms from equities.

That is far less than the 5% or more we’ve seen previously. And it’s worse than it possibly appears at first glance.

• For example, save £10,000 a year and achieve a 5% annualised real return and you’d have nearly £700,000 in today’s money after 30 years.

• But at 3%, you’d be left with slightly less than £500,000.

Over many years, that extra 2% adds up to a whole lot more.

As for bonds, Dimson, Staunton, and Marsh expect negative real returns.

I think private investors might as well hold at least some of their bond allocation in cash nowadays, as we’ve said before. You’ll still get a negative real return, with today’s interest and inflation rates. But your cash will have zero volatility and downside, and it can be reinvested later in better times.

Note: this isn’t something to decide on a whim! Government bonds can provide proven diversification benefits versus equities in times of stress. You won’t get that from cash.

Remember you don’t have to (and probably shouldn’t) go all in/out. You could do say half your fixed income allocation in bonds, and half in cash.

What are you going to do about low returns?

Unlike in 2012, I’m not quite so ready to push back against this gloomy forecast.

For one thing, these guys are renowned academics – as opposed to a regulator with an interest in scaring us into being more financially prudent.

More importantly, we all know that risk-free government bond yields are indeed still incredibly low. Negative, in some cases, in real terms.

Clearly we must expect low returns from an asset class that’s nailed-on to give us worse than nothing, after inflation. (If we see deflation, government bonds will do better. But trust me, you don’t want to root for deflation.)

All other asset classes key off the yields available on (presumed) risk-free government bonds – especially the yield on US Treasuries.

As I’ve explained previously, this includes the returns you can expect from equities. So dumping your bonds and expecting a bumper harvest from shares is – at the least – naive.

If the academics are right (I’m not convinced returns are predictable, but they have more letters after their names than me) then what can you do?

Well, what you can’t do is change when you were born. You have to play the hand you’re given.

Focus on what you can control if you want to deploy countermeasures:

Check your investing costs

If real returns from equities are only going to be 3%, then the difference between using index funds that charge 0.4% and funds that charge 0.1% is 10% of your total expected real return. You can’t afford to waste money like a Boomer, so switch to the cheapest funds. Same goes for brokers.

Save more

Can you trim more savings from your lifestyle run-rate? Can you put more money into your pension to earn an additional employer match and a tax relief bump? Saving more is the surest driver of a better final result.

Invest for longer

A close second is allowing your money to compound for longer. Compound interest takes time. More time compounding means more years to save, too. Finally, the later you leave it to start drawing on your pot, the fewer years your portfolio will need to sustain you. Just don’t wait forever!

Lower your expectations

If you lower your expected returns and you don’t want to save more or retire later, you might make do with less. The Retirement Living Standards initiative tries to project how much income you’ll need to retire to a given level of comfort. Could you handle ‘moderate’ instead of ‘comfortable’? (I’d be wary of going down this route, especially if retiring early.)

Consider alternative assets

I’m sure it’d be appealing to have your investments work harder to take the strain, rather than you. Perhaps you could swap some of your fixed income allocation for infrastructure funds or renewable energy trusts? Yeah, maybe. The trouble is you’re often getting more equity-like volatility for potentially not hugely more return. By all means research and dabble with say 5-10% of your portfolio. But understand the trade-offs.

(Cautiously) chase yield

Similarly, government bonds from the developed economies aren’t the only fruit. You could add higher-yielding emerging market bonds, investment grade corporate bonds, junk bonds, and even preference shares. But again, you’re not getting something for nothing. At the least, swapping some safer bonds for riskier ones will mean deeper falls for your portfolio when the market dives – and potentially even permanent capital loss. Be careful.

Dabble with factor investing on the side

Academic research suggests certain kinds of shares deliver superior long-term returns, although for most of the so-called return premium / factors there’s been little sign of that in recent years. The good news is an allocation to value stocks or a small cap fund is approved even for passive investors. See our articles. The bad news is you don’t know whether your Smart Beta fund will actually lag the market over your investing lifetime.

Go to the dark side: active management

Well, well, well… fancy seeing you here. Seriously, if you’re suddenly willing to pay a fund manager 1.5% to try to get back your missing 2%, I’d think again. Active investing is a zero sum game. On average half of the people who go down this path will do worse – and there will be higher fees for all of them. As for stock picking, I do it but it’s not something to pick up because you like the sound of 10% a year. You’ve got to love the game, man! (Love it because the chances are you are going to lose at it.)

Live more uncomfortably, and do something hard

A wise man once said: if you want easy money then do something hard. Buy-to-let is a lot more hassle than owning a REIT, but you can employ an edge (find a better property), improve your investment (refurbish and remodel), and also gear up your returns (with a mortgage). That’s even more true of starting a business – or a time-sapping side hustle. You could strive for a higher salary to save more. Or you could run equities at 100% and resolve to turn your computer off for 1-10 years if (/when) there’s a big bear market. Risky, but it is an option. Especially if you’re in your 20s or 30s. You’d be paying for any higher returns with more risk (equities might never come back) and more pain (you’ll stay up at night wondering if they will.)

Remember that nobody in those previous generations were gifted those pleasant returns, not even the Boomers. Many times your parents or grandparents felt their world might be ending.

You can never bank on expected returns. That will never change.

Do-it-all

My co-blogger The Accumulator has explained how making adjustments to the dials on your investing plan is a better strategy than simply quadrupling down on risk, say.

Do a bit of everything to make the numbers work. Save a little more, retire a little later, and hold a little bit more in shares.

But don’t just stick 12% into your calculations and pray because that’s the return you need to achieve.

Hope is not a strategy. ²

If we assume we’ll see low returns in the future compared to those enjoyed by previous generations, we can at least take remedial action.

And if equities do deliver 5% real returns over your investing lifetime? Thus leaving you with a fatter-than-expected pot to live on?

I’m sure you won’t be asking for a refund.

1. A now-defunct regulator, basically replaced by the FCA.[↩]
2. Although that doesn’t stop institutional investors when pitching for business. “Sure we’ll hit 10% annualised! How? We’ll add… a secret hedge fund! And a proprietary bit of private equity! Trust us – we’re in finance!”[↩]