Good reads from around the Web.

Simon Lambert at ThisIsMoney has done a deep dive on the recent household income and wealth figures from the ONS, and there’s something in there for everyone – from Jeremy Corbyn to Hyacinth Bucket.

For instance, your household needs to generate £84,747 of annual so-called original income ¹ to be in the top-fifth in the UK.

Quite a figure, even in households with two earners, once you get away from London.

The median for the UK though is a less imposing £35,204. Perhaps that’s not a bad target for financial freedom? Remember it’ll need to go up at least with wage inflation.

Simon also reproduces an interesting graph showing what it takes to get into the top 1% in terms of total household wealth.

(The answer is a cool £2,872,600).

Again, median household wealth is a far more modest £225,100.

Pension wealth at 40% accounts for the largest proportion of the total. Property is second at just 35%. I presume this is due to the high net present value of all those final salary and public sector schemes out there among the oldies.

First among more equals

Simon notes that the ONS figures – when adjusted for benefits and taxes – suggest Britain is becoming less unequal in terms of income.

That’s true from what I’ve read elsewhere, but sadly it’s not due to a reversal in the income disparity as it’s popularly understood.

Average CEOs are still making far more than they should. And while the national living wage will help, I don’t think Britain’s lowest earners are making out like bandits.

No, it’s back to pensions again. The triple-lock for the state pension has transformed pensioners’ incomes in recent years.

It’s hard to begrudge pensioners escaping the poverty trap, but it’s worth remembering that they had at least a shot at owning their own homes and generating a nest egg over the past 40 years.

I wonder if even the most diligent of today’s youngest, poorest workers will get the same chances? If the robots don’t get them, then house prices will.

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1. Original income includes sources of earned income, such as wages, salaries and pensions, and unearned income, that is, income from investments.[↩]

Good reads from around the Web.

I bet you enjoyed stellar returns in 2016. Most well-diversified passive investors in the UK should have got into the 20% range.

Our own model portfolio flew up 25%!

It is easy to feel like you did really well last year, but a mistake to feel special. So put off the phone call to Foxtons and forget watching Billions or even Downton Abbey for lifestyle tips.

2016 was only a great year for most British investors because the crippled pound lifted our portfolios – both in terms of overseas holdings, and also by boosting our biggest multinationals.

And a currency shift is the most even-handed lift up (or slap down) that the market can give deliver. It’s largely blind to your talents, or otherwise, as an equity investor.

This chart of the FTSE 100 in pound, dollar, and euro terms is sobering:

Source: 3652 Days

You got much richer as a global investor based in Britain in 2016 because the UK got much poorer.

In the stocks

To do relatively badly in 2016 with equities you needed to be a stock picker, with all the wide dispersion of returns that entails.

Focusing on domestically orientated UK companies got full-time small cap investor Maynard Paton a bit over 7%, which is hardly a disaster. But a few wayward decisions saw John Rosier clock up minus 4%. Veteran investor and author John Lee [FT search result] did much better (and beat the UK index) with a roughly 18% showing from his UK companies, but even that hugely lagged a global tracker.

I’m not picking on these chaps to ridicule them, incidentally. As an active investor, I enjoy their writing and insights, and as best I can tell they’re all skilled investors.

I’m simply highlighting how easily (so-called) “dumb money” trounced the enthusiasts in 2016. ¹

As an active investor you know you’re going to have bad years now and then. It’s the price of admission. Anyone who doesn’t is either a quant genius far above my pay grade (and theoretically prone to blowing up) or else they’re running a Ponzi scheme.

Besides, the majority of hedge funds delivered yet another lousy index-lagging year, too. Some of those guys are paid millions to deliver worse than nothing.

Pounded portfolios could recover

Returning to currency, one elephant in the room for active investors like myself, Paton, Rosier, and Lee is if and when the pound will reverse.

Normally long-term equity investors can choose to ignore currency fluctuations, for various reasons we’ll save for another time.

But the speed, scale, and political nature of the pound’s shock drop arguably means things are different today.

If the pound rallies hard, then UK stock picker’s portfolios pregnant with home bias should spectacularly outperform, all things being equal.

But all things are not equal, and for Brexit-phobes like me it’s a daily challenge not to try to see the UK markets through Marmite-coloured glasses.

As for the passive investors who hopefully make up the majority of our readers, I say enjoy those great returns.

Why not? The science tells us we feel losses twice as much as we enjoy gains – one reason so many people avoid investing in volatile shares in the first place. Perhaps taking a moment to appreciate the good times can help counteract that.

But remember the good times won’t last forever.

I’ve long been more optimistic about stock market returns than the gloomsters. But another crash someday is a nailed-on certainty, and the pound seems unlikely to fall so spectacularly again.

Remember, the long run real ² return from shares is about 4-6%, depending on who you read. When I hear even John Lee talking about a “steady, unspectacular year” which ended with a return three-times in excess of that, it does make me worry we might be getting complacent.

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1. I suppose it’s only fair to hint at my own returns, given all this finger pointing. I did better than those writers cited, but appreciably worse than a world index fund in sterling terms. And much of my gains were simply due to holding a decent slug of US stocks and other overseas assets.[↩]
2. That is after-inflation.[↩]

We’re always being told that inequality is the scourge of our times. But what, dear investor, are you going to do about it?

By trying to elbow your way into the 1%, you’re only adding to the world’s woes.

Yes you pay your taxes. Yes you’ve set up a Direct Debit to Oxfam.

But wouldn’t it be more helpful if you were less wealthy in the first place?

It’s easier to cut down a tall poppy than to grow a tree. If all the rich became poor the inequality problem would be solved overnight.

So here’s a public-spirited ten-point plan to undermining your investments in 2017.

Money can’t buy happiness – so follow this strategy to get rid of it.

1. Invest in expensive funds

The easiest way to start eroding your wealth is to pay a very expensive fund manager an outrageous fee for delivering returns below what you’d get from a cheap index fund.

Over the long-term, the steady damage done by fees of 1-2% or more will gobble up a big chunk of your returns.

2. Start stock picking penny shares

One danger with using funds is most managers have some clue about what they’re doing. And as they’re paid on performance, they’re going to give it a shot.

Even if you follow a ruinous strategy like continually chasing last year’s hot fund – buying high and selling low – there’s still a danger you could make money, albeit while likely still losing to the market.

Avoid this by stock picking obscure penny shares, ideally listed on the AIM market, perhaps operating in the mining or technology sector.

Real investors know the price of a share doesn’t tell you anything about its valuation, of course. A 3p share isn’t a tinpot outfit if there are ten billion shares in issue.

So look for companies with small market capitalisations – ideally rarely traded and reporting losses for years.

3. Don’t do any research

Once you’ve found a small, loss-making company to invest in, don’t do any more research.

Buy blind.

Okay, at a pinch you might check to make sure it’s on an outrageously hopeful P/E ratio – and perhaps drowning in debt.

But don’t read its annual report or dig into its management or any of that.

4. Trade as much as you can

Adopt the attitude of an inveterate gambler reduced to the fruit machines in the seediest corner of Las Vegas.

Continually shovel money into the market, pull the lever, and if anything goes well, dump it ASAP and swap it for a share that’s down on its luck.

Thanks to modern technology you can now trade via your smart phone on the bus or in the loo at work. Keep your portfolio turning over, racking up costs and working your way into ever more speculative positions.

5. Bet big on tips off Twitter

If you’re a sensible investor used to doing proper research, it might seem daunting to trade so frequently and ignorantly in your quest for poverty.

Happily technology has come to our aid.

Day traders on Twitter are a great resource for finding terrible companies to recycle your money into. Simply chase today’s hot tip and tomorrow move on to the next one!

All the time you’ll be racking up costs and buying dud after dud after dud.

6. Peruse share price graphs and chicken bones

A great way to have absolutely no idea what will happen next to a company’s share price is to study a graph of its historical moves.

Don’t be intimidated by the jargon of chartists. Invent your own price signals by referring to your favourite characters from The Lord of the Rings.

I find a Gollum’s Bottom indicates a perfect time to buy, whereas Gandalf’s Mighty Beard means a reversal is surely at hand.

7. Always keep the news on in the background

In many people’s estimation, 2016 was one of the biggest years for political shocks for a generation. Everything from Brexit to Donald Trump’s victory roiled the market.

Um, except it duly rose after those shocking events, regardless.

Truthfully, it’s very difficult to predict how share prices will react to general news headlines, good or bad.

A barrage of media speculation does wonderfully confuse matters at hand, however, so having the news channel on 24/7 should help you in your quest to lose money.

Another tip is to play gangster rap as loudly as you can stand during market hours.

Motivating songs about whacking your enemies and banking hundreds of Gs by the hour will put you in the right frame of mind for investing in public companies.

You might want to spread the word to your new squad on Twitter, too.

Tweets like…

“Yo yo y’all! Shorties be trippin out of A & J Mucklow Group PLC like dat Nick Leeson with dem runs! Best we ballers be buying $MKLW big style!”

…will go down a treat.

This is especially appropriate if your profile picture reveals you to be a bespectacled 50-something accountant from Maidenhead.

8. Spend your dividends

Studies show that while everyone focuses on share prices, reinvesting dividends makes up a huge portion of the market’s long-term gains.

So needless to say, spend those suckers on beer, crisps, and foreign holidays.

Whatever you do get them out of your portfolio, pronto.

9. Avoid ISAs and pensions

If you’re following this advice you should be consistently losing money and have no need to worry about capital gains.

However there’s always a risk you’ll take your eye off the ball and stumble into the next multi-bagging Amazon.

If you’d invested in an ISA or a SIPP, this would be a disaster, as you’d be forced to bank the gain tax-free when you realized your mistake.

However outside of these tax-efficient wrappers you’ll at least have the comfort of seeing the taxman potentially take a big chunk of your gains.

As a handy side benefit, you could be liable for tax on any dividends you find yourself receiving, too.

(In an ISA or SIPP, those dividends would have to be received tax-free.)

10. Don’t track your returns

Finally, it’s important to avoid properly keeping track of how your strategy is performing.

This gives you the best chance of avoiding learning any uncomfortable lessons, and boosts your ability to delude yourself that you’re doing really well as you steadily deplete your wealth.

Back in Bizarro World

So there you have it – my best stab at helping investors have a rotten 2017.

Of course, some wannabe Scrooge McDucks might decide to do the opposite of everything I’ve written here.

This would very likely to improve rather than hurt their investing. But there’s not much I can do about that!

Happy new year. 😉