This post is one of a series looking at returns in the decade after the financial crisis.

I was finishing my basic education in passive investing as the Global Financial Crisis (GFC) shook capitalism. It didn’t feel like the best time to put my financial house in order but – on the off chance that the sky wasn’t falling in – I was learning as much as I could as fast as I could.

Then as now there was no shortage of pundits, authors, superstars, and salesmen laying out their ideas. The market stalls were festooned with promises:

• All-weather diversification!
• Superior risk-adjusted returns!
• Negative correlations!
• Cheap fundamentals!
• Megatrends!

My head span as I inhaled the aromas of green energy, soft commodities, precious metals, small caps, and high yields.

Which of these spices would add zing to my mix?

Only a few index trackers had a long-term history when I emerged from my bolthole in 2009. There was no way to verify their behaviour1 over the all-important ‘long term’.

But now you can.

Tracking the trackers

The Cambrian explosion of index trackers is more than a decade old. We can now see how closely the longer-toothed ones have matched up to the theory and promise.

The charts that tell our story come from Trustnet.

Trustnet provides annualised and cumulative return data for periods of up to 10 years. The results below are quoted in nominal £ returns, with dividends reinvested from 14th September 2009 to 13th September 2019.

Subtract 3% average inflation to convert the nominal returns into real returns.

The case for global diversification

If I’d been an investing clairvoyant 10 years ago then my name would have been Jack Bogle. Like the father of the index fund, I’d have put everything into a US stock market tracker and subsequently reaped the rewards of one of the great bull markets.

That skyrocketing green line on the graph above is Vanguard’s US Equity Index fund. It returned an astonishing 16.3% annualised. Any US assets you owned in 2009 have soared by a cumulative 350% (see the 10y column in the table).

Perhaps they’re pumped by quantitative easing and corporate tax cuts. Maybe the social dividend has been inequality and the rise of populism. Whatever the case, as investors in the US market we should acknowledge we’ve lived through extraordinary times.

Back in 2009, as a UK investor without the witch-sight, I diversified across every major geographic region on the good ship Earth. And nobody should be sorry if they did that because the iShares MSCI World ETF2 brought in a still exceptional 12.1% annualised and 214% cumulative return. (See the brown E line on the graph).

That’s a 9% annualised real return versus the historic average of around 5%.

Ch-ching!

Note that hard as it will be for newer passive investors to fathom, there weren’t any vanilla all-world trackers available in 2009. The MSCI World bought you exposure to developed world stock markets only.

Most of those other markets chased the US like perfectly nippy sprinters trailing Usain Bolt:

• The supposedly moribund Japan returned 8.5% annualised.
• The iShares UK Equity Index Fund – tracking the FTSE All-Share – delivered 8.3%.
• Europe also scored 8.3% as it dodged the gloomy prophecies of a Euro area implosion.3

The big story in 2009 was the ascent of the emerging markets and I agonized over whether and how to reflect this in my portfolio.  The West was doomed to low growth and the future belonged to the BRICS4 said the talking heads, plus any other developing nation that clustered under memorable acronyms like MINT.

Put yourself into the position of a pundit in 2009. The emerging markets had notched 18.7% annualised between 1988 and 2006 and their acronym-powered growth seemed unstoppable.

But then the brakes went on. These next-big-things posted a relatively poor decade and trailed the developed world, as you can see from the yellow B line on the graph. The emerging markets could only muster 6.6% annualised (3.6% real return after inflation). All-mighty China forked over a measly 5% annualised return (2% real).

Frontier markets (see pink line G) were another smart money bet in 2009. They were the new emerging markets, it was said. Highly volatile yes, but a diversification play because their economies were less integrated into the global mainstream.

Thankfully wiser voices preached caution. More than a decade ago the sage Bill Bernstein explained that economic performance and stock market success don’t always go hand-in-hand:

During the twentieth century, England went from being the world’s number one economic and military power to an overgrown outdoor theme park, and yet it still sported some of the world’s highest equity returns between 1900 and 2000.

On the other hand, during the past quarter century Malaysia, Korea, Thailand and, of course, China have simultaneously had some of the world’s highest economic growth rates and lowest stock returns.

In even simpler terms, just as growth stocks have lower returns than value stocks, so do growth nations have lower returns than value nations – and they similarly get overbought by the rubes.

This is why hot tips are so often a reverse signal for contrarians. When a story is obvious it often collapses under the weight of expectation.

Ten years later and the frontier markets have returned 6.6% annualised – the same as emerging markets.

The graph also shows that the world’s equity markets have been highly correlated, too. They’ve zigzagged together, although the emerging and frontier markets have been sickeningly volatile.

Many shall fall that are now held in honour5

The global portfolio did not score you the best result over the last decade, and it never will.

But the most powerful geopolitical narrative 10 years ago would have sent you in precisely the wrong direction.

The equivalent story in 2019 is to go all-in on the US. It’s the global hyperpower with an incredibly flexible economy blah blah blah, all-conquering tech industry yadda yadda. But don’t commit the cardinal sin of projecting the 10 years forever forward. Ben Carlson has shown how the pendulum has swung back and forth.

The US lagged the rest of the developed world in the 1980s and 2000s while surging head in the 1990s and 2010s. Trends mean revert and commentators have been calling the US market frothy since 2011.

This short piece by Jonathan Clements gives you a 20 year perspective. It is an even starker warning against recency bias.

Looking back 10 years doesn’t tell us what will happen in the next decade, but it can help us remember that basing our decisions on predictions and compelling stories is a mug’s game.

I’ve been called worse things than that, but sooner or later the commentators are liable to be right.

Take it steady,

The Accumulator

Public service announcement: October is going to be sentimental around here, as we continue to gaze back 10 years and see how several other passive-friendly strategies have fared. Subscribe to get all misty eyed with us.

1. Never mind the fact we all know that past performance is no indicator of future results. [↩]
2. The iShares MSCI World ETF is currently more than three-fifths invested in US companies, anyway. [↩]
3. I kept Europe off the graph for simplicity’s sake. [↩]
4. Brazil, Russia, India, China, and South Africa. [↩]
5. Horace. [↩]

What caught my eye this week.

Morning! I am racing about today so I’m going early with our compilation of the latest money and investing articles to have caught my attention.

If you spot something I’ve not listed – particularly from the weekend personal finance pages – then please do add it with a summary in the comments below. I will be popping onto my mobile every few hours as usual to moderate the comments, and I’m sure your fellow readers would appreciate the heads-up.

Otherwise, thanks as ever for checking in on our site and have a great weekend!

[continue reading…]

I am currently involved in a couple of financial disputes. This isn’t normal for me and I’ve lost sleep over it.

Several thousand pounds are at stake, most likely. Perhaps sneaking into five-figures. That sounds a lot of money – it is a lot of money – but I asked myself this morning why exactly is it bothering me so much?

Is it the money – or is it something else?

I can afford to lose the claims. It would represent a small hit to my net worth. I say that not to boast (many readers could brag considerably more than me) but for context.

My point is the money shouldn’t matter to the extent its potential loss has me awake at 3am.

Money money money…

I care much more about money now I’ve got some compared to when I had none.

I’m not proud of that but it’s true.

Causation, correlation, or coincidence?

A bit of all three I suspect, and more besides.

As a student and into my early 20s, I only thought about money in the abstract. Like a cliché from central casting, I spent more time flirting with ideas like communism and anarchism.

Obviously it’s easier to eschew personal property when you haven’t got any. Even so, I made no effort to materially level up.

I’d avoided student debt thanks to a grant, a few part-time jobs, and some nascent financial savvy, but after a stint working on at college after graduation I was unemployed for six months.

I told myself I was a writer, but I didn’t write anything. Eventually I realised I’d soon not have the money to cover my rent for a room in a dubiously converted garage in Brixton, and a friend explained how to sign-on.

I went along, felt ashamed, didn’t claim anything, and started applying for jobs.

My first job paid well enough, though nothing like what my degree might have earned. No matter, I soon quit anyway for a 50% pay cut to do something I was excited about. I proceeded to earn mediocre money but have a lot of fun for a decade – and to save a slug of what I did earn.

I dumped my savings into high interest savings accounts. I thought about them maybe once a year.

I won’t go into my not-buying-a-property saga again, except to say that chasing house prices was what first made me pay attention to getting more money as an adult.

But even then, I did so inefficiently.

I didn’t invest (fortunately, as I dodged the dotcom bust) and I did extra freelance work in my spare time rather than leveling up my earning capacity. And then, 15 years or so ago when I was finally earning a reasonable amount relative to my flaky ‘career’ path, I jacked it in to co-found a company that in a couple of years I’d extracted myself from for breakeven1.

My friends recently sold that company for a few million.

Money is a mind virus

This was around the same time I got serious about investing. But I continued to live a double life, like Keanu Reeves’ Mr. Anderson in The Matrix.

Friends saw the same freelancer living his breezy graduate student lifestyle. I continued to favour freedom and fun in my work over a higher income.

But by night I was devouring investing forums, financial books, and company reports – and turning what had been a house deposit into a six-figure investment portfolio.

If someone saw contradictions, I explained my Bohemian investor philosophy to them.

But perhaps I was already changing.

Money had started becoming important to me, or at least something I thought about everyday. It was becoming part of my identity – if only in secret to myself.

Starting a financial blog might have contributed to this shift. I don’t think it was a big factor. My idea of financial independence is the freedom to not think about money, not the strictures of hitting a target to quit work or live off some particular sustainable withdrawal rate. I’ve never been very goal orientated in that respect.

Before I bought my flat, I realized I could probably stop working if I wanted to, and if I was prepared to live well within my means.

But I didn’t want to – though I didn’t much want to spend the money either.

I was much more interested in beating the market. And I think it is precisely tracking my returns and my net worth for the past half a decade that has really made a mark.

My experiments in ultra-active investing – and also the meticulous record keeping involved – has reminded me multiple times an hour exactly what my net worth is, and how it has fluctuated since yesterday or even in the past 20 minutes.

Live that every day for a few years and it must change how you see the world.

Before I mostly only logged into my broker accounts when I’d found a better idea to replace one of my existing ones, and so wanted to trade. There could be months in between. I didn’t track my returns, just my net worth – and only when I remembered to or was bored.

It was like a game, and almost as a side-product I grew wealthier. But eventually, thanks to all the tracking – and the aim of market-beating – my own money became like the all-important high score to beat.

On the house

I’d argue though that until a couple of years ago I still wasn’t taking it all super seriously.

I believe buying my flat (and getting a giant mortgage) is what has really focused my mind on money, in terms of how much I have – and what I now have to lose.

As I’ve long suspected, owning even a new home is a mini-money-pit.

First you incinerate a chunk of your savings with stamp duty and legal fees. Then there are the escalated material demands – a fancy sofa here, a distressed mirror there – and beyond even that owning a home is a kind of Bizarro fruit machine that only spits out bills that need paying, at least until you’ve a few years of price appreciation on the docket. (Something I don’t expect for a while…)

In addition, for me getting a mortgage was partly an experiment to see how it would feel to run what’s effectively a levered portfolio.

It turns out I don’t like the feeling very much.

I’d fully intended keeping my (interest-only) mortgage indefinitely but I can see that thinking may change. I suspect the debt is mildly stressing me out.

Either way the mortgage definitely has me thinking far more often about my net worth and my liabilities.

The mortgage has introduced paths where I can go bankrupt. They’re not high-probability paths, but without any debt they weren’t there before.

Mo money mo problems

So that’s the backdrop that I believe has me losing sleep over contested money that once I would have gunned for but not been overly disgruntled about.

If I wanted to stress out about money, I should have started 20 years ago:

• Compared to the money that went begging for all the years I had a fun job and wasn’t paid very much, the amount at stake doesn’t matter – yet I didn’t think about money in those days.

• Compared to what I’ve missed out on by not sticking at that first employer (which was acquired a few years later by Microsoft, and everyone had shares) or my start-up or believe it or not two other on/off employers where I would have eventually had a stake, it doesn’t matter. But I never thought about staying at those places for money, either.

• Even compared to certain woeful stock picks I’ve made over the years, this money isn’t a huge deal – yet I usually just shake my head and move on when an investment goes wrong. I felt bad in the financial crisis, but I don’t think I lost an hour of sleep. (I had other things to worry about.)

• Compared to the gains I’ve missed out because I de-risked my portfolio after buying my flat – because I care now about losing what I’ve got, and I want more buffers – it’s again a minor sum. Opportunity costs count!

• Compared to the amount I’ve chucked away in stamp duty and (likely) house price falls it doesn’t matter much.

And yet it has got to me like none of the above.

I suspect it’s partly a bucketing issue. My mental accounting is going awry, because I feel wronged.

That’s illogical.

I believe there’s probably also something extra going on because one of the disputes involves my flat. There’s no doubt your own home feels more personal to you than even a closely-watched portfolio.

I probably also feel a bit dumb for not spotting one of the issues earlier. But stock picking has revealed my inadequacies many times before, so that’s really no excuse.

Money boxed

Warren Buffett talks about the sins of omission compared to the sins of commission. Buffett means that he regrets not buying multi-bagging Amazon or Google more than he kicks himself for buying shares in a loser.

In conventional investing, the most you can lose is whatever money you put in. But the potential upside you miss when you don’t invest is unlimited.

Something like that is true in life.

In my brain – though evidently not my gut – I know it’s not worth getting stressed out about a few thousand pounds now when I might have been earning six-figures decades ago if money was all-important to me.

Perhaps it’s the same for you, maybe not. We all have missed opportunities, or at least paths we didn’t take.

But I fear I’m also more stressed because I’m getting old and crotchety, and old crotchety people end up caring more about money.

You see it all the time. Is it because we’ve more to lose as we get older? Or is it because there’s less time to make back whatever we lose or never had – a kind of holistic sequence of returns risk?

Is it because young people are so rich in ways we will never be again, whatever we do – and so we can’t bear to lose any compensation for that impoverishment?

Or is it simply what the economists call loss aversion? That the pain of loss is greater than the joy of equivalent gains, and so when you’ve more to lose you’re naturally exposed to more pain?

I’m not sure but I don’t like it.

One reason I bought my flat is because I saw I’d been succumbing to what I call Buffett’s folly – the idea that every purchase today has to be priced in terms of the 30-odd years of compounded returns forgone.

But in the real world you have to live – and spend – in the now, a little, now and then.

Excessively caring about money as you get older sees everything from wealthy but freezing pensioners refuse to put the heating on to One More Year syndrome when you really want to retire to the spectacle of Californian tech titans buying their third back-up nuclear-bomb-proof bunker in New Zealand.

Being reckless with money is beyond foolish.

But being good with money also means keeping it in perspective.

Do you find yourself caring more about money then you’d like to admit as you chase down financial independence, strive to secure your retirement, or even just pursue higher returns from the stock market? Bare your soul in the comments below!

p.s. Since I wrote this post – and did all this musing – the larger of the disputes has been amicably resolved. Karma or coincidence? I don’t know but I’ll take it, along with the insights it produced. A friend who read an earlier draft suggested I hold back this update for the sake of dramatic tension, but I don’t want anyone getting out their tiny violins for me without cause. Besides, the point is it wasn’t *really* a huge deal. Finally, pertinently, I don’t feel as relieved as I’d previously felt aggrieved…

1. After taking into account the money I’d put in and the opportunity cost of lost earnings. [↩]