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Vanguard finally reveals details on its long-awaited SIPP

Vanguard logo

Fans of Vanguard (Vanfans? Guardinstas? Fanguards?) have waited years for the fund giant to launch its own low-cost SIPP for UK investors.

The Vanguard Personal Pension was originally expected shortly after the company’s direct investment platform hit the UK in May 2017.

However the SIPP launch was delayed several times, for undisclosed reasons.

It’s understandable the US-headquartered company wanted to get its British tax and pension law exactly right – no easy matter – never mind fine-tuning the business sums. But you do wonder if the delays have caused some diehard Vanfans to delay pension contributions for longer than they would have?

Regardless, the end is in sight. Like a child on an interminable holiday trip to Wales who finally spots the uprights of the Severn Bridge, we’re not there yet – the SIPP won’t arrive until 2020 – but we can now see where we’re going.

To summarise from Vanguard’s latest update:

  • Vanguard’s SIPP will launch in ‘early 2020’; pension withdrawals will not be possible until 2021.
  • The account fee will be 0.15%.
  • There will be a cap of £375.
  • That cap will apply across all holdings in one name on Vanguard’s direct platform, except JISAs (so your SIPP, ISA, and general accounts).
  • You can invest from £100 a month, or lump sums of £500 or more.
  • The SIPP will offer 76 funds and ETFs, all from Vanguard.
  • There will be no fees for SIPP set-up, contributions, transfers in or exits, dealing in funds, reinvesting income, valuation statements, account closure, death processing, or divorce.
  • Restricted ‘bulk’ ETF dealing will be free, but if you want to trade ‘live’ you’ll pay £7.50 a pop.
  • There will be the usual annual fund costs docked from your returns. You’ll also be on the hook for internal fund transaction costs, as is standard with funds.

Vanguard offers the following comparison on the cost of investing £40,000 into a Vanguard Target Retirement Fund with its platform, compared to investing with the SIPPs of 14 rival platforms:

Fees-y win: £40k annual contribution across platforms compared.

Obviously we’re quoting numbers straight from the company here, not our own sums. It looks very competitive for contributions so far though.

As for drawdown mode, Vanguard says:

The Vanguard Personal Pension will also be competitive for investors who want to enter drawdown over the age of 55, once this option is available in the 2020-21 tax year.

Simply put, there will be no additional charges for going into drawdown in the Vanguard Personal Pension. […]

[Research company] Platforum ran the numbers for an investor with a £210,000 sum1 in a Vanguard Target Retirement Fund, looking to draw down 4% a year, after fees and charges, for 10 years.

Investors using the Vanguard Personal Pension in this scenario would have £3,975 more remaining in their pot compared with the highest cost SIPP in the market, having saved £5,089 in fees to withdraw the same amount of money.

We stan Vanguard

While we’re proudly independent here at Monevator, our focus on simple, low-cost investing and broad index tracker funds makes it hard not to come across as raving Guardinistas when it comes to most of Vanguard’s products.

The Vanguard Personal Pension isn’t going to buck that trend.

We’ll reserve our final judgement – and filling in the blank spot on our comparison table – until the rubber meets the road next year. But this does look like being an instant table-topper among the ‘percentage fee charging’ SIPP platforms.

My co-blogger The Accumulator points out the Vanguard SIPP should be particularly welcomed by younger or newer investors with smaller pots, as the low charges will extend the threshold at which you’d even need to consider switching to a flat-fee offering. And then there’s the fee cap to factor in, too.

Investing commission-free in ETFs also sounds splendiferous, provided you can cope with the bulk-dealing times Vanguard offers – and as a passive investor, why wouldn’t you?

That said, it’s not perfect; it only offers Vanguard products.

While in practice this will give nearly everyone all the choice they need to construct a low-cost passive retirement portfolio, it’s not amazing from the perspective of diversifying against the (extremely remote) possibility of some sort of systemic company or platform failure.

Vanguard is one of the biggest asset managers in the world and a SNAFU that caused some sort of permanent hit to your capital is pretty unthinkable. But we’re a paranoid lot around here.

A slightly more likely (though still very unlikely) issue would be something like delayed access to your money in a Financial Crisis 2.0. At least by diversifying between platform provider and funds you potentially have a bit more cover.

Of course you can always get around this by running two SIPPs – one with Vanguard and another with a third-party and non-Vanguard funds. And having all your money on any single platform from any company gives you a single point of failure risk.

Will you be in the vanguard?

There’s no rush to decide exactly what to do.

For one thing, the Vanguard Personal Pension is probably still a few months away. Plenty of time to think.

Moreover, your existing platform may well decide to cuts costs ahead of this launch.

In the very long-term it’s going to be hard for most rivals to compete with Vanguard on costs alone, just because of the economy of scale advantage enjoyed by the industry’s megalodon.

Competitors may choose instead to trumpet choice or other variables. Still, the collapse in share dealing commission in the US recently gives a good example of how quickly costs can fall if everyone gets religion.

  1. Cited as the median pension in payment for a 65-69 year old. []
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Weekend reading logo

What caught my eye this week.

A regular listener to the ThisIsMoney podcast, I’ve been waiting for Simon Lambert and his team to get stuck into the election manifestos for three reasons.

First, they’ve been trailing it for weeks and they were clearly ready to go.

Second, I am as curious as any other concerned citizen / consumer / tax-payer / wage slave.

But most importantly, I said I wasn’t going to opine about this election. I wanted to give myself – and Monevator – a break from politics.

Well, I’m half back-pedaling that today. (Hey, that’s politics.) It keeps coming up in the Weekend Reading comments, and, well, it’s obviously something of a big deal.

But I’m still not going to write about it… because ThisIsMoney and the Financial Times have done the job for us:

  • The general election and your finances [Search result]FT
  • What the general election means for your money – ThisIsMoney

Both papers do deep non-partisan dives into the various manifestos. Read them and you’ll quickly get up-to-speed on the personal finance angle of the general election. For me that’s a sideshow with this vote anyway; your view may vary.

What’s that? You want some spice?

Well ThisIsMoney editor Simon Lambert takes on the strange anomalies on the tax bands that produce very high marginal rates:

Labour plans a new 50 per cent ‘super rich rate’ of income tax above £125,000 but high earners will have to pay an even higher rate of 67 per cent before they get there.

A combination of the 45p tax rate threshold dropping to £80,000 and the removal of the personal allowance means that those earning £100,000 to £125,000 would effectively pay 67p in income tax for every extra pound they earn.

Despite outlining a radical revamp of income tax, Labour confirmed to This is Money that it would not remove the quirk in the tax system that sees the marginal rate of tax rocket for those lucky enough to see their earnings go above £100,000. […]

An income tax system where the marginal rate goes 20 per cent, 40 per cent, 60 per cent, 40 per cent, 45 per cent is clearly daft.

Clarifying and simplifying the tax system shouldn’t be controversial, but back in the real world it’s radioactive. Labour told Simon they have no plans to change the system, while the Conservatives didn’t even bother to give (or risk?) a reply.

Meanwhile over at the FT the still mostly wonderful (Brexit cheer-leading!) Merryn Somerset-Webb notes that before we soak the rich, we need to figure out who they are.

Yes, Merryn has plenty of sympathy for the devil – aka £80,000-man:

In fact, his take home earnings are not as much higher than the average as a first glance suggests.

The top quintile of earners in the UK are on an average of about £88,000.

The bottom quintile are on more like £7,900. Add in tax and benefits, and those numbers fall to about £65,500 and rise to £19,000.

That means the top fifth take home, on average, 3.4 times as much as the bottom fifth. That’s significant, but much less significant than the 11-fold difference in pre-tax pay.

It’s a point well-made. With that said, as I wrote a half-a-dozen times last week, I’ve no problem with anyone advancing the argument that he’s taxed enough already.

My despair was over his Blimp-ish reality distortion field. I think it was a man earning £80,000 shouting “liar!” at an MP while claiming he was in the bottom 50% of earners on his £80K that set people off, not the technicalities of wealth distribution.

This is the Weekend Reading to debate the financial aspects of the election, if you’re so-minded. But please keep it civil and as constructive as possible, and ideally focused on personal finance. Have a great weekend!

[continue reading…]

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The lifetime allowance for pensions

Update 15 March 2023: The Government has announced that the Lifetime Allowance for Pensions is to be scrapped, with changes beginning April 2023. We’re keeping the post below intact now for those who need it, and for posterity!

I must be a masochist. Not content with the torture of bringing clarity to the labyrinthine annual allowance, I’ve now undertaken similar self-harm by tackling the lifetime allowance for pensions.

I’ve given it my best shot in the post that follows. If I failed then please feel free to use it as a sleeping aid.

What is the lifetime allowance and why does it exist?

The lifetime allowance is the total value of money you can build up in a pension before you’re hit with a lifetime allowance charge.

The lifetime allowance as of 2019/2020 is £1,055,000.

The lifetime allowance charge

Any amount above the lifetime allowance is called the excess. When that excess is taken back out of your pension, then a charge of:

  • 55% is levied if it is taken as a lump sum.
  • 25% is levied if it is taken as an income.

A quick recap.

When you put money into a pension the government provides tax relief.

For example, if you earn £80,000 a year then you are a 40% tax rate payer. If you put £600 into your pension out of taxed income, the government will also put £200 into your pension and you can claim £200 relief from HMRC. This gives you a total of £400 tax relief.

The underlying principle behind this pension tax relief system is that you defer taxes. You get back the tax you paid today in your pension, but you will later pay tax when you take the money out.1

It’s this principle which motivates the lifetime allowance.

In effect, the Government has decided it isn’t in the business of giving rich people unlimited tax deferral benefits. It therefore created the lifetime allowance, which limits the total amount of tax deferral the Government is willing to give you.

That sounds reasonable, but unfortunately – as with the annual allowance – the words ‘piss up’ and ‘brewery’ are never far away.

More on that later.

History of the lifetime allowance

The lifetime allowance came into existence on 6 April 2006 – a date known to those in the pensions industry as A Day.

A Day is the pension expert’s equivalent to the birth of Christ.

On A Day a huge raft of disparate measures and rules were scrapped with new ‘simplified’ rules coming into force.

More than eight different regimes were boiled down into two: the lifetime allowance and the annual allowance.

The lifetime allowance was initially set at £1.5 million. It crept up to £1.8m in 2010/11 before being drastically cut back down. But it’s not all bad news – from the 2018/19 tax year the lifetime allowance has increased in line with the CPI measure of inflation.

The changing lifetime allowance, in millions per tax year.

Just to complicate matters, each time the lifetime allowance was cut, the government provided protection mechanisms: in 2006, 2012, 2014, and 2016.

These ensured that some of the excess above the lifetime allowance in a person’s pension was protected from the tax charge.

When is the lifetime allowance assessed?

The most important thing to remember about the lifetime allowance is that it is not assessed just because you have a pension pot above £1,055,000.

Rather, the lifetime allowance is assessed at specific points when you interact with your pension.

These are called benefit crystallisation events (which I’m going to call BCEs for short, even though my editor The Investor hates acronyms!)

There are 12 BCEs in total. I’m going to focus on the six main ones (and also the pre-A Day interaction).

The benefit crystallisation events (BCEs)

Let’s run through what these mean:

BCE1 – When defined contribution benefits become available to pay a drawdown pension. The value is calculated as the market value of the assets made available for drawdown.

BCE2 – When you become entitled to a defined benefit pension. The value is tested as broadly 20 times the annual pension.

BCE4 – When you convert a defined contribution pot into a lifetime annuity. The value is calculated at the cost of purchasing the annuity.

BCE5a – When, for a pot in drawdown, the member reaches 75. This is calculated as the value of the drawdown less any amounts previously crystallised under BCE1.

BCE6 – When you receive a lump sum before age 75 (i.e. the tax-free lump sum). This is calculated as the value of the lump sum.

BCE8 – When you transfer out to an overseas pension scheme (called a QROPS). This is calculated as the amount transferred, less any amounts crystallised under BCE1.2

Pre-A Day test – The pots are measured at 25 times pension or max capped drawdown. This is to account for tax-free cash taken. Pre-A Day pots are measured when the 1st post-A Day BCE occurs (such as, reaching 75 (BCE 5a) with a drawdown pot post-A Day).

A word on defined benefit vs defined contribution treatment

What is perhaps noticeable is the disconnect between how defined benefit and defined contribution pots are measured.

Broadly, defined benefit pots (BCE2) are valued at 20 x annual pension whilst defined contribution pots are valued at the annuity purchase price (BCE4) or the drawdown market value (BCE1).

To illustrate:

A £100,000 defined contribution pot could buy a £2,801 joint-life 50%, 3% escalation annuity at age 65.3

This would be valued at £100,000 under BCE4.

However if such an income was provided through a defined benefit pension it would be valued at only £56,020 under BCE2.4

With annuity rates at all-time lows, it is possible that were somebody to transfer from a defined benefit to a defined contribution scheme, they could end up the wrong side of the lifetime allowance and incur a tax charge that they may have avoided if they’d stayed in their defined benefit scheme.

How the charge is assessed

The charge is assessed by adding up all your pensions and ‘filling up’ the lifetime allowance like a bucket. You only get hit with a charge if the bucket starts overflowing.

Another thing to note is that drawdown pensions (except pre-A Day pots) are tested against the lifetime allowance twice.

The first test is BCE1 when the funds are first designated. The pension is then tested again on either:

  • annuity purchase (BCE 4), or
  • reaching age 75 (BCE 5A), or
  • on transfer to a QROPS (BCE 8)

To ensure there no double counting, only the increase in funds crystallised under BCE 1 are tested at the second designation.5

How the charge is applied

As I mentioned above there are two tax-rates: 55% and 25%.

These are commonly called the ‘lump-sum’ and ‘income’ rates.

It may be easier though to think about these instead as whether the money ‘leaves’ or ‘stays’ inside the pension tax regime.

For example, if you take a tax-free lump-sum on drawdown, it ‘leaves’ the tax regime – because you won’t be subject to any further income tax on it. In this case, any excess above the lifetime allowance that you take as a lump sum is charged at 55%.

If you instead take an annuity income, then you take a 25% tax charge on the excess income above the lifetime allowance plus any income tax due.6

Aha! You might now be cunningly thinking that 25% is lower than 55%, and so taking income is always better?

In reality it all depends on what income tax rate you’ll be at, as an example shows.

You take a £100 lump sum over the lifetime allowance:

£100 x (100% – 55%) = £45 after tax

Take £100 income over the lifetime allowance:

45% tax-rate: £100 x (100% – 25%) x (100% – 45%) = £41.25 after tax
40% tax-rate: £100 x (100% – 25%) x (100% – 40%) = £45 after tax
20% tax-rate: £100 x (100% – 25%) x (100% – 20%) = £60 after tax

As those being hit by the lifetime allowance are likely to be high earners (40% or even 45% tax rate), there’s probably little difference in overall tax rate between lump sum and income.

In terms of how the charge is actually paid, usually, the pension scheme will pay it if they offer the facility. This is called ‘scheme pays’. Schemes are joint and severally liable for the tax, so they like to make sure the tax is paid to avoid having HMRC on their back.

However, pensions schemes do not have to offer scheme pays in all circumstances. It is best to check in advance.

Always use protection?

As I mentioned earlier, HRMC provided protections against the reductions in the lifetime allowance. These protections each work a little differently.

What protection is right for you – or whether you should employ protection at all – will depend on your circumstances.

I’ll only cover the two protections now available to savers: fixed protection 2016 and individual protection 2016.7

Fixed protection 2016 and individual protection 2016 were introduced on 6 April 2016 when the lifetime allowance was cut to £1 million.

Those intending to apply for fixed protection 2016 had to ensure that active membership of pension schemes ceased from 6 April 2016.

There is no deadline for applying for fixed or individual protection 2016.

Fixed protection 2016

Under fixed protection 2016  your lifetime allowance is fixed at £1.25 million. You can’t already have an earlier fixed or A-day protection. Once you opt for fixed protection, you can’t make any further contributions to a pension.8

Individual protection 2016

You can opt for individual protection 2016 if your pension pot was worth more than £1m on 5 April 2016. It fixes the lifetime allowance at the lower of £1.25 million or the value of the benefits on 5 April 2016.

Unlike fixed protection, you can keep saving into a pension or accruing.

Valuing the pension depends on its type:

1. Uncrystallised benefits (i.e. not yet paying):

a. Defined contribution – at the market value of funds
b. Defined benefit – at 20 x pension plus any cash by addition
c. Cash Balance – amount available for provision

2. Crystallised benefits (i.e. already in payment):

a. Pre-A Day pensions – 25 x pension / Max GAD (Government Actuary’s Department rate) for capped drawdown at the first post-A Day BCE9
b. Flexi-drawdown – 25 x Max GAD when flexi-drawdown entered10
c. Post-A Day vestings – Value at BCE

Losing protections

Unfortunately, it’s possible to lose protections after you’ve successfully applied for them. In some cases this can be completely unintentional.

The good news is that individual protections (and primary protection) are almost impossible to lose. The only situation where an individual can lose the protection is if they divorced and their pension shared (this is where a pension is split between spouses to allow for a clean break). This reduces the level of protection on the pension. Under individual protection 2016 there is an offset mechanism, which reduces the level of lost protection.

The bad news is that the rules are much more strict for fixed protection11. An individual loses fixed protection if they:

  • increased their benefits in defined benefit scheme above a certain level;
  • contributed to a defined contribution scheme;
  • started a new arrangement under a registered pension scheme other than to accept a transfer of existing pension rights; or
  • transferred to an unregistered pension scheme (i.e. not a QROPS), from a defined contribution to defined benefit scheme (depending on circumstances) or from one defined benefit scheme to another (again depending on circumstances)

Unlike with individual protection, an individual doesn’t lose fixed protection if they are subject to a pension debit (divorce). However, they will not be able to rebuild any pension fund without revoking their fixed protection.

Flaws with the lifetime allowance

Still awake? Amazing!

It’s time we stopped explaining the lifetime allowance and started complaining about it.

First of all, what was intended to hit only the very wealthiest earners has already started to swallow up hundreds of thousands of savers. This can be seen in the data – HMRC’s take from the lifetime allowance has increased by over 1,000% in 12 years.

Likewise, annuity rates have plunged since A-day meaning that a defined contribution pot buys a significantly lower guaranteed income for life.

At the same time the lifetime allowance has drastically reduced. At the time of writing, £1m would buy only a c. £28,000 3% rising, 50% joint-life annuity12. That is less than the median household income of c.£29,000.

A third problem is that planning for the lifetime allowance is incredibly difficult. It is a moving target. It is also hard to know whether it will still be around – or in what form – in 10-30 years’ time.

Another issue is that the combination of the lifetime allowance and annual allowance could result in not only the clawback of tax relief, but also see further tax paid on pension pots. The combination of the two also results in strong incentives to be wary of saving into a pension when you’re at peak earning capacity. (i.e. when the sun is shining, ahead of a future rainy day).

But the biggest issue is the lifetime allowance is flawed in construction. Even leaving aside that the £1m allowance figure is itself completely arbitrary, the allowance is only set to increase by CPI.

Most pension schemes target returns far in excess of inflation – as do most of us Monevator readers!

The FCA advises that the projected return for equities should be 3% to 5%.13 A common benchmark for master trust pensions is CPI plus 3%. And looking back over the past 10 years, passive investors would indeed have realised returns far in excess of inflation.

This means that even a very distant lifetime allowance charge can become a real issue for those prudent enough to save into a pension for retirement.

Without labouring the point, beating inflation is the whole reason we invest. This means that the lifetime allowance punishes most those that save and invest successfully!

Looks like we’ve made it to the end

Like the annual allowance, the lifetime allowance is a complicated moving puzzle and it is worth seeking professional advice if you need it.

Assuming you haven’t fallen into a coma, please let us know of anything we’ve missed in the comments below.

  1. It’s a bit more complicated than that – what with tax-free cash and the annual allowance – but we have to at least try to simplify things! []
  2. Keep in mind that since 9 March 2017 QROPS transfers can incur a 25% tax charge if certain conditions are not met, plus a five-year look-back applies. []
  3. https://www.hl.co.uk/retirement/annuities/best-buy-rates as accessed 11/11/2019. []
  4. £56,020 = £2,801 x 20. []
  5. For a worked example, see the HMRC tax manual. []
  6. QROPS transfers count as a 25% charge. []
  7. The other protections are 2006 primary and enhanced, introduced on A-day; fixed protection at 2012 and 2014; and individual protection 2014. []
  8. Or accrue within a defined benefit pot at, roughly speaking, higher than 5% of RPI per year. []
  9. The calculation for these is quite complicated, refer to HMRC guidance. []
  10. The calculation for these is quite complicated, refer to HMRC guidance. []
  11. The rules are also more strict for enhanced protection – but I only cover fixed protection here []
  12. See: https://www.hl.co.uk/retirement/annuities/best-buy-rates as accessed 11/11/2019 []
  13. These are the FCA prescribed projections. []
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Help! Analysis paralysis is stopping me from investing

Investing is not rocket science

A Monevator reader writes:

“I’m wondering if you have any general advice for someone on the edge of choosing between Vanguard’s LifeStrategy fund or going DIY (i.e. a Slow and Steady rip-off, adjusted for risk I’m comfortable with)?

I’ve been going over it all for too long, devouring this site and others. I’ve also read Smarter Investing, as well as a handful of other books on the topic.”

Dear Reader,

You’re not alone – a lot of people freeze at this stage. I was personally stuck in analysis paralysis for over a year before I made my first investment.

I was going round in circles, like a plane awaiting permission to land. Eventually I realised that I already had all the permission I was going to get.

I was frightened of doing the wrong thing and was hoping that the ‘right answer’ would somehow strike me like lightning.

But the truth is that if you’re deciding between different shades of a diversified passive investing strategy then you’re already as close to the right answer as you can get.

Like crack parachutists, most passive investing strategies will land you in roughly the same ballpark, and it’s fruitless to try to predict which one will come closest to the bullseye.1

Jump out of the plane! You won’t break your legs so long as you:

  • Take a conservative approach to risk tolerance. If you have no experience in the market and you’ve got more than 15 years of investing ahead of you, choose a 60:40 or 50:50 global equity:government bond split until you have some idea of how you will respond in a crisis.
  • Keep your costs low. The evidence against high fees is overwhelming. The UK’s financial regulator, the Financial Conduct Authority (FCA), published a report showing that benefiting from cheaper – but typical – passive fund costs could mean you 44% better off versus typical active fund costs.
  • Take action over a difference of 1% or 0.5% in fund and broker fees – but don’t sweat less than 0.1%.
  • Begin! The sooner you start investing, the easier it will be for you to reach your goal. So just start. Put away what you can into your ISA or in your pension – but stop putting it off. Get some momentum going, then work out the finer details like how much you should be investing later. (In fact do this next, once you’re investing monthly. It’s not hard.)

Even though I was committed to the passive way from my earliest investing years, I still sought advantages through optimisation.

That’s a very human thing to do, but the most important lesson I’ve learned since is to keep things simple.

Don’t take my word for it, ask Warren Buffett

Warren Buffett is one of the world’s richest men and one of the greatest investors of all time. He doesn’t need your money, he has nothing to prove, and he is a legend in his own lifetime.

He recommends plain vanilla passive investing.

Buffett makes his case in three pages of condensed and delightful wisdom that you can read in his 2017 Berkshire Hathaway shareholder letter2.

To condense Buffett’s wisdom still further:

The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.

Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund.

To their credit, my friends who possess only modest means have usually followed my suggestion.

I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.

Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something ‘extra’ in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else.

The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”

If you want hard evidence instead of sage advice, read about Buffett’s winning bet against the hedge fund industry. The gory details are recounted from page 21 of the same letter.

Warren Buffett, pah! Enter The Accumulator!

It’s tough to follow a Warren Buffett mic drop (are people still dropping mics?) but I think I can do it with the tale of The Accumulator versus The Accumulator’s Mum.

The Accumulator’s Mum knows naff all about investing – having outsourced all responsibility to her family office, aka The Accumulator.

The Accumulator can at least claim he knows more about investing than his mum.

The Accumulator’s Mum has beaten The Accumulator over the last seven years.

The Accumulator put his mum into a Vanguard LifeStrategy fund.

While The Accumulator knew his mum needed the simplest strategy possible – and so gave her one – he himself wanted to ‘optimise’ through factor investing, REITs, over-balancing into the lowest P/E ratio investments, yadda yadda, yadda.

All that effort left The Accumulator trailing The Accumulator’s Mum’s higher passive exposure to the US market and her lower exposure to value equities.

The Accumulator hasn’t told his mum about this. If you’re reading mum, you’re welcome.

Please don’t go on about it.

Oblivious investing

You’ve heard from Warren Buffett and the Accumulator’s Mum. What more do you need?

Allow me to cite one last source – a wise and unassuming US financial blogger called Mike Piper, aka The Oblivious Investor.

Piper is one of those rare bloggers who risked their reputation by announcing that they’ve reduced their strategy down to ‘The Accumulator’s Mum’ level of easy-peasy-ness.

Piper made a succinct case for simplicity, stating:

The primary reason we made the change was to defend against what I’ve come to see as the biggest threat to our investment success: me.

To be more specific, it’s my temptation to tinker that scares me.

Piper’s evidence-based approach taught him that asset allocation is not precise – he calls it a sloppy science. Moreover, he realized that his expertise could be counterproductive and that the smartest move he could make was to reduce the chance that he’d screw up his own plan.

Piper’s answer was to move everything into a Vanguard LifeStrategy fund.

(In the interests of balance, please note that alternatives to Vanguard’s LifeStrategy fund are available.)

Take the plunge

My own experience has been similar to Piper’s: simplicity has a value all of its own.

The promise of complex strategies often goes unfulfilled, as illustrated by our recent look at the last 10-years of investment returns.

I’ve had to learn a lot to realise I don’t need to know as much as I thought.

The no-brainer approach really is a no-brainer.

Take it steady,

The Accumulator

  1. You can spend forever reading about which strategy worked for the last ten years or 21.5 years or what have you – but that doesn’t tell you what’ll work in the future. Sometimes it might even be a contrarian signal. []
  2. See pages 23 through to 25 []
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