Good reads from around the Web.

I think we’re nearly all agreed now that UK property prices are too high, and in the South East at historically stretched levels compared to rents or incomes.

(Okay, so my mum is a holdout. She rightly views my housing sob story as leavened by a substantial dollop of my own personal failings… I think she also wants to see a granny annex in her future!)

You do still hear from the odd Barry Blimp who says that it was just as difficult to buy in his day, when he bought a three-bedroom house in Zone 2 in London aged 25-years old on his graduate salary – and that he managed it because he didn’t own an iPhone.

But even most naysayers have shifted to tell you that fine, yes, house prices are absurd, but what’s so bad about renting anyway?

This view is invariably advanced by people who haven’t rented for decades, and often as not who’s only recent contact with a tenancy contract is the one they just got signed for their latest buy-to-let.

Down and out in London and Bristol and Oxford and…

Meanwhile people who feel locked out of the property market know that it’s not just a matter of being allowed to bang nails into the walls to put up their own IKEA pics.

They can see how not owning housing – geared up via a mortgage to lottery-level winnings for older generations – has left them floundering in the wake.

I see this illustrated all the time with my 40-something London friends.

The majority who bought in their 20s never stop taking holidays, eating out, and buying fancy bits and bobs.

The few who didn’t even avoid having too many Sunday lunches in the local gastropub – or go the other way, throw in the towel, and spend their large yet useless deposits on year-long hedonistic benders. (i.e. A bit of travel).

As for my 20-something friends, they live from paycheck to paycheck and imagine owning a one-bed flat with the same sense of wonder with which the Baby Boomers viewed the moon landings.

Before anyone gets out their tiny violins, I’m not talking about me. My lifetime savings rate has been very high, and my investment returns above average. As a result I’ve amassed a chunky warchest. I could buy, but I don’t.

However I don’t think it’s reasonable to expect an entire generation of bright young people to turn themselves into a Scroogier version of Warren Buffet just to do what their parents did as a matter of course.

Fine, perhaps this is the way the market will be for the foreseeable future. But if we’re being pragmatic then we should at least acknowledge the strain it is putting on social norms.

The return of feudalism

In particular young people – who also face student debts, high rents, low wages, unfunded pensions, and no chance of a BTL windfall – will get relatively poorer even if they do the right thing, unless some sort of action is taken.

Business Insider recapped a Resolution Foundation paper this week that shows how property ownership in the UK is driving inequality.

It notes that:

Britain has changed since 1998.

Back then, it only took workers about three years to save enough money for a down-payment on a house.

Now it takes 20 years, on average.

(Sure Barry, it was just as hard in your day. The kids should shut up and stop drinking cappuccinos, right?)

This graph shows how property ownership is now the major driver of inequality:

Source: BI/Resolution Foundation

The key is to look at how the lines used to be close together, and now aren’t. It was not ever-thus, in short. Not owning a home didn’t put you on a downward escalator for life.

Raising the White Paper flag

Like most, I don’t see much in the Housing White Paper that looks likely to address the under-supply of new homes in the UK.

Perhaps recent political events might if they curb migration and hence population growth – but then lower immigration could also reduce supply by depleting the workforce. (House builders are already complaining about a skills gap).

Maybe it’s time to think differently. If we can’t build enough extra houses, then perhaps those without houses could get a different kind of tax break, for instance.

It irks me enormously that friends see 10-20% capital gains tax-free growth each and every year on their homes while I face a huge bill if I sell various un-sheltered legacy holdings.

Shouldn’t investments be fungible, especially nowadays when it is so much harder to buy property? Maybe if you don’t own your home you should get a six-figure CGT allowance?

Okay, that’s an aspiring 1%-ers problem. The vast majority of millennials will struggle to even make a dent into the new £20,000 annual ISA allowance that’s coming in April.

Maybe renters could deduct their rent from their income tax bill? It sounds insane, but then crazy ailments may require outlandish treatments.

What the government should not do is row back on the tax changes hitting BTL. If anything it should speed them up. There’s no justification for a policy that actively encourages a minority to get richer, as per the inequality graphs above, while other citizens are locked out.

Oh, and before someone says it, I don’t think inheriting property wealth is the ideal solution. That just compounds the new feudalism of a property owning class and a rootless peasantry that we seem to be sleepwalking into.

Unless like me you want to start taxing inheritances at 90% or similar. And I know very few of you want to do that. 🙂

Here’s a few more property stories from this week:

• Property owners get richer while everyone else gets poorer – Business Insider
• How to own a home by the age of 25 – BBC
• The 30-somethings fleeing London’s property prices – The Guardian
• Can the Government’s Housing White Paper fix the “broken” market? – Telegraph
• Buy-to-let landlords face remortgage crunch [Search result] – FT
• You could buy builders for their high dividends instead of BTL – ThisIsMoney

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This article about investing in the Donald Trump era is by former hedge fund manager turned author Lars Kroijer, an occasional contributor to Monevator. He also wrote Investing Demystified.

New US President Donald Trump is making headlines on an hourly basis. Our social media accounts are going crazy with comments about his presidency being a de facto coup or a one-way route to the apocalypse.

You may well be asking whether you should change your investment strategy as a result?

In short, the answer is perhaps – but probably not how you think.

In previous articles I have outlined how I consider it highly unlikely that the vast majority of investors can beat the markets – whether through active stock selection, market timing, or via picking the one out of ten actively investment funds that may manage to do so over a ten-year period.

I’ve also argued that for your equity exposure you should pick the broadest and cheapest index tracking exposure you can get your hands on, namely a world equity index tracker fund.

‘Just’ because Donald Trump is now President of the United States, that is no less true. You most likely couldn’t beat the markets before 9 November 2016. You still can’t. That hasn’t changed.

But what also hasn’t changed is that you can still expect to make returns of perhaps 4-5% above inflation. This estimate is based on over 200 years of history of equity returns in many states of the world.

However these average long-term expected returns will be volatile over the short-run. You can expect much higher returns some years, and terrible losses in others. And you can reasonably expect to be compensated in higher risk periods with commensurate higher expected returns, though there are no guarantees of this.

Okay, so even if in a Trump world we haven’t found a crystal ball, what can we do?

In my view, there are two main things we should focus on:

1. Evaluate whether the risk of the markets has changed enough that we should re-evaluate the risk levels of our portfolio.

2. Consider if the sudden change in the political landscape has changed our overall economic life enough that our risk profile should change as a result.

For the rest of this article I’ll explain how to do both things.

Market risk under President Donald Trump

You’ll find below a graph of the expected future risk of the US stock market. Without being too technical, it measures the expected standard deviation six months into the future. Since the index value is based on the implied volatility of equity options, it is a market price.

If you think you know the future volatility of the market better than this chart then you can get rich trading it. (Many try!)

Source: CBOE.com

There are many issues with this kind of chart, such as that the value itself is very volatile (so the risk changes a lot), the volatility doesn’t capture ‘fat tails’ ((The fact that unlikely events happen far more than predicted by the normal distribution assumption of the standard deviation.)), and it only looks six months into the future. All that said, it does give a good idea of future expected risk.

Look at the very volatile 2008/09 period circled in red, and compare it to the more recent period, also circled. What this tells us is that as momentous as the election of Trump was politically, in terms of market risk it hardly made a dent.

Because the election of Trump was a genuine surprise – Betfair had the probability of Trump becoming president at about 15% on election day – we can get a good sense of how much things shifted as a direct result of Trump’s election. (If Trump had been expected to win, then the impact of his presidency would already have been built into the market price.)

As things turned out, the equity market risk hardly moved.

Confused? Don’t be.

Just know that the expected risk of the stock market in the future did not change as a result of Trump, and so this factor alone should probably not cause you to change the risk profile of your portfolio.

Your risk with Trump as President

While the market risk has not changed as a result of the election, your personal risk might have. The overall market did not move hugely after the Trump election, but there are clearly some sectors and geographies that could be hugely impacted by his election.

You therefore need to understand how Trump’s election might affect your overall life.

For example, if you work at a Mexican company that exports most its products to the US, then a Hilary Clinton victory would clearly have been better news.

Similarly, imagine a scenario where you work in mid-level management at a BMW factory in the United States. You’re so confident in the company, you’ve previously invested most of your savings in BMW stock, your pension is guaranteed by BMW, and most people in the town you live in are also employed by BMW.

Now imagine Trump goes on one of his 3am Twitter rants:

“BMW are a bunch of foreign losers. Time to kick them out”.

Then imagine some hours later after Trump has slept a bit and had his morning coffee he tweets:

“I meant it. We are shutting them down”.

All hell breaks loose. BMW is down 50% and people start talking about the need to close the US operations. There’s a discussion about the risk of the BMW corporation defaulting on its debts.

Your whole economic life has been turned upside down because of Trump getting out of the wrong side of bed. To say you are overexposed to BMW would be a massive understatement. Your job, pension, savings, and house all correlate to the BMW corporation. You were guilty of putting all your eggs in the BMW basket and are now paying for it.

Very nasty – but less extreme versions of this example are equally worth avoiding.

Is Trump fighting for you or gunning for you?

So how do you know if sectors you are exposed to might be helped or hurt by Trump? Or by Brexit, incidentally, or any other big event?

Again, because Trump’s victory was a surprise we can see the market impact right after the election. If Trump’s hypothetical BMW Twitter rant had taken place before the election then you would expect BMW stock to be down a lot right after the election. That’s how you know.

It was not a surprise to see the Mexican Peso decline after Trump’s surprise win.

My advice? Sniff around. Understand your economic exposure and see how those sectors fared in the market’s mind after the election. Then look at how much Trump’s various statements and Tweets impact on how these things move.

Maybe it’s time for a change

If your investment portfolio consists of a world equity tracker combined with super low-risk government bonds, you will have broadly diversified away a lot of the sector and company-specific Trump risk.

But as illustrated by the BMW employee example we just saw, your individual non-portfolio exposures may still lead you to change the risk you feel you can afford to take in your investment portfolio.

For example, you may previously have felt quite relaxed about stock market risk, and employed a fairly bullish 75%/25% split between equities and bonds.

But after assessing your Trump-adjusted risk, you may feel a 50%/50% risk is appropriate.

This would not be because the markets have gone down in value, or up in terms of risk. Rather it would be because the sectors or geographies you are otherwise exposed to has changed your overall risk profile under Trump.

Deciding how a Trump presidency might impact your overall economic life is far from a science. We don’t really know and can’t expect to be precise about it.

But you shouldn’t ignore the issue. The Trump presidency has the potential to be very consequential on your economic life.

There will be other shocks in the future, too. If you’re uncertain as to how much risk you should be taking in your portfolio, perhaps consider using a financial advisor to help you think through your exposures.

When hiring someone, make sure you don’t start paying them to actively outperform the market. Just as you probably can’t do that for yourself, they are likewise extremely unlikely to be able to outperform.

But they should be able to help you understand your overall economic life, how your risk profile may have changed – or even how you can protect yourself from being the mid-level BMW manager in the example above.

President Trump and you

I know it may feel odd that something can dominate the news like the Trump presidency and yet we are still not able to justify having a different perspective to that of the overall market.

However do think about how Trump might impact your job, sector, house, pension, insurance policies, and other things that contribute to your overall economic welfare – and then perhaps re-consider the risk of your portfolio as a result.

Below you’ll find a video that recaps the things I’ve discussed in this article. (You will find some other investing videos on my YouTube channel).

Lars Kroijer’s book Investing Demystified is available from Amazon. He is donating all his profits from his book to medical research. He also wrote Confessions of a Hedge Fund Manager.

The Financial Services Compensation Scheme (FSCS) has increased the protection it gives you on cash savings that you hold in any bank or building society accounts that it covers.

The compensation limit for deposit protection is now £85,000. The limit for joint accounts is £170,000. These limits were raised at the end of January.

The £1m limit for temporarily high balances is unchanged. (See below for more on this).

What is the FSCS?

The FSCS is a statutory compensation scheme for customers of FCA ((Financial Conduct Authority)) and PRA ((Prudential Regulation Authority)) authorised firms. The FSCS is funded by levies raised from such firms.

The deposit protection the FSCS offers is one of the significant benefits of cash for private investors. Everyone should know the details.

The FSCS protects deposits with the vast majority of mainstream current and savings accounts that you’re likely to come across, including virtually ((As far as I know it’s actually all such accounts, but there may be quirky exceptions so please do double check!)) all those available from the major UK banks or their subsidiaries that are authorized by the PRA or the FRA.

Do make sure you’re covered by the FSCS, don’t just assume it. See the PRA’s website for a full list of regulated firms.

Note: Non-cash investments are treated differently. We’ve covered investor compensation in a different article.

What happens if I have more than £85,000 in a failed UK bank?

If you hold cash deposits with a financial institutions in excess of the deposit insurance limit, then you’d become a general creditor of that institution in the event that it fails.

For instance, if you have £200,000 in deposits in a sole account with a failed bank then the last £115,000 is not guaranteed and you wouldn’t be able to recover it via the FSCS.

It’s important to note the FSCS guarantees are on a per institution basis. See below.

What is an FCA Authorised Institution? The FSCS compensation limit does not apply to any particular bank, let alone to multiple accounts you may have with the same bank. Rather, it is applied per FCA registration licence number. This is important because banks you perhaps do not realise have anything to do with each other may be owned and operating under the same licence (e.g. Barclays and The Woolwich) while other banks that you know are connected by ownership may actually operate under distinct licences (e.g. Lloyds Bank and Halifax). See Money.co.uk for a list of the different UK firms and the single licences under which they operate. You can also download a list from the PRA.

Spread your cash between accounts to maximise protection

As we’ve said, the FSCS will compensate you for up to £85,000 on cash deposits held with any ‘authorised institution’ in the event of its failure. (I’m ignoring joint accounts here for reasons of simplicity. You can do the maths for homework!)

The total is calculated by adding up all the money you’ve spread across any of that institution’s subsidiary banking brands registered under the same banking licence.

For instance HSBC and First Direct are registered under the same banking licence. If you had £45,000 with one and £45,000 with the other, then in the event of failure you’d only be compensated for £85,000 of the total £90,000 you’d placed with them.

In contrast £90,000 split across two firms with different banking licenses would be covered in full.

Once you have more than £85,000 in cash savings you should therefore open a new bank account with an entirely different qualifying banking group. By saving new cash there you can ensure all your savings are eligible for compensation in the event of a failure.

Remember to consult that list to ensure your money is appropriately diversified.

Temporarily high limits

The FSCS provides a special £1 million protection limit for temporarily high bank balances held with a bank, building society, or credit union if it fails.

This special limit was introduced a couple of years ago as a result of the European Deposit Guarantee Schemes Directive. It offers people with some types of temporary high balances FSCS protection on up to £1 million for up to six months.

If you’d just sold a house, for instance, you might have a temporarily high balance. The temporary protection stops you having to open numerous different bank accounts just to protect your short-term cash hoard.

• It’s worth reading the FAQ on the FSCS website if you have a temporary high balance.

Fluctuating deposit protection

So the deposit guarantee limit is £85,000. As I mentioned this was changed on 30 January 2017. Before then the limit was £75,000.

Confused? Buckle up – it gets worse.

You see, the limit has been at £85,000 previously. It then went down to £75,000 and now it has gone back up.

These fluctuations are due to changes in the exchange rate. As the pound has strengthened and then weakened against the euro, the limit was lowered and then raised again.

Some readers might be pleased to learn they can blame Europe for the confusion. Others might blame our vote to Leave. You see, the European Union Deposit Guarantee Schemes Directive fixed a guarantee limit of €100,000 (or the equivalent) across Europe. This means changes in the pound/euro exchange rate makes the UK’s limit more or less attractive, compared with the situation over the Channel.

To address this, the directive requires the UK regulator to review the limit every five years. However it can also move before then if big enough exchange rates shifts warrant it.

And that’s what has happened. Twice. In just a couple of years!

I presume the reason for harmonizing protection is to stop people moving money from one country’s banks to another in a panic.

Such concerns seem finickity in normal times. But the most recent rounds of chaos – the credit crunch of 2008 and the euro crisis of 2012 – should still be fresh enough in our memory for us to see why regulators would seek to curb ‘regulatory arbitrage’ like this.

Nevertheless it is confusing.

At least the FSCS has so far announced the limit changes ahead of time. It does this to give cash fat cats time to move their money around if they need to.

But roughly 95% of people were entirely covered by the lower limit, anyway. Hard as it may be to believe around here, the vast majority of British people have less than £85,000 in savings. (Some 16 million have less than £100.)

Also, the changes are obviously more of an issue when the limit falls than when it rises.

At the new higher £85,000 limit, you’re clearly better protected than before. But when the limit falls – which it could well do again in the next few years – you might suddenly have money at risk of a bank failure. (There’s also been confusion in the past with fixed-term deposits that straddle the change dates.)

Beyond cash

Remember that some other very low-risk assets, specifically UK government bonds, have a different risk profile to cash. They won’t be in any immediate danger should a commercial bank go bust. ((I say “immediate danger” because in a scenario where UK banks are going bust left and right, investors *may* question the viability of the UK state and such bonds could plummet. Given that we can print our own currency to meet our obligations, however, it’s much more likely that they’d rise in value in a crisis, at least in pound sterling terms.))

Former fund manager and Monevator contributor Lars Kroijer has written about the safety of your cash in the bank. He believes you should assess the credibility of individual banks, even with the FSCS protections in place. Read his piece for more.

Bottom line: If you’re lucky enough to have a lot of cash, pay attention.

I have a dream: One guarantee limit, never changing

It seems sub-optimal to me to chop and change legislation specifically designed to give people confidence in the banking system.

When the guarantee was lowered, I wrote:

I remember the craziness of the last financial crisis, so I do understand the desire for a harmonized protection scheme.

But who is to say the Euro won’t be stronger in six months anyway? Let alone a year or two?

Well here we are just a couple of years later, and the limit has indeed been raised.

True, for most savers there will be no practical difference – the old limit was sufficiently high to cover their deposits and 98% are covered by the new limit. But they will have read a lot potentially confusing stories. Again, not what you want with this sort of scheme.

Ideally anyone in the street could tell you what the compensation limit is. It wouldn’t change from year to year. Maybe once a decade? That’s the way to instill confidence.

I also don’t see why the general deposit compensation limit should be raised, but not the temporary high limit. Obviously very few people will have temporary high balances at any given time, but the principle that justifies the shifting guarantees should still hold.

It’s all a bit silly really. From the UK state’s point of view, this protection is akin to the deterrent affect of nuclear weapons. It’s there but you don’t ever want to use it.

If the FSCS ever has to start bailing out UK High Street banks, we’d be in serious trouble. The state would probably step in, and all bets are off. (In the last financial crisis the UK government even covered private savers with overseas failed banks that weren’t protected, for instance. Next time it could be more or less generous).

What the FSCS is really there to do is stop bank runs, like we saw with Northern Rock in 2007. The fact that it’s there should mean we don’t ever actually use it, because savers know their money is protected. A deposit guarantee scheme is not something that should ever be used in the normal run of things.

I guess there does have to be some limit to the protection. Without it, oligarchs might move billions to UK banks for rock-solid protection. That would represent a huge liability to the state.

But why not protect all savings up to say £1 million? At that point the limit would be irrelevant for virtually everybody – even the vast majority of those with multiple accounts held under the same banking licence.

£1 million is easy to remember, too!

Perhaps Brexit will deliver some stability, although depending on our terms of exit we may seek equivalence with EU legislation, which would leave us where we are today.

In any event, for now £85,000 per authorized institution it is. To be ultra-safe you should probably diversify your cash savings beyond that between different banks as appropriate.

It’s always safest to assume a failure is possible. Even if it’s very unlikely.

Note: This post has been updated, and some older comments below may refer to the previous FSCS compensation limit. Check the date of the comment if you’re confused!