What caught my eye this week.

One big driver of the thousands of young economic migrants who’ve come to Europe and the UK over the past decade is said to be the spread of social media.

Now that the developing world can see – it all its influencer-filtered glory – how the West has been living all these years, many of world’s poorer citizens want a piece of it.

Wouldn’t you?

Of course we might say they should look to pull their own countries up instead. Strive for freer markets, better governance, more education, stronger property rights, and whatnot.

I agree but it’s easier said than done. While globalisation and capitalism have done a decent job of alleviating true poverty since the 1970s, from memory only a dozen or so developing countries have made it to developed status since the 1990s.

Also you don’t need to be an 18-year old student activist at SOAS to see the West still has multiple embedded advantages, which it strives to protect.

It’ll even adopt the role of victim to do so. Just consider the spectacle of the world’s richest nation bemoaning bullies and vowing to be make itself great again.

Get up and go

The point is though that as an individual the situation can look even more hopeless.

You have to rely on your country’s politicians and institutions to do the right thing. We increasingly can’t even rely on ours for that.

Indeed isn’t there an ironic tension that it’s the champions of individualism in the right-wing media who are the ones who most bemoan young men taking it into their own hands to try to better their lives?

Of course understanding their motivations – and even extending our sympathy – doesn’t mean we should let them act against the law.

Illegal immigration is an overblown and politically weaponised issue, but it’s a real one. Not only does it erode trust in our multicultural social fabric in the short-term, it can only scale badly in the long-term, given the disparity in global demographics.

So we have to draw the line somewhere. Much of the nastiness we’re seeing these days is a reflection of the developed world’s struggles to do just that. (Though to be clear plenty of it is stoked by opportunism from a resurgent far-right, too.)

Would you like an extra zero with that?

All that said, perhaps Barry Blimp – or at least his more hard-pressed children – might be finding it a bit easier these days to empathise with economic migrants motivated by unimaginable wealth abroad.

Because the fact is the West is not a homogenous bloc. And it’s becoming ever-clearer that the US and the UK in particular have been on very different trajectories.

Of course there are millions of poor and struggling people in the US as well as here. And at least ours have better healthcare.

But this Tweet that went viral from Monevator contributor Finumus highlights a real contrast:

If you consume US personal finance and investing media, you’ll come across this wealth disparity all the time. Casual references to $1,000 splurged at a casino or $20,000 spent on a jet ski on a whim or $500 concert tickets as part of an everyday Friday night out.

It’s not that we don’t ever spend like this in the UK. It’s that there seems to be a zero tacked onto the end of the typical well-off American’s fun budget.

Their truly disposable income comes across as an order of magnitude higher.

Mickey Mouse budgets

Here’s an interesting example from the past couple of weeks. The writer Aaron Renn bemoans a ‘middle-class squeeze’ that has created Have-VIP-passes at Disney World and Have-Nots:

[…] there are just a lot of people making a lot of money today.

A couple where I live who are both middle managers at Eli Lilly could easily have a household income north of $350,000. The median individual employee at Facebook makes $379,000.

This has produced asymmetric financial competition. It used to be that there were rich people, but the middle class wasn’t really competing with them. Rich people bought mansions or luxury cars, but it didn’t affect the average person. There weren’t enough rich people to affect how long it took you to get through the line at Disney World, for example.

Today, there are so many people with so much money that the middle class is now in direct competition with people who have vastly greater financial resources.

You might argue Aaron’s take undermines my point. Sure there are lots of richer people in America, but that’s because of growing inequality there too?

Well yes, except that here in the UK we don’t even really have much in the way of wage inflation at the top. And on average we have had stagnant real wages since the financial crisis:

That chart is from last year, but it’s too striking not to use – and nothing much has changed since except more of us are paying higher-rate taxes and there’s a bigger tax burden on employers.

Again, I know and appreciate the US has plenty of poor people. But Britain is frequently compared to the poorest State in the US – Mississippi –  and in doing so we’re found to be worse off, per capita.

Not a good look for a nation that still considers itself amongst the leading ranks.

A plague on all your over-priced houses

What’s to be done about? Well plenty that isn’t. But just not shooting ourselves in the foot would help.

You wouldn’t want to make it more expensive to hire people, to overburden development, or choose to depress our wealth creators. And of course as a trading nation you wouldn’t impose permanently higher costs on the economy by deciding to leave the vast and prosperous free market on your doorstep.

At this point you might be hurrying to the comments to post your political point of view. But let’s face it, both sides have done poorly over the past few years.

Team Blue must take the lion’s share of the blame, thanks to their lengthy and shambolic stint in power that left us in this mess. But Team Red has been to the cavalry what Jar Jar Binks was to the war effort on Naboo.

Fortunately it’s still possible in the UK to get ahead financially, if you’re say a well-educated Monevator reader who saves and invests hard, uses tax shelters to the max, and you had the good fortune to be born before 1990.

However you can understand why some people jump on boats in despair at their own political systems.

Just be aware if you are tempted to cut corners that the US is destroying boats it doesn’t like in international waters. (It’s also urging we do the same).

Ho hum.

Have a great weekend.

p.s. We were a bit too imprecise about passwords in The Realist’s excellent debut article on preparing your paperwork ahead of your death. So please note it may be against the T&Cs – and even the law – to access some accounts after your loved one has died, if they were held in their own name. See this commentary from the Bereavement Advice Centre.

[continue reading…]

New contributor The Realist makes the case for a ‘When I Die’ file that gathers all your worldly financial, er, gumf in one place. Your heirs will thank you. Especially if you remember to tell them where to find it in advance…

Who wants to spend whatever free time is left after work, sleep, feeding children, transporting children, and cleaning up after children… thinking about how someday those children may find themselves struggling to unpick our finances when we depart?

I know I don’t.

I can barely find the time to watch the Formula One from two days ago on record – probably after I’ve already found out the result through some pesky algorithm. (Do better, artificial intelligence!)

However if my beloved sport is sometimes lampooned as a procession, then the same might be said about life.

By which I mean it’s only a matter of when, not if, we shuffle off this mortal track. And there’s no pause or rewind button to postpone the inevitable.

Will you, won’t you?

Statistically speaking, death is pretty likely. Studies show that 100% of humans participate in the endeavour at some point.

Oh well, when it’s your turn you won’t care what happens afterwards, right?

Wrong. Anyone who has written a will has already realised this – and thought about what they’d like to have happen when there are no more pit stops left to take.

Your will (‘and testament’) is the starting point for whoever will deal with the aftermath of your passing.

A will is legal document that outlines how your assets – money, property, possessions – should be distributed after your death.

Wills also enable you to appoint guardians for your minor children, and to name an executor to manage your estate. They can be written with a local solicitor or even online with services such as Farewill.

If you have no will then stop reading and go and get one. I’ll still be here when you’re done.

Got a will? Good stuff.

But that’s not quite the end of the story.

Because the reality is that while having a will is great in theory – in practice dealing with your estate can still be tricky for those left behind, even with a will in hand.

The Grey Box

Life is full of surprises.

In our family we expected the infirm, sedentary, eight-years-the-senior mother-in-law to go first. The younger, fitter, active father-in-law would surely only follow her some immeasurable rounds of golf later.

Forces at play in 2021 had other ideas.

Covid, specifically. You may have heard of it.

My wife is an only child. So with my mother-in-law unable to offer much assistance, it fell to my wife and me to deal with the aftermath of everything that comes with the passing of a parent.

You’d need to be a Zen master to find much to smile about at a time like this.

Nevertheless we did run into one heartening provision that significantly altered the trajectory of much that was otherwise flying towards the proverbial fan.

Enter: The Grey Box.

We called it The Grey Box not because its contents were shrouded in a swirling fog of mystery, but because it was, well, a grey box.

A grey metal box as it happens.

And inside this box was a ‘When I Die’ file that made everything much easier.

Everything you need to know but were too afraid to ask

Sometimes called an ‘If I Die’ file, I’ve removed the implied jeopardy of the situation and will refer to it as a ‘When I Die’ (WID) file from here on.

My father-in-law was an accountant by trade. If I had to describe him in one word it’d be ‘organised’.

And by foreseeing the need for – and organising – his WID file to the future benefit of his family, my father-in-law made dealing with his affairs much easier.

You see, estate management – particularly if a death is unexpected – is challenging.

Financial gifts of inheritance steal the limelight. But being informed by the recently departed about what to sort out and where it can be found might be a greater gift.

Let’s talk about sex

Okay, not the mid-article interlude you were expecting!

But it’s relevant, because studies over the past two decades have found that Britons would rather talk to their family about sex than money matters.

Yep, we’re more likely to discuss an ex-partner’s foot fetish than an ex-employer’s defined benefit pension scheme.

Unless I’ve lived a particularly sheltered life though, only the latter is likely to be of interest to my family once I’ve sidled off to the Pearly Gates.

So let’s talk more about personal finance, eh?

Would I die to you

Your WID file should contain everything that your loved ones will need to make sense of your financial life when you move on.

As a starting point, your WID should cover the following areas.

Personal details – Obvious, maybe. But perhaps there’s a legal middle name you have never admitted to, or an annulled marriage from your youth where you briefly had a different name? This could matter when your executors are making filings or searches on your behalf.

Will and estate information – Either a copy of your will, or details of where it’s kept.

Insurance – A full list of insurances held is vital. These will either need to be cancelled, or else they may be due to payout in the event of your death. (Perhaps instructions on where to find the ten-year warranty for that air fryer you’ve promised to your brother-in-law might also come in handy?)

CV – Or rather, a complete list of your employment history. You didn’t know that Dad used to have a night job stacking ice cream boxes? No, neither did we. But there could be a forgotten pension associated with it somewhere.

Pensions – Since the rollout of workplace pensions, the number of individual pension pots held by individuals has increased. Be sure to list what you have and who manages it, plus any benefits that may be due to payout now you’re not here.

List of accounts – This is where it gets trickier. As a minimum, include all financial organisations where you’re a customer and detail the account types you hold with each. Account numbers will also help.

Passwords – Do not include your little black book of pin numbers. Storing them alongside account information is a huge risk in the event of theft. Instead, use a password manager or as a last resort, a coded but decipherable message as to where the critical passwords can be found. UPDATE: Reader @DavidV has noted in the comments that you should not access digital accounts of the deceased held solely in their name, as this may be a breach of the Terms and Conditions and also may not be legal. See comment #2 below and this guidance from the Bereavement Advice Centre.

Property deeds – Murphy’s Law dictates that shortly after you’re gone, next door’s fence will blow over. Or is it your fence? At least when armed with the property deeds your executors can have a sensible discussion.

Debts – Loans, credit cards, and mortgages. Your executors will assume responsibility for settling these as required.

Important contacts – Numbers and email addresses for the family solicitor, accountant, work colleagues, and your distant cousin Andrew in Australia. Anyone who should be informed – or you want informed – in the event of your passing.

Funeral arrangements – It’s becoming more common for people to plan their own funeral whilst alive. Perhaps your family are not aware you did? This is a good place to keep the relevant paperwork, just in case.

Any other pertinent information – Include personal wishes that may not be covered elsewhere. (You want your ashes sent up into the atmosphere in a giant Roman candle? Who knew!)

LPAs – Strictly speaking, Lasting Power of Attorney (LPA) documents would be called upon prior to your death. Keep them here though, because if a LPA is needed, you may not have the capacity to explain the WID file location or its contents anyway.

Easy access

Even the best WID file is useless if no one can find it. This is not the time for riddles or for turning the house upside down like some high stakes escape room puzzle.

Pick one or two trusted people. Tell them exactly where your file is. If it’s digital then tell them how to access it.

Any other business?

This was not an exhaustive list and your WID file is not a one-and-done project. It’s an opening framework to periodically update and tweak to suit your needs.

Life changes. Financial institutions get merged, assets move, and maybe you’ve decided you no longer want Hells Bells played at your funeral because your leather jacket hasn’t fitted you in years.

Thoughts for the future

Remember, the purpose of your WID file is to help those you love to deal with your loss during what will be a very emotional time.

So make it relevant to your life, and keep everything together in a single, logical place. Not at the back of the man-drawer filing system where you store those little coin-shaped batteries.

Understand that what makes perfect sense to you might look like a car crash to someone picking up your WID file for the first time.

Heck, it may even look like a car crash to you once you’re done compiling it. In which case perhaps it’s time to simplify your finances?

That pension pot with just £9,000 sitting in it from 2001 – can it be consolidated into your main SIPP? If so that’s one less financial institution that’s going to hoard a precious original death certificate for six months.

Estate planning isn’t just about paperwork – it’s an emotional act of care. By creating a clear, accessible file with fewer moving parts to deal with, you’re giving your loved ones the gift of less stress during an awful time.

True, there is an account tracing service run by the National Bereavement Service. But by being intentional now you’ll spare your executors a scavenger hunt through banks and brokers they’ve never heard of.

Positive thinking

I accept that creating your own Grey Box may sound a bit morbid. Nobody wants to think about this stuff.

However I’ve found that doing so can also be oddly comforting. A reminder that whilst we can’t control everything, we can cut down the chaos we’ll inevitably leave behind.

Also: your box doesn’t need to be grey! You can even give it a funny name if it helps.

Perhaps you should speak to your own parents about doing a WID if they’re still around, too? Here’s a nice project to keep them busy…

Better yet speak to anyone for whom you might be an executor.

Let’s all get our own Grey Boxes going. I know it’s hardly ideal dinner table conversation fodder. But one day you may be grateful you broached the subject.

Sex and pensions – you can’t discuss either when you or they are gone.

Grey matters

In our family we’re eternally grateful for our father-in-law’s Grey Box.

When he collated it, my father-in-law could have had no expectation that it would be called into action so soon. He was only 72 and full of life.

However its thoughtful contents were ready just when we needed them most.

This was possibly the greatest gift he could have passed on to us. With time and consideration, your own Grey Box might be the greatest gift you can give, too.

• More morbid: The Accumulator outlined his investing succession plan – starting with a love letter to the surviving partner – in a post for Monevator members.

Understanding your future expected returns is an important part of your investment plan.

Your expected return is the average annual growth that you can reasonably hope your portfolio will deliver over time. It may be a real return of 4% per year, for example.

With a credible expected return figure you can work out whether you’re investing enough money to meet your goals – just by plugging your number into an investment calculator.

Give us a few minutes and we’ll show you how it’s done.

What are expected returns?

Expected returns are estimates of the future performance of individual investments – typically asset classes. Expected return figures are provided as average annual returns that you might see over a particular timeframe. Say the next five or ten years. 

The figures are usually based on historical data, but modified by current valuation metrics.

The Gordon Equation is one of the better-known expected returns formula. 

Because future returns are highly uncertain, some sources offer a range of expected returns or probabilities. This emphasises the impossibility of precise predictions. 

Think of expected returns as a bit like a long-range weather forecast. You’ll get some guidance on conditions coming down the line. But expected returns can’t tell you when exactly it will rain. 

Even so, expected returns are a useful stand-in for the ‘rate of return’ required by investment calculators and retirement calculators.

For instance:

You’d put your portfolio expected return number in your calculator’s ‘rate of return’ slot.

By collating estimates for individual asset classes, we can calculate a portfolio’s expected return. See the table below.  

Moreover, because expected return calculations are informed by current market valuations, they may be a better guide to the next decade than historical data based solely on past conditions.

Expected returns: ten-year predictions (%)

Source: As indicated by column titles, compiled by Monevator.

The table shows the ten-year expected returns1 for key asset classes, expressed as nominal average annual percentage returns in GBP. 

We have sourced them from a variety of experts.

Make sure you subtract an inflation estimate from the nominal figures in the table. This gives you a real return figure to deploy.2

For average inflation, you could use the ten-year UK instantaneous implied inflation forward curve (gilts) chart from the Bank of England. 

Their mileage may vary

As you can see from our table, opinions vary on the expected rate of return.

Methodology, inflation assumptions, and timing all make a difference.

But overall, equity return expectations have dropped dramatically since our last update.

The global equities median expected return was 7.3% in July 2023. Now it’s 5.4%. That’s well below the historical average. 

Sky-high US stock market valuations are a major factor. High valuations mean that stock market prices are elevated relative to measures of underlying company worth such as earnings, sales, dividends, and profit margins.

In other words, investors buying US shares today seem to be paying a lot for the chance of benefitting from anticipated future growth. 

In that situation, there’s a heightened chance that demand will drop for stocks as market participants decide that prices are too high compared with the likely payoff. 

If that view takes hold, then the resultant fall in prices can translate into lower stock market gains – or even outright losses for a time, depending on the period of your investment. 

That’s the theory anyway, and indeed market valuation signals like the CAPE ratio have tended to correlate high valuations that exceed historical norms with subdued average future returns (over the next ten to 15 years).  

Forecasting models take these signals into account – along with other inputs such as macroeconomic assumptions and historical return factors. 

The upshot is most are currently predicting slow growth ahead for the US stock market, which is also the largest component of global equities.

Notice that the prospective returns for Global ex US equities (that is, stock markets other than the US) are significantly better than for global equities ‘inc US’.

Temper your tantrums

Remember, these return expectations are only projections. They’re as good as we’ve got but they’re about as accurate as buckshot. The numbers will almost certainly be off to some degree.

For instance, the CAPE ratio has been shown to only explain about 48% of subsequent ten to 15 year returns. 

And some forecasts have predicted low US returns for years, only to be defied by reality as the S&P  500 whipped the rest of the world. 

Rethinking bonds

Very notably, UK gilts3 and wider global government bonds are forecast to earn only 1% less per year than global equities at present.

That implies a low opportunity cost to diversifying into bonds right now. 

So it may well be time to rethink your fixed income holding if 2022’s bond-o-geddon frightened you out of the asset class entirely. 

Today’s higher yields mean that bonds are far more likely to be profitable over the next decade than they were at the tail-end of the near-zero interest rate era. 

The current yield of a 10-year government bond is a good guide to its average annual return over the next decade. And a 10-year gilt is yielding 4.74% at the time of writing. 

Portfolio expected returns

Okay, so now what? 

Well, let’s use the asset class expected return figures above to calculate your portfolio’s expected return.

Your portfolio’s expected return is the weighted average of the expected return of each asset class you hold. 

The next table shows you how to calculate the expected return of a portfolio. Just substitute your own asset allocation into the example one below:

Portfolio expected return = the sum of weighted expected returns.

This gives us 2.41% in this example.

Feel free to use any set of figures from the range of expected returns in our first table above. Or mix-and-match expected returns for particular asset classes where you can find a source. Research Affiliates and BlackRock should cover most of your bases. 

The expected return of your bond fund is its yield-to-maturity (YTM). Look for it on the fund’s webpage.

Because most sources present expected returns in nominal terms, remember to deduct your inflation estimate to get a real expected return. 

You should also subtract investment costs and taxes. Keep them low!

Taken together, the formula for the expected return of a portfolio is therefore: 

• The nominal expected return of each asset class – minus inflation, costs, and taxes  
• % invested per asset class multiplied by real expected return rate
• Add up all those numbers to determine your portfolio’s expected return

The resultant portfolio-level expected return figure can be popped into any investment calculator.

You’ll then see how long it could take to hit your goals for a given amount of cash invested.

How to use your expected return

Input your expected return calculation as your rate of growth when you plot your own scenarios. 

Drop the number into an investment calculator or into the interest rate field of our compound interest calculator.

As we saw earlier, the expected return rate we came up with for the portfolio above was a pretty disappointing 2.41%.

Historically we’d expect a 60/40 portfolio to deliver more like a 4% average rate of return.

After a long bull market for equities, market pundits seem to feel there’s less juice left in the lemon. They’ve therefore curbed their expectations.

The long view

If you’re modelling an investing horizon of several decades, it’s legitimate to switch to longer-run historical returns. 

That’s because we can assume long-term averages are more likely to reassert themselves over stretches of 30 or 40 years. 

The average annualised rate of return for developed world equities is around 6-7% over the past century. (That’s a real return. Hence there’s no need to deduct inflation this time.)

Meanwhile gilts have delivered a 1% real annualised return. 

Even though your returns will rarely be average year-to-year, it’s reasonable to expect (though there’s no guarantee) that your returns will average out over two or three decades.

That’s what tends to happen over the long term.

Excessively great expectations

Planning on bagging a real equity return of 9% per year is living in La La Land.

Not because it’s impossible. Golden eras for asset class returns do happen.

But you’ll need to be lucky to live through one of them if you’re to hit those historically high return numbers.

Nobody’s financial plan should be founded on luck. Because luck tends to run out.

So opt for a conservative strategy instead. You’ll be better able to adapt if expectations fall short. You can always ease off later if you’re way ahead. 

Remember your expected return number will be wrong to some degree, but it’s still better than reading tea leaves or believing all your dreams will come true. 

Don’t like what you see when you run your numbers? In that case your best options are to:

• Save more
• Save longer
• Lower your financial independence target number

These are factors you can control when faced with potential low future returns. All are preferable to wishing and hoping.

How accurate are expected returns?

Expected returns shouldn’t be relied upon as a guaranteed glimpse of the future, like racing tips from a kindly time-traveller. 

Indeed the first time we posted about expected returns we collated the following forecasts:

These were long-range real return estimates. The FCA one in particular was calibrated as a 10-15 year projection for UK investors. 

What happened? Well, the ten-year annualised real returns were actually:

• Global equities: 7.6%4
• UK government bonds: -2.6%5
• A 60/40 portfolio returned 3.5% annualised. 

The 60/40 portfolio expected return forecasts above now look amazingly prescient. Before 2022 they looked too pessimistic, but that turbulent year of rate rises has knocked both equities and bonds down a peg or three. 

Previously, the 10-year actual returns had run far ahead of the forecasts. Maybe these realised returns had been juiced by waves of quantitative easing from Central Banks? Perhaps the retrenchment of globalisation more recently has also been a factor.

In any event I wouldn’t expect even the greatest expert to be consistently on-target.

Rather, it’s better to think of a given set of expected returns as offering one plausible path through a multiverse of potential timelines.

Take it steady,

The Accumulator

P.S. This is obvious to old hands, but new investors should note that expected returns do not hint at the fevered gyrations that can grip the markets at any time.

Sad to say, but your wealth won’t smoothly escalate by a pleasant 4% to 5% a year.

Rather on any given day you have a 50-50 chance of tuning in to see a loss on the equity side of your portfolio.

And every year there’s on average a 30% chance of a loss in the stock market for the year as a whole.

On that happy note, I’ll bid you good fortune!

Note: this article has been updated. We like to keep older comments for context, but some might be past their Best Before dates. Check when they were posted and scroll down for the latest input.

1. Note that most corporates badge their expected returns calculations as ‘capital market assumptions.’ [↩]
2. Real returns subtract inflation from your investment results. In other words, they’re a more accurate portrayal of your capital growth in relation to purchasing power than standard nominal returns. [↩]
3. i.e. UK government bonds. [↩]
4. Source: Vanguard FTSE All World ETF [↩]
5. Source: Vanguard UK Gilt ETF [↩]