Good reads from around the Web.

The road to knowing a lot about investing is paved with knowing a little bit.

And as we all know, a little bit of knowledge is a dangerous thing.

I’ve seen the pattern on this very website. A new actively-minded reader will discover Monevator, often via one of my more actively focused articles, and then start commentating on other posts around the site.

They’ll usually state how they’re not stupid enough to put money into bonds or how they’re very cleverly positioned in the investing theme de jour (dividends, gold, and emerging markets at various points over the past few years).

Or, if you go back far enough, you’ll find them saying how unlike those other lemmings they aren’t being fooled by the bull market at all.

(Indeed the Armageddon-blog Zero Hedge now seems to be a support group for these particular people.)

Damascus is lovely at any time of the year

Anyway in time the market does what it does, which is punish over-confidence and piss on hubris.

Usually we don’t hear much from these chastened geniuses again, but a few have become regulars on my co-blogger The Accumulator’s articles. As best I can tell they’ve become largely passive converts.

I don’t point this out to mock them, but rather to applaud them.

For most people true wisdom in investing means coming to understand how little is knowable – especially if you need to slap timing onto the reckoning sheet – and instead focusing on what is controllable (costs, taxes, asset allocation, and your personal savings rate).

If like me you do carry on active investing (and my allusion to the famous old movies is entirely deliberate) then you had best be doing it with a mug of humility on the desk next to you.

It is happening again

One of the most consistent newish investor foibles is a belief that they can perceive market tops that somehow everyone else has missed.

They’ve all seen an asset crash or two and read all the quotes, and they can’t wait to opine that “this time is never different” or “We’ve seen this movie before and it ends badly”.

But we usually haven’t seen exactly this movie. To offer another over-exposed quote, history doesn’t repeat itself, it rhymes.

Markets rise and fall, but if the moves were as easily forecast by people who’ve done little more than read a few articles on Warren Buffett, we wouldn’t get stock market bubbles or busts.

Reality is far trickier, except with hindsight.

The continuing advance of both the US stock market and the bond market are current examples; the strength of London property a longer-standing one that’s totally humbled yours truly.

People have been wrong about these markets for years. Each will someday decline, but someday is another matter.

Boringly true

The brilliant blogger Ben Carlson points out that the quote “I’ve seen this movie before and it ends badly” is almost invariably used by doomster pundits, who are wrong far more frequently than they’re right.

It’s potent because it sounds so sassy and dark.

In reality, anyone who has seen the movie of the markets before knows that – over anything other than the short-term – it mostly doesn’t end badly.

As Carlson says:

No one ever says, “I’ve seen this movie before and it ends with higher dividend yields, lower prices, better valuations and higher expected returns.”

Over the long-term, investing in Western stock markets hasn’t been anything like a movie, but more like a long-running soap opera.

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Good reads from around the Web.

I still get comments incorrectly – and often indignantly – claiming there’s a 10% tax paid on dividends that holding shares in an ISA “no longer” protects you from.

I still read media advice saying the same thing.

Not as often as before, admittedly, mainly because the seed of this misconception was abolished over a decade ago and many of those who bore a grudge have literally moved on (/away!)

But the myth lingers, so I was glad to AIC boss Ian Sayers addressing it this week.

Sayers writes:

Trawl the internet and you will come across many statements like:

 “Apart from dividend income (paid with 10% tax already deducted which can’t be reclaimed), the rest of the income is tax-free”

“Dividends from equities are paid after a ten per cent tax credit has been deducted and ISA investors cannot reclaim this.”

The problem is that these statements are untrue.

Now, I am not criticising anyone for not getting this quite right.  The tax position of dividends is not only complicated but also counter-intuitive. My concern is not simply this is confusing investors, but may be leading some to make the wrong investment decisions, and even pay tax that is not due.

I am also not criticizing anyone who hasn’t read my articles on UK dividends and ISAs for not getting this right.

However if you have read widely and yet you still state the opposite in our comments and wonder why I delete you rather than continue to breath life into this hoary old half-dead Internet-enabled horse, now you know. 🙂

• The AIC has produced a short and clear guide debunking the whole “10% tax” myth, which you can download as a PDF.

Something that is affected by the 10% muddle is your income tax liability.

It’s complicated, but the AIC guide makes a good fist of explaining it.

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I sometimes fantasize that people in power read Monevator, and that our humble blog makes a bigger impact in the world.

Note: I said fantasize.

Like all fantasies, my mooning is sustained by the odd sigh here and lingering moment there… The policies I’ve mooted on Monevator that later make it into law… The emphasis on some new idea or meme that soon after gets discussed by regulators or raised by a politician.

I know it’s silly. In fact, I’m sure it must be an affliction that’s common to all egomaniacs writers.

After all, if you’re doing your job properly as a writer then you’re aware of the zeitgeist and of its consequences for your readers.

And presuming you’re not ranting in the comment section of the Telegraph or Guardian, you might even have the odd half-decent idea or two that occurs to – oh – several thousand other people at the same time.

Tens of thousands, maybe!

But still… I must admit I swooned like a Jane Austen heroine at the lido when I heard George Osborne announce the new Help to Buy: ISA in his Budget.

A tax-free savings perk that would directly aid first-time buyers who were building up a deposit to buy their first home?

Time slowed down, and it seemed like Osborne was looking directly at me.

“My aides found this great idea on a website called MoneyMotivator,” he said, inevitably getting the name wrong and smudging my moment of triumph.

“Check it out for loads of other good guff.”

Except he didn’t really say that. It was only a daydream.

Just as well, because my idea was better than his.

Say hello to the Help To Buy: ISA

You may just remember my 9 ideas to fix the housing market kicked off with:

#1. New Savings Tax Breaks to Help First-Time Buyers.

My own idea was 4%-paying first-time buyer bonds, like Pensioner Bonds but paid tax-free, to help this stricken end of the market with climbing the mountain that is buying their first home.

The Chancellor’s answer – the only one that matters, since his is law and mine just idle musing – is different.

We are to get Help To Buy: ISAs.1

The Help To Buy: ISA is a new ‘one-shot’ special ISA allowance, where the government will boost the savings you put into it by 25%.

So if you save £200, the government will boost that £200 with a bonus of £50.

Actually, according to the official factsheet you can only save “up to £200” a month into a Help to Buy: ISA.

In other words, there’s no scope for high-rollers (/cash-rich house-buying refuseniks) to just dump some spare money into a Help to Buy: ISA for an immediate bung from the government.

(Not that the idea crossed my mind. *Cough*)

Also, the maximum Help to Buy: ISA bonus you can achieve will be £3,000.

Getting that bonus will require saving up £12,000.

At £200 a month it would take around five years of regular saving hit that target2.

Are you thinking “hmm” yet?

Standby then, because it gets, well, not exactly worse, but certainly less attractive.

How the Help To Buy: ISA boosts your deposit

You see I’m using the PR spin-sounding words “bonus” and “boost” quite deliberately – because the government doesn’t actually give you any extra money.

Instead, the bonus you have earned from all that Government boosting is only paid when you buy your first home.

That’s sensible from a targeting point-of-view, but still a bit finickity.

Here’s more fine print, lifted verbatim from the Help to Buy: ISA factsheet:

• New accounts will be available for 4 years, but once you have opened an account there’s no limit on how long you can save for

• Accounts will be available through banks and building societies from Autumn 2015

• You can make an initial deposit of £1,000 when you open the account – in addition to normal monthly savings

• There is no minimum monthly deposit – but you can save up to £200 a month

• Accounts are limited to one per person rather than one per home – so those buying together can both receive a bonus

• Only available to individuals who are 16 and over

• The bonus is available to first time buyers purchasing UK properties

• Minimum bonus size of £400 per person

• Maximum bonus size of £3,000 per person

• The bonus will be available on home purchases of up to £450,000 in London and up to £250,000 outside London

I’m glad they didn’t put an age limit on eligibility, given how varied first-time buyers are these days. I do wonder if and how they will police the clause that the money must be for your first home though.

Here’s a handy summary diagram of what it all means, hewn from the burgundy Budget document itself:

How many ISAs can you take?

One thing I’m not sure about is whether you can open a stocks and shares ISA as well as your single Help to Buy: ISA in the same year.

According to the official details on how the scheme will work:

As is currently the case, it will only be possible for a saver to subscribe to one cash ISA per year.

It will therefore not be possible for an account holder to subscribe to a Help to Buy: ISA with one provider, and another cash ISA with a different provider.

So on the face of it you are okay to open a share ISA and get that ISA allowance for the year in the bag, as well as the Help to Buy: ISA. Just not a cash ISA.

But I’m confused because I thought ISAs (or NISAs as we were supposed to call them after the revamp, and did for about 5 minutes) were now transferable back and forth between stocks and cash versions?

I’ve never done the conversion, however, so perhaps I’m not appreciating some nuance here?

If you can shed any light in the comments below, please do so!

Whether it matters depends on where you buy

At the end of the day, a potential first-time buyer like me has a new savings option that it would seem foolish not to take advantage of.

True, that £3,000 bonus won’t amount to much for those of us who’ve amassed six-figure sums and a few grey hairs trying to keep up with London housing over the years.

But it could be a very useful perk in areas that are more “realistically-priced” (to use the Estate Agent lingo), where salaries are also lower and most Banks of Mum and Dad are probably less able to write huge no-doc loans to children on their whim.

The average deposit size outside of London is now about £28,000, as shown in this new chart from the Treasury:

Source: Help To Buy: ISA scheme details.

On these figures then, the Help to Buy: ISA bonus could be worth around 10% of the median deposit size for typical first time buyers – although median deposit sizes will surely grow far larger in the several years it takes to save up a deposit via this scheme.

If you can take advantage of the Help to Buy: ISA scheme and you think you’ll one day buy a home, then – in the absence of any information yet on interest rates and so on – it seems it would be smart to do so.

It’s free almost-money from the saver’s perspective.

It seems churlish to complain.

Still: Hmm.

Help To Stop A Property Slump

Some critics will argue that the Help To Buy: ISA is just the latest way for the Government to prop up the housing market with taxpayer’s money.

Also, one might suspect that house prices will be higher in a few years by an amount equivalent to where they would have been had this extra Government money not arrived, which would leave first-time buyers no better off than they were before it.

These may prove to be valid points, but I’m not sure.

I suspect that as it will take years of saving to achieve the maximum government bonus, a Help to Buy: ISA may prove too weedy and diffuse to impact the property market much at all.

The spending commitments start trivial, which reinforces that point. In the first year the government expects the scheme to cost it a mere £45m, though this does rise to a heftier £835m by the years 2019-2020.3

Remember, aggregate UK property wealth is well over £5 trillion!

Too little, too late

While we’ll have to see if Help To Buy: ISAs do have any impact on property prices, they might not do much for first-time buyers prospects, anyway, especially in the more expensive regions.

As The Guardian reported in its summary of the Help to Buy: ISA’s pros and cons:

Lucian Cook of property firm Savills says the £12,000 limit on savings should prevent a surge in house prices and means the scheme is “more likely to help get buyers over the deposit hurdle in the lower-value, lower-growth markets of the Midlands and the north than say London and the south-east, where significant constraints remain”.

Seems a sensible view. The long timescale required to build up funds does work against both the bubble-stoking potential and the scheme’s usefulness, especially in and around London.

Presuming no house price crash, even modest first-time buyer property price appreciation is likely to far outstrip that £3,000 bonus in most of the country over the next few years, I’d have thought.

House price rises could soon leave your £15,000 saving scheme looking rather weedy.

Help To Buy: ISAs are better than nothing

Sadly, as ever in the UK it seems the best bold plan still appears to be to get a big mortgage as soon as you are able to, and to cross your fingers.

What’s really required though for first-time buyers is lower prices (or at the least flattened prices) due to far more supply – whether that comes from building more new homes where they’re needed, from encouraging people rattling around in too-big houses to downsize to free up the space, and/or from making being a landlord less financially attractive, and so removing some of the competition with less-affluent first-time buyers.

All themes touched on in my housing article and in the many excellent comments made by readers, incidentally, if you’re eager for more.

As for the Help To Buy: ISA, sure it is better than nothing, unless you’re a cynic – in which case it does seem like a pre-Election bung.

Better listen to us next time George old chap.

At least he’s followed up on my Northern supercity suggestion.

(Okay, so perhaps one or two other people have also had that idea… 😉 ).

1. Thank goodness the silly NISA name change of last year appears to have already met an official death. [↩]
2. Although as we’ll see in a moment, you can kickstart the Help to Buy: ISA with a £1,000 lump sum. That would shave off nearly six months. [↩]
3. These costings are cited on page 64 of the Budget. [↩]