Good reads from around the Web.

I met my friend The Bear last week for one of our occassional wanders through London.

The Bear is not his real name – he is not a character from a Disney movie, or even a gangster from a Guy Ritchie one.

He is however invariably pessimistic about something – hence a bear in investing terms – and I do enjoy his entertaining rants.

Not just doom and gloom

I have other reasons to meet up with The Bear, besides getting myself a healthy dose of anti-euphoria.

For one thing he kindly hands over past issues of the cult US investing newsletter Grant’s Interest Rate Observer – delivering a big batch that I carry about in a Tesco bag during our wanderings, before starting to work my way through them on the Tube before I’m even home.

More on that later.

The other reason I value talking to The Bear about investing is that while he can seem dogmatic in his views, he is not dogmatic in how he should respond to them.

For example he is apoplectic about what he sees as the rigged and ruinous nature of the UK property market (he swears a lot about everything) but that hasn’t stopped him owning shares in UK housebuilders, which he plans to dump before his predictions of a downturn come true.

And like his hero James Grant of the Interest Rate Observer fame, he is scornful about the utility of extended low interest rates and QE.

Yet The Bear has profited from owning shares in certain UK banks in the past few years, which he bought when they were cheap enough to withstand even his gloomy outlook.

I also like how he’ll make a dozen small bets, knowing he might lose all his money on half of them but with the chance of 2-5-10-fold returns on those that do prevail. (Bankruptcies, deeply discounted rights issues and the like).

That’s what the maths says makes sense, but very few stockpickers have the fortitude to carry it out.

Are we there yet?

I should say that I don’t actually know if The Bear has beaten the market, for all this sparky thinking and stock picking effort.

I discuss investing with him for intellectual stimulation and to challenge my own views, not for actionable advice.

(Indeed if I do ever achieve my aim of persuading him to write occasionally for Monevator, this will be the motivation.)

One thing that makes it difficult to judge any investor’s world view, let alone their performance, is timing and timescales.

For instance, I put it to The Bear that perhaps Grant’s subscriber list had shrunk, given that the publication has been warning of the dangers of a reckless Federal Reserve and the folly of selling your gold for several years now in which the US economy and market has actually recovered and gold has tumbled down the toilet.

A subscription to the fortnightly Grant’s Interest Rate Observer costs $1,175 a year. Small change for a hedge fund perhaps, but not so trivial that you wouldn’t want to think the authors were occasionally getting something right?

My friend responded with the classic defense of the unrequited pessimist…

…namely: “It’s still too soon to tell. Wait until it’s over.”

Waiting for the Fat Lady

This sentiment is the ready retort of anyone whose downside bet has gone against them.

It was long my rallying cry against soaring London house prices, until I decided it’d be better to shut up than cry wolf for another decade. (Many others have since taken up the call).

It’s also what optimists think when they buy in the midst of bear markets, even if they quote Warren Buffett rather than reach for the mantras of more pessimistic folk.

“Wait until it’s over” is a strong defense, because you can’t argue with the logic – because you can rarely be sure it’s over.

It’s true that Grant’s and others who’ve warned of all kinds of toxic fallout from QE have – as my friend suggested – become almost laughing stocks when they appear on CNBC and the like nowadays.

My friend (and no doubt Grant too, for he is a formidable student of the markets) sees this as a sign that the last days of the current bull run may be upon us.

Equally, it’s easy to forget how terrified everyone was of QE when it began, even though investors and pundits today tend to cheer it whenever they see it and now fear tighter money instead.

I admit I expected inflationary consequences, like most other onlookers.

But today? Inflation? On the contrary, we only recently saw some deflation.

The Bear would say you need to look at elevated asset prices and depressed yields to see where QE-stoked inflation has had an impact.

I’d retort that I don’t remember many of the doomsters saying “buy bonds and equities because of QE”.

In fact, quite the opposite.

“Buy gold because the dollar will soon be worthless” was more their sentiment at the time.

You told them ‘not to fight the Fed’ all you liked (and I did). This time was apparently different.

Whoops!

In truth all of us take what we can and justify it as we go along to some degree, however much we try to stay alert to these sorts of behavioural flaws.

Long-term buy and believe

Now, most of you are passive investors, to whom this post has been at best a semi-interesting diversion that’s probably outstaying its welcome.

However don’t think you’re not betting on the same sort of reversions that my friend is looking for.

Passive investors in equities and are other assets are not neutral on the direction of those prices in the long-term.

On the contrary, their implicit position – which of course I think is eminently sensible – is that while ups and downs are apparent on a graph of stock market returns, over the long-term, for most markets, the trend is definitively higher.

What would you tell a cynical family member who said you were wasting your money, given that shares were down but you were still pumping your hard-earned cash regularly into your index funds?

“It’s too soon to say that,” would be your reply. “Let’s wait and see over the long-term.”

You don’t know Jack

The truth is whether we’re passive investors, permabulls, or inveterate doomsters betting on a crash, we only have so many decades, which means we can only afford to take so many steps back from those graphs.

Eventually our time horizon shrinks to such an extent that the zags down on the graph look more like ravines, and the zags up more like distant summits that always seem to be just another valley out of reach.

That’s why we’re told to reduce our exposure to riskier assets as we age.

It’s also why we diversify – in case we’re climbing the wrong mountain.

How things turn out are only ever obvious in hindsight. I’m always reading Grant’s 12-18 months after it publishes its (always extremely readable) thoughts, which could make me feel like a genius if I’m not careful.

I know better than they do! True, I haven’t seen the ending but I have seen the spoilers.

But real life is not like reading old publications, obviously. However we invest, and wherever we think things are going, we’ve walking along with our hands outstretched, feeling our way through the fog.

One reason passive investing works so well is because it acknowledges and even exploits such uncertainty with a humble and automatic strategy that can cope with almost anything that looms out of the gloom.

Us more egotistical active investors have to work hard to remember we know nothing, and to challenge our preconceptions all the time.

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So, drawdown or annuity? For 20 years, that has been the choice facing retirees. But at least there was a choice – prior to 1995, buying an annuity was pretty much your lot.

Wind the clock forward to April 2015, however, and a bold new era of pension freedoms has begun.

Our pension, we are told, has become as flexible as a bank account.

That said, some pension providers aren’t yet offering the full range of new pension freedoms – and it’s not difficult to see why. Certain aspects of the new freedoms are fiendishly complicated, imposing a hefty administrative and compliance burden.

And that can be a double-edged sword. Because it’s a reasonable bet that anything that imposes a hefty administrative and compliance burden on providers will also be complicated for retirees to figure out, as well.

Important decisions

That isn’t a problem if you’ve got an ever-helpful financial adviser at hand to help out, of course.

Though we all know what bastions of probity these have often proved to be in the past.

So for those of us a little leery of Mercedes-driving gentlemen in flashy fur coats, it might be handy to get some of that complexity demystified, before making potentially irreversible decisions regarding the disposition of our own individual pension savings.

Which is why I thought I’d have a bash at it myself, on behalf of Monevator readers.

Be warned: I’m not a financial industry insider, just an ordinary investor like you.

Please feel free to use the comment box below to amplify (or even correct) what I say if you know better.

Your Lamborghini beckons

Most of the complexity, it seems, comes from the emergence of the new Uncrystallised Funds Pension Lump Sum (UFPLS) route to taking pension benefits.

The phrase is quite a mouthful, and far less memorable than former pensions minister Steve Webb’s oft-quoted remark about the new pension freedoms enabling retirees to spend the lot on a Lamborghini if they so wished.

Nevertheless, if you do want to go down the Lamborghini route, it’s UFPLS that will take you there.

Also, it’s fair to say UFPLS is the route to a great deal many more interesting possibilities besides.

Because it’s UFPLS that really lies at the heart of the new freedoms.

Simply put, apart from UFPLS, there’s not a lot that’s really new, apart from tinkering at the edges – such as removing GAD limits to drawdown, for instance.

So you really do need to get your head around UFPLS, and understand why you might want to go down the UFPLS route – and why you might not.

Crystal clear

The key is the word uncrystallised.

Fairly obviously, a conventional annuity crystallises your pension:

Here’s your pot; here’s your 25% tax-free sum (should you wish to take it); and here’s your regular annuity income.

Likewise, drawdown also crystallises your pension – although rather less so, now that GAD withdrawal rates are a thing of the past:

Here’s your pot, here’s your 25% tax-free sum (should you wish to take it); and here’s your resulting drawdown income—which can be regular, irregular, or deferred, as you wish.

(Why would you elect for drawdown, and yet defer the resulting income? To get your hands on the 25% tax-free sum, of course.)

In contrast, UFPLS, as the name makes clear, does not crystallise your pension.

Making a withdrawal crystallises only the amount that is being withdrawn – leaving the remainder invested to (hopefully) continue growing.

The retiree can take the 25% tax-free sum each and every time they make such a withdrawal, with the remainder of the withdrawn amount subject to tax at the retiree’s highest marginal rate.

As a result, UFPLS offers the prospect of giving retirees a larger amount of tax-free cash than is possible with conventional drawdown, because the sum remaining invested (hopefully) continues to grow – and 25% of a larger amount is, er, a larger amount.

To UFPLS or not?

So should we all opt for UFPLS?

According to pension experts such as Tom McPhail at Hargreaves Lansdown, UFPLS is a decision requiring careful thought.

Not least because conventional drawdown offers two distinct advantages over UFPLS.

First, because of its administrative overhead (read: ‘form filling’), UFPLS is better regarded as a vehicle for irregular (and perhaps sizeable) withdrawals.

For a monthly income, drawdown is going to be an easier route.

Second, with UFPLS the government has taken the opportunity to clamp down on allowance ‘recycling’ – the dodge where investors took out the 25% tax-free sum and re-invested it their pension, thereby getting a double-dollop of tax relief.

Or, as we Northerners say, ‘free money’.

This clampdown takes the form of a £10,000 annual Money Purchase Annual Allowance, coupled to making post-UFPLS pension savings ineligible for the sometimes-handy ‘Carry Forward’ rules, whereby earnings in one tax year can be used to gain tax relief in another tax year.

So in a post-UFPLS situation, if one were to, say, sell a business or benefit from a large inheritance, you couldn’t tuck the money inside your pension in handy £40,000 dollops, gaining tax relief each time.

In contrast, investors simply taking the 25% tax-free sum through the drawdown route will not be deemed to have used the new pension freedoms, and so retain their ability to benefit from the £40,000 tax relief allowance.

(Don’t take income, though – otherwise the £40,000 tax allowance will be lost.)

The bottom line

So there we have it. Lots of things to weigh up, and various calculations to perform.

From what I can make of it, three ‘golden rules’ seem to apply:

• Despite the allure of the Lamborghini, large UFPLS withdrawals are best avoided, as the tax ‘hit’ will be too expensive.

• Don’t opt for UFPLS if you think you’ll subsequently have a sizeable lump sum to invest—in short, UFPLS is for genuine, ‘don’t look back’ deaccumulators.

• If you need ready cash in the form of a sizeable lump sum, then taking the 25% tax-free cash via drawdown leaves more options open than taking the equivalent sum out via UFPLS.

Note: Do you know all about UFPLS? We’d love to hear from you below. And do read The Greybeard’s other articles on deaccumulation and the changing landscape for pensions.

Good reads from around the Web.

August always means the dog days for Monevator, and this year is no different.

Visitor numbers to the site are well down, as many of you unfathomably find fun, sea, and sunburn more appealing than pondering your optimal tax sheltering strategy.

The City, famously, gets sleepier. Hard to believe in these days of robot traders and PhDs fighting for scraps of additional return, but it seems to be true in the small caps I follow, where trading volumes are very light.

The Accumulator takes August off – which this year partly means taking a month off his on/off hiatus to write Monevator: The Paper Version (working title).

And Greybeard missed his monthly pension article deadline, due to illness.

(I’m sure he was poorly, but still… what about those Ashes, eh? 😉 )

As for the wider investing world, nobody is very excited about the interest rate speculation that so-called Super Thursday in the UK and the latest Federal Reserve minutes might otherwise have whipped up.

Even my tropical fish look bored.

Some things on my mind

Perhaps Monevator is having a mid-life crisis?

My co-blogger sent me an article from The Atlantic about the famous halfway stage through life when you look around and let out one almighty “meh”.

The author recalls his own happiness hiatus:

As the weeks turned into months, and then into years, my image of myself began to change.

I had always thought of myself as a basically happy person, but now I seemed to be someone who dwelt on discontents, real or imaginary.

I supposed I would have to reconcile myself to being a malcontent.

It’s well worth reading the article in full, but it’s also a convenient jumping off point for a few bits of housekeeping aimed at any of the Monevator faithful who are tuning in on one of the most pleasant weekends of the year.

Feel free to skip to the links below, as it’s all pretty self-indulgent stuff about the site that you don’t really need to know.

What does “US but relevant” in the links mean?

A few people have asked me why so many of my links in Weekend Reading are from the US.

Also, they add, what’s with the “US but relevant” comment that is appended to some US links but not others?

On the first point, I include a lot of US content because there’s so much more to choose from. If anything I show home bias, considering the relative mass of commentary!

This leads into the second point. Much of the US stuff I include is about general investing strategies, or interesting stocks or sectors. And where it’s just about US markets, that’s often directly useful too, at least to active investors – the US is still the elephant in the global money circus.

“US but relevant” is a warning I tend to save for where an article also talks about specific aspects of personal finance that won’t be applicable to UK readers.

Typically these include US savings vehicles (e.g. 401k plans) or quirks of the US tax system (such as its treatment of capital gains made by funds, which differs from the UK).

In such cases, “US but relevant” will hopefully stop people getting misled by such minutia, especially newer investors.

No discussion forum, after all

Last week I finally decided to to scrap a Monevator discussion forum I’ve had in sporadic development for a couple of years.

I’ve hinted at such a forum in the works to a few of you who’ve asked for it over the years, so I thought I should warn you to now stand down.

It’s a mild shame. The forum had quite a few hours put into it (including efforts made by my collaborator to help debug the-then beta Discourse software we were using) as well some money I’d spent over the past year on some separate server space to test and eventually host the forum.

However last weekend Monevator was hit by a batch of particularly unpleasant comments – mostly aimed at a fellow financial blogger but also a few at me – to the extent that I had to delete a big swathe of mean-spirited stuff, and to post some of the others only reluctantly.1

I was standing in a tent enjoying a jazz quartet at a festival when it hit me: “Just think, if you finally switch on the forum then you could be lucky enough to miss this sort of thing for more of dealing with that nastiness every day…”

That at last resolved my prevarication. No forum.

Now, many bloggers I know say that reader interaction is one of their biggest rewards from blogging.

I know that The Accumulator is a big fan, too.

But I’ll be honest, it’s never done much for me.

Don’t get me wrong – I do enjoy reading many of your comments.

For instance, I love Mathmo’s attempts to draw a thread through Weekend Reading. I like gadgetmind’s hints from the hi-tech cutting-edge. I’ve even come to enjoy some of Nevermind’s dour pronouncements. And the great warmth from Minikins often makes me smile.

However when it comes to interacting, it’s not such a positive experience.

These days the site often gets hundreds of comments in a week, so just keeping up with reading them is a feat.

(Remember that comments can be posted at any time on all our 1,200-odd old articles. And I see and read them all…)

Time is short for me like everyone else, and so interacting nowadays almost invariably just means correcting errors or deleting nastiness.

On The Accumulator’s passive investing articles it’s a different story.

Here readers do a great job of keeping us abreast of the minutia of changing platform and fund costs. And there’s very rarely any verbals (except when one of those annoying active/passive skirmishes breaks out).

But on my posts, interacting mainly entails addressing loud people who don’t know a quarter as much as they think they do saying something that’s either wrong or half the story.

My mother of all people told me years ago to ignore these comments. At the time I was having a spat with a professed expert who was calling the S&P “obviously” overvalued (this at about half the level it is at now) and me a dangerous zealot for suggesting people stay invested in equities.

Thing is, I told my mum, we don’t write long detailed articles on Monevator only for them to be derailed shortly afterwards in the comments. Hence I often feel the need to keep repeating myself in the comments, to stop readers getting misled.

The point is policing the comments is hard enough. I just haven’t got it in me to keep a forum up to standard – or even worse from turning rotten, filling up with spivvy stuff that costs people money and hosts scams and so forth.

I have even considered turning off comments on Monevator, as huge numbers of other sites are doing these days.

However we do have a mostly excellent community here on Monevator – partly through luck, partly because I suspect our verbosity and our investing approach attracts sensible people, and partly because I have always applied the benign dictatorship approach to censorship.

So for as long as that continues, we’ll keep the comments.

As for the discussion forum, I’m sorry a minority has potentially spoiled what could have been a useful asset for the majority, but time is just too tight right now to ensure I could deliver something of the quality and consistency that the majority deserves.

Finally, on monetization

Lastly, making money from Monevator – something that’s even more my problem, not yours!

This thought was sparked by a discussion I had with some readers the other day who explained they never see the adverts on Monevator because they block them.

These were regular readers, and they expected me to be proud of their ingenuity and sticking-it-to-the-man smarts.

And sure, as a Web user I don’t like ads any more than anyone else.

However the reality is the ad blocking revolution is going mainstream, and it looks like it might soon start to threaten the business model of lots of web publishers, including this one.

Hence I must admit to being less than enthusiastic about the spread of ad blocking!

As things stand, I really do try to keep ads under control here on Monevator.

For instance we don’t do full-site ‘wraps’ or pop-ups, we don’t break up the articles with ad blocks at all (virtually everyone does this now) and we have NEVER sold advertising pretending to be content or text links or things of that sort, despite daily requests to do so.

That is where all the lucrative money is now with web advertising (and why half the sites you visit these days are slow, loud, annoying, and possibly compromised in terms of their editorial).

Anyway, I’ve always just assumed monetization would get sorted eventually, if we built a decent product.

Seven years in perhaps I should try harder to do so!

In an ideal world we’d directly charge you a few quid a year, perhaps via a Patreon-style ‘pay what you can’ crowd-sourced solution. Then we could ditch ads altogether.

Even The Accumulator’s mythical book is an attempt to find a sustainable revenue stream, should he finish it before we’re both on the State pension.

(Please buy it, when it eventually comes out…)

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1. Incidentally if any of these people or others try to repeat the gist of their comments again below, I’ll just delete them again. I think we best agree to disagree on this particular subject, eh? 🙂 [↩]