What caught my eye this week.
I enjoyed the following comprehensive map of all the biases we face when using our brains. (Click through for a high-resolution version, the link is at the top of the page you’re taken to).
It’s pretty clear that to err is human. And pretty amusing to remember all the economics text books – and the odd Nobel prize – premised on the notion that we make perfectly rational choices.
Have a great weekend!
September was a bit rocky for the Slow & Steady portfolio. All told we nosed up by another 1% over the quarter.
Looking into our different asset allocations, our temperamental friend, Emerging Markets, shed over 3% in September but put on more than 4% overall since our last report. Meanwhile our two gilt funds continue to slide in the face of rising interest rates and UK economic uncertainty.
It’s all just the usual bump and grind as our advancing index harvesting machine reaps the growth of global capitalism. Here’s the latest portfolio crop in spreadsheet form:
The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000 and an extra £900 is invested every quarter into a diversified set of index funds, heavily tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts here.
The recent performance of Emerging Markets tells us a lot about how het up we should get when a volatile asset class takes a dive.
The following graph shows the performance of our iShares Emerging Markets index tracker over the past month according to data site Trustnet. It doesn’t look or feel great:
It’s hard not to feel pain when staring at a sharp downhill tumble. But if we zoom out over three months, the situation is reversed. Emerging Markets are still comfortably up:
Although the chart doesn’t show it, Emerging Markets were the best performing asset class in our portfolio during this period. But was the recent dip the beginning of a terrible fall? The garden was looking a lot rosier in late August.
A year gives us a much better perspective:
That September slip is nothing we haven’t seen before. There was even nastier spill last November. Over the course of the year Emerging Markets are up by 15% – only bettered among our holdings by our Global Small Cap fund.
Now let’s zoom out again:
This five-year view reminds us how wild a ride Emerging Markets can be. They rose 45% in the last half-decade but went precisely nowhere for nearly four years. You can see how a previous peak in April 2015 was wiped out in the blink of 12 months. Compared to that, the last month is nought but a wee dip.
Personally, my brain cannot help but read triumph in those upward slopes and feel the queasy in every dip. But those are temporary concerns. In stark contrast to the advice of the mindfulness brigade, investing is not about living in the now.
The graph is a good analogy for how we’ll feel in the future. The longer your perspective, the less important those daily, monthly and even yearly results will look and feel. A couple of decades of growth should smooth away their impact, leaving them as barely traceable outlines of a distant event whose significance is confined to the past.
Every quarter we tip another £900 into the market mixer. Our cash is divided between our seven funds according to our asset allocation.
We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves, but all’s quiet this quarter. So we’re just topping up with new money as follows:
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF 0.08%
Fund identifier: GB00B3X7QG63
New purchase: £54
Buy 0.278 units @ £194.27
Target allocation: 6%
Developed world ex-UK equities
Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%
Fund identifier: GB00B59G4Q73
New purchase: £342
Buy 1.088 units @ £314.30
Target allocation: 38%
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.38%
Fund identifier: IE00B3X1NT05
New purchase: £63
Buy 0.233 units @ £270.11
Target allocation: 7%
Emerging market equities
iShares Emerging Markets Equity Index Fund D – OCF 0.25%
Fund identifier: GB00B84DY642
New purchase: £90
Buy 58.747 units @ £1.53
Target allocation: 10%
Global property
iShares Global Property Securities Equity Index Fund D – OCF 0.21%
Fund identifier: GB00B5BFJG71
New purchase: £63
Buy 32.847 units @ £1.92
Target allocation: 7%
UK gilts
Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374
New purchase: £234
Buy 1.468 units @ £159.38
Target allocation: 26%
UK index-linked gilts
Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%
Fund identifier: GB00B45Q9038
New purchase: £54
Buy 0.296 units @ £182.34
Target allocation: 6%
New investment = £900
Trading cost = £0
Platform fee = 0.25% per annum.
This model portfolio is notionally held with Charles Stanley Direct. You can use that company’s monthly investment option to invest from £50 per fund. Just cancel the option after you’ve traded if you don’t want to make the same investment next month.
Take a look at our online broker table for other good platform options. Look at flat fee brokers if your ISA portfolio is worth substantially more than £25,000.
Average portfolio OCF = 0.17%
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.
Take it steady,
The Accumulator
What caught my eye this week.
I was a little disappointed to hear (via DIY Investor UK) the Chairman of City of London Investment Trust making vaguely fearful noises about the liquidity risks of Exchange Traded Funds (ETFs).
City of London has a very good story to tell – its charges are low, and it’s beaten the market over three, five, and ten-year periods. It doesn’t get much better for an active fund, really.
And to be fair, compared to some outlandish charges you hear, the passive swipe made in its final results is pretty innocuous:
It also remains to be seen whether passive funds such as Exchange Traded Funds provide sufficient liquidity in a bear market because they have not been tested in their current size.
By contrast, City of London’s gross assets now exceed £1.5 billion and its market capitalisation stands at just under that figure.
Our size means that we provide investors with a ready liquid market in our shares and our closed end status enables us to ride out market setbacks without being forced into selling sound investments at inopportune moments.
But while all that’s technically true, I don’t think issues about the size and structure of the ETF market are very relevant to investors in City of London.
Yes, the ETF market is far larger than it was a few years ago. And yes, during moments of dislocation, ETF liquidity can be interrupted.
However these interruptions have tended to be very brief – think minutes, not days. Most of the time only smaller ETFs investing in much less liquid securities see any sustained mispricing. (I’d be cautious with so-called ‘liquid alt’ ETFs for that reason).
Moreover, as an active investor I see investment trust prices jumping around and spreads widening and shrinking all the time. Trading at a discount (or premium) to underlying assets is pretty much a feature not a bug for investment trusts. Indeed during the last bear market, the discounts to net assets on income investment trusts soared – as I flagged up at the time.
It’s true that the closed-ended nature of an investment trust means it does not need to sell underlying assets in a panic, which can be a benefit – especially if you want exposure to those less liquid assets where niche ETFs may struggle.
But the share price of the trust itself always fluctuates. And when the underlying market they invest in is in freefall – such as in a market crash – you can be pretty confident a growing discount will reflect that strain. 1
Less knowledgeable investors who bought into reassuring words about the size and strength of a particular trust might be somewhat surprised if and when this happens. Especially as I am confident the biggest ETFs trading in the sort of liquid blue chip shares that big income trusts own will more or less function as normal and trade in line with assets for 99.9% of the time, even during a bear market.
Brief disruptions to ETF pricing may be a problem for some kinds of investors – say the hedge funds who use them in place of direct shareholdings to quickly shift their exposure to markets.
But most long-term private investors – exactly the sort who might favour investment trusts – would probably prefer the twice-a-decade 20-minute interruption to smooth pricing that an ETF might suffer over a persistent discount to the worth of their fund in a bear market.
I like the City of London Investment Trust – and not coincidentally my mum is a shareholder – but I’m not sure a fight with, say, a cheap and liquid ETF like the iShares Core FTSE 100 ETF is one it wants to pick.
What caught my eye this week.
Another week in the time-warp that is Brexiting Britain. Don’t hold your breath if you’re waiting for Star Trek.
First we had prime minister Theresa May’s ‘Brexit vision’ in Florence.
While almost devoid of content, I thought May delivered a pretty rousing speech.
Unfortunately it was almost 18 months too late.
True, it wouldn’t have convinced me Brexit was a good idea back in May 2016. But I would have doffed my cap to her for making a stirring case.
But this wasn’t a wishy-washy Vote For Us campaign speech. This was a speech given more than a year after the UK voted to leave the EU! In a Referendum where many apparently thought we’d be more than halfway to the exit by now.
And it’s ever more abundantly clear that there is/was no idea of the scale of the challenges, no plan, no progress – just barely concealed panic.
The only content in this curious piece of should-be historical reenactment? An admission that – of course – there will be a transition period and – of course – the UK will continue to pay into the EU during it.
Both are entirely obvious requirements to anyone but the politicians on the Leave stump last June, and to a sizeable cohort of their voters.
You might consider May vaguely acknowledging these realities is progress, but it wasn’t delivered in a grown-up or rational way. Rather she offered a deeply couched acceptance to soften up the Brexiteers for the inevitable. It was in the same way flummoxed parents promise to the kids in the back of the car that there’ll be ice creams later but first we have to go to B&Q. Miserable.
Meanwhile back in London – shining capital of a bold new Brexit Britain or Wiley Coyote running over a cliff-edge, depending on your point of view – we had Transport for London announcing it would not be renewing Uber’s licence to operate, potentially cutting off a service enjoyed by three million people at a stroke on 30 September.
True, Uber won’t just cease operations – there will be an appeal. An appeal I suspect they’ll win. We might be tending towards mob rule in the UK, but the mob wants Uber and I think they’ll keep it.
But to try to cut the service down at a stroke seems a Draconian way to do business in 2017.
Why not big fines? Why not notice periods? I’m not an expert on taxi cab licensing, so perhaps my thoughts are wide of the mark. But to me it seems like a return to 1970s-style local politics and protectionism, and emblematic of the irrational way we’re making decisions these days.
Uber is a far from perfect company, but the world and its dog knows that. The founder has been replaced. The internal culture is getting an overhaul.
Yes, there have been some horrible crimes committed by Uber drivers. If it has dragged its feet bringing them to light, it should be punished.
But those celebrating Uber’s apparent cessation in London should think about the bigger picture.
Firstly, as is often the case with capitalist innovations, it’s easier to overlook the massive way the company has improved life, just because it happens to make a profit.
Uber has facilitated millions of journeys in London – especially late at night or to out of the way places – that made living in this often difficult city easier. We’re talking tens of millions of hours of lives better lived.
Then there are the attacks and similar. Nobody wants to write “yes, but” and consider the bigger picture when it comes to such things – but that’s exactly what we should do.
Over the past two decades I have seen numerous friends – most often younger and arguably more vulnerable women – get into literally random cars on the street, despite my protests, for various financial and perceived safety reasons. Horror stories about rogue mini-cab drivers were ubiquitous until Uber arrived on the scene.
Are Uber-haters considering the alternative of going back to 2010 – many more people walking home late at night or getting into unlicensed cars at 3am drunk or similar because they can’t find/afford a black cab or even a mini-cab?
I agree Uber has not been the greatest company culture-wise and they need to upgrade their practices. But the technology is revolutionary and it has transformed late night London. The fact that all Uber journeys are logged and linked to a user makes it far safer than most alternatives. TFL should be working to roll this out everywhere, not seeking to roll it back.
Uber should have been fined or put on some sort of official notice or similar. They should not exist outside of regulation. But there’s no use being sentimental about it. Black cabs are as dead long-term as red phone boxes.
Let’s hope this decision isn’t the canary in the Brexit coal mine that Tyler Cowen at Bloomberg fears:
The new Britain appears to be a nationalistic, job-protecting, quasi-mercantilist entity, as evidenced by the desire to preserve the work and pay of London’s traditional cabbies. That’s hardly the right signal to send to a world considering new trade deals or possibly foreign investment in the U.K.
Uber, of course, is an American company, and it did sink capital into setting up in London — and its reputational capital is on the line in what is still Europe’s most economically important city…
Unfortunately, the U.K. is in a position where it can’t afford too many more mistakes. It just made one.
