Good reads from around the Web.

One of the big frustrations of the ‘priced-out’ generation – which is fast becoming anyone under 35 in the South East, or at least those without access to Feudal leg-ups from their parents – is that older generations really don’t get how tough it is to buy a house under your own steam now.

“It was equally hard in my day,” some 60-something property millionaire next door will say.

“We ate baked beans for three months and used toxic waste drums for furniture. To get a mortgage I had to marry one of my girlfriends just to look respectable to the bank manager, and she still had to take care of him behind the golf clubhouse to seal the deal. Interest rates were 8%, and I had to sell my LPs.”

Even I’ve underestimated the younger generation’s despair, and I’m not a complacent home owner.

Rather, as a conscientious objector to high house prices in London and hence a deliberate renter, I’m on their side, too.

So I really shouldn’t have opined to some much younger friends over email that their unwanted office relocation out of Central London to Zone 2 at least put them within shooting distance of cheaper property they might eventually buy.

One bombarded me – as is the way of the under-30s now – with animated movie clips of the clinically insane cackling and of cars being deliberately driven off cliffs.

The other emailed: “Twenty three minutes on and I’m still laughing at the idea of ever buying ANYWHERE myself.”

I did the maths. He earns about £35,000 a year. He’s doing okay, by ordinary late-20s standards.

He’s screwed.

The dirty dozen

On this point, The Guardian has come out with some new statistics that show how stretched the market has become:

A homebuyer earning the median salary for their region in 1995 would have had to spend between 3.2 times and 4.4 times their salary on a house, depending on where they lived.

In 2012-13, the last year for which complete data is available, the median house price had risen to between 6.1 times and 12.2 times median regional incomes.

Prices have only pushed higher since 2012-2013.

And as those of us foolish enough to live in London keep reminding everyone else, it really is a madhouse down here:

In 1995, the median income in London was £19,000 and the median house price was £83,000, meaning that people were spending 4.4 times their income on buying a property.

But by 2012-13, the median income in London had increased to £24,600 and the median house price in the capital had increased to £300,000, meaning people were forced to spend 12.2 times their income on a house.

Now, this data does overly exaggerate the escalation in house prices to incomes over the past 20 years.

That’s because prices in 1995 were still in the dumpster due to the last big house price crash.

(Yes, we used to have those, even in London.)

I know that well, because that’s when I first took an interest in London property. The sticker shock of seeing prices well above those lows just 4 or 5 years later definitely discouraged me from buying, even when it was still a sensible thing to do.

Nevertheless that doesn’t change the thrust of the argument.

I’d imagine the median pre-1995 would still only have been around 5 times back to the mid-1980s, and probably lower before that.

But regardless of how much it’s grown, a price to income ratio over of 12 times in London is far in excess of what’s prevailed throughout history.

You’ve got to fight for your right to party walls

So younger people aren’t just moaning like every generation before them when they say that property is almost hallucinogenically expensive.

It is.

The wonder of it is they’re not rioting on the streets every day, like some previous generations would have.

Certainly the baby boomers of the 1960s would have been making their voices felt.

But then, they could afford to take a six months leave of absence to drop out and rabble rouse.

At least as far as the men were concerned, they lived in a world of full employment, free higher education if you could get in, good blue collar salaries if you couldn’t, and social mobility was peaking.

And though the fun wore off in the 1970s, by the 1980s they could begin amassing the property wealth they have today – aided enormously by the right-to-buy and buy-to-let booms that the current Government is only just applying the brakes to.

People obviously weren’t evil in doing this (despite what some bitter Internet warriors say).

They were just trying to improve their lot.

If Monevator had been around in the mid-1990s I am certain many of them would have been reading it – and for that matter I’m sure we’d have been making the case for getting into property for those double-digit yields.

But that was then, and this is now.

We know the consequences of all that, and something has to change.

A European problem, too

For me, it could eventually be the country I live in.

The gulf between what you can buy in the UK and in the great livable cities of Europe is staggering.

True, it helps enormously that I don’t rely on those famed London office-based salaries for my income – and that I’ve saved a fair wodge along the way.

So really all I’ll be doing if I was to move to Spain or Portugal or Italy is arbitraging how far my savings will go.

The indigenous youth of those countries actually think property is a pipedream, too, according to a report in the FT this week [search result]:

The affordability gap has widened so much that 72 per cent of Europeans questioned in the ING survey believe that society would benefit if house prices fell.

This is felt most sharply by renters, with 93 per cent of Spanish, 75 per cent of British and 74 per cent of French tenants citing expensive housing as a block on their path to home ownership.

Of course, in most of those countries a sickening proportion of the young haven’t got jobs at all.

That’s not the cure for high house prices that anyone wants.

You can’t swipe your first flat

Bottom line: If you know a young person, be kind to them.

Yes, they have iPhones, Tinder, and they live in a more tolerant, flexible society.

But the majority of those without wealthy parents foresee no chance of ever owning a place of their own.

[continue reading…]

Good reads from around the Web.

There is always lots of commentary when the stock market falls fast, but this week it seemed unending.

Given how rarely big declines have happened in recent years, I guess the excitement was not a surprise.

Pundits finally got another chance to express their worldly wisdom about plunging share prices.

• Traders like nothing more than volatile markets when talking about trading, as well as when actually doing it.

• Bears have waited a long time to say “I told you so”.

• Bulls had fun pointing out that being bullish has been right for many years.

• Legions of Warren Buffett disciples and buy-and-hold passive investors have been itching to show off their long-term thinking skillz.

I certainly wasn’t too precious to miss the chance, either.

My thoughts on how to face a stock market slump went up earlier this week.

Most of us kept calm and carried on

Actually, amid all the noise there was a lot of sensible stuff being said, at least on the Internet (and in the Monevator comments).

Perhaps it’s the people I read – largely investors, not journalists – but I came across much less of the hysteria that you tend to read in the newspapers.

My single favourite contribution was from US investor and Motley Fool co-founder David Gardner, in an excellent podcast that offered his rules of thumb on coping with stock market volatility.

I love Gardner’s thoughts on investing and I admire his active investing style, which focuses on expensive growth stocks. He has an interesting and internally coherent philosophy.

Obviously it’s also far off-base from the passive investing path I’d strongly suggest most people follow with most or all of their money.

But even passive purists will find this soothing podcast worth listening to.

Here’s an extract (and for context he’s talking about the US market):

The market always goes down faster than it goes up, but the market always goes up more than it goes down.

Those are opposed ideas.

Let’s start with the second part of that line. The market always goes up more than it goes down.

Well, that’s pretty obvious. Anytime you have something that’s gaining 9-10% per year over a century, you can expect that’s going to go up and, indeed, the market is doing not much more than reflecting the growth of innovation, technology, and wealth worldwide over the course of the last century.

And that’s why I have great confidence in the market over the next century, because we will all continue to grow and to prosper together.

Great businesses will come along. More great entrepreneurs will start things you and I can’t dream of and add value to the world. And that’s what’s happening with the stock market.

The market always goes up, of course, over time more than it goes down.

But what’s the first part of the line that I just delivered to you?

The market always goes down faster than it goes up.

And that’s really important to keep in mind — both of those thoughts — especially during a week like this one.

I can’t think of any time in my investment career when on three consecutive days my stock portfolio rose 4%. That just doesn’t happen.

You might have one great day here or there.

But the idea that over the course of three days somebody would gain 10-15% of their net worth thanks to just market gyrations — I’ve never seen that happen.

And yet, it just happened on the downside.

I’ve also never seen a stock market in one day gain 20 percentage points or more, but yet that did happen in 1987 on the downside.

The market always goes down faster than it goes up.

You can have fun picking apart the word “always” in the comments if you like, but I’d rather focus on the main point than on outlying periods and places dug up from the history books.

I think you’ll find that’s a much more profitable way to think in the long-term than lurking around bearish sites and forever fearing the next Japan.

Still, horses for courses.

[continue reading…]

When stock markets slump, people pay attention.

In some ways that’s a shame, because falling markets are as normal as rising markets.

Stock markets that go down faster than they went up are perfectly normal, too.

A stock market slump is therefore literally unremarkable.

But we’re human. We evolved to take an interest.

Our instincts run on fast-forward, even if our wiser slower brains try to press pause and ponder.

The price of admission

When markets fall, some panic and consider selling. That’s natural.

Others act brave, rub their hands, and boast about it being time to buy – to be greedy when others are fearful.

That sentiment is right, and they can sound like bold geniuses.

But how long were they sat in cash, waiting for the moment to get back in?

If you buy equities when they drop 10% but you missed the previous 50% rally, you’re not being greedy when others are fearful.

Not in the bigger picture.

You’re actually being timid when others are stoically betting on the long-term propensity of stock markets to rise over the long-term.

And you’re probably going to be left poorer compared to someone who is less cunning but more pragmatic.

The price they pay for their long-term gains is not feeling as smug as you when the market does swoon. They have to take their lumps.

Usually that’s a price worth paying.

Molehills and mountains

Investing is a marathon, not a sprint.

When markets fall you can feel like Indiana Jones, running down some corridor with the precious prize in your hand – but with a boulder thundering behind, threatening to squash you.

But that’s only one scene of the story.

A better movie metaphor might be The Lord of the Rings.

I’m thinking of that montage scene where three members of the Fellowship are shown galloping across at least three mountain ranges as part of their continent-spanning quest.

The heroes go up one peak, but right ahead of them is a march down the other side.

If the Fellowship had thrown in the towel at the bottom of one of those valleys then the ending would have been very different.1

Investing is likewise – at best – a long march through peaks and troughs.

Hopefully you’re heading higher overall. But it’ll be a long time before you know for sure, and you need to be careful not to end up in a hole when your time runs out.

Otherwise it’s two steps forward, one step back – and repeat.

You knew this was coming

Fresh comments appear on old Monevator posts when markets fall.

• “I’m re-reading this post to remind me why I’m invested this way.”

• “I thought I was ready for a hit but I have to admit it hurts.”

• “This is my first real experience of falling off a cliff and to be honest…I feel alright really…”

It’s humbling to think we’ve built a site that people come to when they feel unnerved by investing.

It’s great too when another reader replies with some sensible words. That means we’ve built a community.

My co-blogger The Accumulator is always more alert to these sorts of emotional shifts than me.

He suggested I write a post reassuring readers about investing through tough times.

I suppose this is my attempt, but it might not be quite what he was expecting.

If you look around the Web you’ll find plenty of pundits saying this latest correction was overdue, or the slump is overblown, or that it’s a buying opportunity, or that in a year it’ll be forgotten.

Perhaps. Nobody knows. Not just in the short-term – we all understand such volatility around here – but also in the long-term.

We make our best guesses and we build diversified portfolios that can hopefully withstand those guesses being somewhat wrong.

But we never truly know.

All over in a flash

I’ve lived through a few of these stock market storms, and they can still surprise me.

Regular readers will know I’m an active investor for my sins, despite my believing in the gospel of passive investing (we can discus why I’m active some other day).

I’m used to choppy asset prices, and to an extent I seek it out.

Yet on what they’re already calling the Black Monday of August 2015, I was newly dumbfounded.

I had cash ready to deploy into certain US companies, if I could get them at the right price.

So I waited and watched the US markets open – only to be left open-mouthed as the prices of huge firms like Apple, Facebook and Visa fell 10% or more on the off.

It was almost what I’d been waiting for. Yet I did nothing.

Why?

Because it was almost but not quite what I expected.

The deep price cuts were too much, too mad, too crazy.

I was shocked.

I remembered the financial panics of 2008 and 2009 and I wondered if I’d misread the situation. Was it happening again?

This moment seemed to last for an age as I dithered over whether to buy.

Then suddenly prices reversed and began speedily climbing (which seemed equally strange) and a company that I might have bought at 5%-off now seemed expensive at 7% lower – because 30 seconds ago it had been 15% down!

This craziness lasted barely five minutes in total, and by the end I’d bought … nothing.

So much for the bold old investor!

Cliff notes

That’s what markets do. They surprise you and unsettle you.

In response to the reader’s comment about falling off a cliff, another Monevator regular said: “This isn’t a cliff.”

And he’s right, according to the history books. Markets have fallen much further than 10%.

But perhaps for that reader, it was a cliff – even if statistically a 10% fall is nothing to write home about.

You’ll know when it’s a cliff for you when you feel it in your stomach.

Prepare yourself for a normal 10% correction and you’ll not be prepared when markets fall 20% or 30%.

Prepare for that and you’ll still feel sick from a 50% plummet like we saw a few years ago.

Been there, done that?

Perhaps they’ll fall 80% in our lifetime.

Who knows?

This uncertainty is paradoxically why equities can be expected to return more than cash over the long-term.

People hate this uncertainty, they hate the random plunges and swoons, and they hate the long periods where you feel like you’re banging your head against a brick wall for getting into shares instead of saving into cash, buy-to-let property or premium adult phone lines.

As a consequence, people under-invest in shares, and they over-invest instead in cash, bonds, and property.

And so most of the time those of us who do bite the bullet and buy shares get rewarded with superior gains over the long term.

Most of the time – but not always.

Expect the unexpected

If the volatility of equities was truly predictable – if a 10% correction did come along every 10 months, or whatever the statistics imply – then nobody would be too concerned by it.

Perhaps you’d book your holiday to coincide with the falls, and avoid all the fuss entirely.

But that’s not how markets work.

Markets do things like go up when the news is relentlessly terrible for years – and then plummet on a blue sky day.

Or you’ll have heard that shares “climb a wall of worry” and so you’re happy because everyone seems scared – and then the market crashes anyway, right in the face of that fear.

Or shares fall hard like in 2000-2003, and so people talk about a once-in-a-generation cratering – and then they crater again just a few years later.

That’s only once in a generation if you’re a gerbil with great grand kids.

The truth is you don’t know what shares are going to do. You just don’t.

You might think you do – that you’re girded for the long-term returns and for short-term volatility – but then, say, the whole world turns Japanese for three decades and even after dividends you barely break even.

Do I expect that to happen?

No.

But it might.

Known and unknown unknowns

• Nobody expected interest rates to be held near-0% for six long years.

• Few expected super-safe 10-year government bond yields to wallow below 2% – or to turn momentarily negative in Germany.

• Newlywed home buyers in Tokyo in 1989 did not expect to be underwater 30 years later.

• No gold bug expected the metal’s price to fall under $1,200 back in 2011 when gold was hitting new all-time highs above $1,800.

The subsequent fate of these surprising outcomes is misleading.

After a few weeks, months or years, they lose their power to shock and we come to accept what happened as just another data point.

They seem less scary then, and we return to believing we know what’s going on.

But do we?

Something else we don’t expect is already waiting in the wings.

Back yourself

You don’t need predictions from a talking head about where the market is going to go in the next six months.

Nobody really knows is the fact of the matter.

Deep studies have proven that rules of thumb for forecasting the market don’t work.

In general, some people are just better at talking like they know what’s going on than others – especially if they also happen to have been lucky recently.

Equally, you don’t need me to tell you to stick to your volatile equity allocation because the stock market will come good in the long term.

You need to be able to find that voice for yourself.

I love it when a plan comes together

The reality is you cannot be certain that even a well-diversified All-Weather portfolio will eventually deliver the returns you expect it to.

If you’ve done your planning properly then the chances are it will.

But it might not.

You have to understand that investing is the ultimate example of our brain’s capacity to anticipate the future and contemplate uncertainty (as opposed to living on your monkey brain’s fight-or-flight wits) but also that to prepare for the future is not to claim to predict it.

You need to create a financial plan that reflects this reality. Take your time.

Your plan should be:

• Well-diversified

• Realistic

• Worth pursuing

Beyond that, it’s your plan, and it needs to be specific to you.

Whatever it becomes, you need to be able to stick to your plan when times get rough.

Not because things might not be rough for a reason – who knows, the boat might well be sinking – but because it was your best, most rationale, most well-considered plan that you devised on a calm day when you were thinking straight.

The chances are that if things now seem rough enough to give you second thoughts then you’re also being emotional.

That will play havoc with your perceptions and decision making abilities.

Better to act dumb.

What have you signed up for?

Lash yourself to your plan like Odysseus had his men tie him to his ship’s mast.

That way you should avoid throwing yourself into the sea.

Why not stuff your ears with metaphorical wax if you’re a passive investor, too?

Odysseus had his men do that, so they avoided the sirens’ song altogether2.

Treat your investing like you buy your house – just get on with it, month in, month out, and don’t panic at every headline.

When I asked my co-blogger how he was doing during the last wobble, he told me that he was feeling fine, but that it might be because he hadn’t actually looked at his portfolio for several months.

Months!

Is that wise? It’s at least worth thinking about.

His investing runs automatically. It will go on like a robot slave, shunting money from his bank account to his diversified passive funds regardless of his opinion about the front page of the Financial Times.

It will throw money into the abyss if it comes to it.

Some will say that’s madness. Others will say it’s the height of passive investing wisdom.

I say it’s a plan. It’s his plan, and that’s why he can stick to it.

What’s your plan?

1. Assuming Gandalf didn’t turn up again with those elephant-sized EasyJet eagles to airlift them to their next destination. [↩]
2. A precaution Odysseus skipped over himself, presumably for the sake of a good story [↩]