Good reads from around the Web.

I sometimes suspect a few of the great and the good read Monevator.

And maybe they do – but if so they are currently paying more attention to the comments. Or at least the debate in the comments in my recent post about high house prices.

Long story short: I argued that inheritance tax is one of the fairest of the various unpalatable taxes out there, and it should be whacked up accordingly.

Nearly everyone disagrees.

I won’t rehash that debate again, but I would recommend you follow the link above and have a read if you care about this issue, as there are some great points from all angles in that thread.

A civil and constructive Internet discussion! Perhaps I should notify the authorities?

Death to the death tax

It took less than a fortnight for the Conservatives to reveal they are to move the other way, and dial back inheritance tax even further.

You’ll surely have heard by now that ‘death tax’ is to be abolished.

As CityWire reports:

The government is to abolish the 55% pensions death tax charge, chancellor George Osborne has announced.

The measure will come into force in April 2015 alongside the pension reforms outlined in the Budget.

The new rules mean that if a person who dies is 75 or over, the person who receives the pension pot will only pay their marginal tax rate as they draw money from the pension. If someone aged under 75 dies, the person who receives the pot is able to take money from the pension without paying any tax.

Beneficiaries will be able to access pension funds at any age and the lifetime allowance, currently £1.25 million, will still apply.

Within moments of the news breaking, I posted on my personal Facebook wall that while I’ve agreed with most of the changes made to the pension system this year, totally abolishing such taxes will make pensions a charter for the rich to pass on millions free of inheritance tax.

And after an hour I was reminded again by my friends that everyone hates inheritance tax.

Keep in mind too that as I’ve mentioned before, most of my friends are – or think they are – pretty left-leaning.

The king is dead, long live the kings!

Anyway, before too long the wider media had picked up the scent, with the always-sharp Merryn Somerset-Webb noting:

A fantastic tax dodge for the already wealthy

[…] advice on pensions will now need to “dovetail” with that on IHT.

Quite. What were once personal pensions are now to be “family assets that can be very effectively used for intergenerational planning”.

Subject to the current Lifetime Allowance, families can pile £1.25m into a pension over time and leave it to be drawn down (or topped up) by descendants as they see fit.

I suspect that George Osborne doesn’t want us to go on about that bit too much.

Merryn also thinks that it might be a political gambit. She believes public sector workers could clamour for their schemes to be changed to enable them to benefit, too – presumably by moving them to defined contribution schemes (which may be less onerous on the State).

She could be right. For what it’s worth, I also suspect critics are correct that it’s futile to raise inheritance tax, simply because it’s so hard to collect. It’s already semi-optional for the rich, and generates little money accordingly.

Money for nothing

Given our previous discussions, I presume most Monevator readers would be very pleased with the abolishing of so-called death taxes.

And I can see the logic of giving people an incentive not to use the new pension freedoms to spend all their money at 55 – not to mention making avoiding inheritance tax more democratic and accessible.

But in an ideal world I’d still rather tax workers and entrepreneurs less, and tax the dead and the recipients of their unearned largesse more.

We don’t live in a society where the rich are having trouble growing any richer.

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Whether you’re swayed by the academic theories against active investing – or just the abundant proof showing most fund managers demonstrably fail to beat the market – the case for index investing is overwhelming.

No wonder the lucrative active fund industry has been battling indexing since the latter was introduced in the 1970s.

Jack Bogle, who as the founder of Vanguard group did so much to popularise index funds, even saw his competition decry passive investing as un-American!

It didn’t work.

Today Vanguard is one of the largest managers in the world by assets under management (although crucially, with its low-cost index funds it makes much lower margins on those assets than its more active rivals).

Fidelity, another big player in index funds, is also high up the rankings.

Index funds still on the rise

Yet despite the success of Vanguard, Fidelity, and iShares here in the UK (which is now owned by the giant Blackrock), overall active investing still has a bigger market share than passive investing.

That seems incredible, if you just consider the evidence we’ve seen in this video series from Sensible Investing.

Clearly still more people need to be hear the somewhat counterintuitive case for index funds, as outlined in the next video.

It features loads of different voices, ranging from John Redwood MP to Merryn Somerset-Webb to Monevator favourite Larry Swedroe:

As the video points out, none other than market-beater extraordinaire Warren Buffett has repeatedly made the case for index funds.

Buffett famously said:

“When the dumb investor realises how dumb he is and buys an index fund, he becomes smarter than the smartest investors.”

Most recently, Buffett revealed his wife’s estate would be put into an index fund after he’s passed on.

Just think about it.

One of the world’s greatest active investors – one of the few with any kind of long-term record of success, let alone Buffett’s 60-year streak – is effectively telling you not to bother even trying when it comes to active investing.

It’s a bit like Jamie Oliver telling you to keep out of the kitchen, for your own sake.

Do as he says or do as he does?

I believe that for all his folksy sayings about being greedy when others are fearful and so on, Warren Buffett – an investing genius – knows just how hard it is for most people to beat the market.

Tens of thousands of the world’s smartest and best-paid people still try every day. Most fail after costs.

Will you really do better than them?

If you want to invest actively for some other reason (I pick stocks myself) then fair enough.

But don’t do it because you think you’re the next Warren Buffett, or because you think it’ll be easy to beat all the other wannabe Buffetts out there.

The chances are you won’t even beat Buffett’s best bet – a cheap index fund.

Check out the rest of the videos in this series so far.

Good reads from around the Web.

Since the world’s wealthy are happy to have their funds devoured by the locusts of high-finance – hedge funds and their 2/20% fees – then who knows, maybe they’ll be glad to have their money managed by rats, too?

Enlightenment Economics reports on a curious project to teach rats to trade:

The rats were trained to press a red or green button to give buy or sell signals, after listening to ticker tape movements represented as sounds. If they called the market right they were fed, if they called it wrong they got a small electric shock.

Male and female rats performed equally well. The second generation of rattraders, cross-bred from the best performers in the first generation, appeared to have even better performance, although this is a preliminary result, according to the text.

Marcovici’s plan, he writes, is to breed enough of them to set up a hedge fund.

If you’re thinking you want to get in early – before the best of the rat traders start to demand exorbitant amounts of cheese – you might head to the Rat Traders website to learn more.

Unfortunately you’ll discover that while the idea caught the blogosphere’s imagination this week1, the last updates from the site hail from 2009.

Perhaps the rats were blown-up in the financial crisis? Or maybe they turned to teaching or caring for the elderly or some of the other things we were told financial folk were going to do, having seen the error of their ways.

(Until about 2010, when they started making bazillions again.)

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1. Thanks to Monevator reader G. for putting me on the trail. [↩]