Good reads from around the Web.

I really liked an analogy from blogger Random Roger that I read this week. In an article stressing that investing is about long-term results, Roger writes:

One comment we’ve heard several times in this year’s Tour de France is that they can’t win the Tour today but they can lose it today.

And this relates to investing.

You cannot ensure that you will have enough money when you need it by having a good month, quarter or year, but it is possible to seriously jeopardize your ability to have enough when you need it with certain behavior.

Can you remember how much you were up in March 2010? Or whether you beat the market (if that’s your aim) in 2007?

Very unlikely. Even if you do keep detailed records, you’re either a savant or you’ll need to consult your files before answering.

Yet how much does the typical news-obsessed investor sweat when the market falls 5%?

These short-term oscillations matter a lot to fund managers and financial journalists, but they don’t mean much in the long run. What goes up usually comes down almost as far on a day-to-day basis. Often enough by tomorrow!

It’s over the months and much more so the years that the gains really add up.

[continue reading…]

RIT is back with a roundup of movements in the most important assets for private investors. For oodles more data, check out his own website, Retirement Investing Today.

The Investor gave us a succinct summary of the first half of 2013 at the weekend, via his latest Weekend Reading.

The talk this past quarter though was all about Ben Bernanke suggesting he may slow down his monthly $85 billion money printing – sorry, I mean quantitative easing (QE) – exercise if the US economy continues to improve.

Bernanke didn’t actually make any change, nor did he suggest that he was going to stop or begin reversing QE. All he did was suggest the rate of QE may slow.

• In response the S&P 500 got a lot more volatile. For example it fell 4.8%, from 1,652 on 18 June to 1,573 on 24 June, before recovering to 1,632 on 5 July. Thanks to that late recovery making up some of the pain, the S&P put on 4% overall for the quarter. (Nervous investors would have done better not to check their fund statements for a few months!)

• Gold also fell. It fell 6.5% between 18 June and 24 June, as it moved from $1,368 an ounce to $1,279. All told, the quarter 28 March to 5 July has seen gold drop a massive 23.3% to close at $1,224. Is this big fall due to punters thinking they no longer need the supposed inflation protection of gold? If so then UK investors at least have been in gold for the wrong reason. I’ve run an analysis back to the late 1970s and I can’t find any correlation between gold prices and inflation.

• The bond markets also responded to Bernanke. US 10-Years moved from a yield of 2.18% on 18 June to 2.72% on the 5 July. 10-Year Gilts in the UK followed suit, moving from 2.16% to 2.51%. Remember a rising bond yield means a falling bond price. One reason yields are rising is the market fears a major buyer of bonds – the Fed – is about to reduce purchases.

I don’t know everything that’s going on in the markets (in fact I know very little) so if you know of any other macro effects that have occurred over the last quarter or are likely to affect the next quarter, please do share them below.

Disclaimer: What follows is not a recommendation to buy or sell anything, and is for educational purposes only. I am just an Average Joe and I am certainly not a Financial Planner.

Your first time with this data? Please refer back to the first article in this series for full details on what assets we track, and how and why.

International equities

Our first stop is stock market information for ten key countries1.

The countries highlighted in the image (which you can click to enlarge) are the ten biggest by gross domestic product. They are countries that a reader following a typical asset allocation strategy will probably allocate funds towards.

Here’s our snapshot of the state-of-play with each country:

The prices shown in the table are the FTSE Global Equity Index Series for each respective country.2 The prices are all in US Dollars, which enables like-for-like comparisons across the different countries without having to worry about exchange rates.

The Price to Earnings Ratio (P/E Ratio) and Dividend Yield for each country is as published by the Financial Times and sourced from Thomson Reuters. Note that these values relate only to a sample of stocks, albeit covering at least 75% of each country’s market capitalisation.

Here’s a few things that jump out:

• Best performer: Japan’s stock market was the best performer quarter-on-quarter, rising 7.4%. This comes on top of last quarter’s gain of 8.7%. Year-on-year the honour goes to Germany, which is up 24.2%.

• Worst performer: Brazil takes the wooden spoon with a quarter-on-quarter fall of 18.3% and a year-on-year drop of 15.1%.

• P/E rating: Italy has seen the biggest P/E increase, up 17.4% on the quarter and 43.4% on the year. China on the other hand has seen its P/E fall 16% quarter-on-quarter and 5.6% on the year. This means Italy looks more expensive relative to earnings, and China cheaper, as investors have got more optimistic about Italy and less so about China.

• Dividend yields: China now sports the largest dividend yield of the countries we follow at 4.9%. If you’re chasing dividend yield, you might also consider a less risky Asian country, Australia. Its MSCI Australia Index yields around 4.5%.

Remember that falling prices usually increase dividend yields. So rising yields aren’t necessarily good news for existing holders, since they most often indicate prices have fallen. A higher yield might indicate a more attractive entry point for new money, however.

Longer term equity trends

To see how our ten countries are performing price wise over the longer term, we use what we call the Country Real Share Price.

We take the FTSE Global Equity Price for each country, adjust it for the devaluation of currency through inflation, and reset all of the respective indices to 100 at the start of 2008.

Here’s how the countries have performed over the five and a half years since then, in inflation-adjusted terms:

In inflation-adjusted terms, only the US has seen prices reach new real highs, and even then by just a tiny 4.5% rise since 2008.

Italy remains the laggard.

Spotlight on UK and US equities

I can’t discuss share prices without looking at the cyclically-adjusted PE ratio – aka PE10 or CAPE. (You can read what the cyclically-adjusted PE ratio is elsewhere on Monevator).

Below I show charts that detail the CAPE3, the P/E, and the real, inflation-adjusted prices for the FTSE 1004 and the S&P 5005.

As always you can click to enlarge the graphs:

A few thoughts:

• The S&P 500 P/E (using as-reported earnings, including some estimates) is at 17.4 and the CAPE is at 23.0. This compares to its CAPE long run average of 16.5 since 1881. This could suggest the S&P 500 is overvalued by 39%.

• In contrast the FTSE 100 P/E (again using as as-reported earnings) sits at 12.8 with the CAPE at 12.7. Averaging the CAPE since 1993 reveals a figure of 19.3. This could suggest the FTSE 100 is still undervalued by 33%.

I personally use the CAPE as a valuation metric for both of these markets and use the CAPE data to make investment decisions with my own money. Not though that some traders and investors doubt the usefulness of the CAPE.

House prices

A house is probably the largest single purchase that most Monevator readers will ever make. It’s therefore worth looking at what is happening to prices.

In the roundup I have chosen to calculate the average of the Nationwide and Halifax house price indices, as follows:

QE and the Funding for Lending Scheme continue to keep mortgage rates at record lows. We’ve now also had the first full quarter of the first piece of the Government’s Help to Buy Scheme, which aims to help buyers with deposits.

• If you’re a home owner then this manipulation of the market, as I would label it, has delivered what you will probably take as good news – average prices rose in the quarter by £5,282, or 3.2%.

• If you’re priced out of home owning then the dream just moved further from your grasp.

The next house price chart shows a longer-term view of my Nationwide-Halifax average. I also adjust for the effects of inflation, to show a true historically levelled view:

In real terms housing is still well down on the peak, with prices back at late 2002 levels.

I continue to believe the market is both affordable and overvalued, although I’m sure the majority of the British public don’t necessarily agree with me. No matter which side of the fence you sit on, what can’t be argued against is that volumes for properties priced at £250,000 or less are on the floor.

As I keep saying, I just wish the UK government and Bank of England would stop manipulating the market and allow it to adjust to the free market price so volumes could return to normal and a true market price become established.

Of course there are plenty on the other side of the fence.

Commodities

Few private investors trade commodities directly. However commodity prices will still affect you, and maybe your investments.

With that in mind, I’ve selected five commodities to regularly review. They were chosen based on them being the top five constituents of the ETF Securities All Commodities ETF, which aims to track the Dow Jones-UBS Commodity Index.6

Quarter-on-quarter we see natural gas rose a further 21.2% increase. Year-on-year it’s up over 66%. I’m not surprised, given how natural gas prices lagged the other commodity price rises we track.

My preferred commodity for investment purposes is gold, for sheer ease-of-investment. It’s down 13.2% on the quarter per the IMF monthly data sets. This sharp drop has caused me to top up my personal gold holdings, as I rebalance my portfolio according to strict mechanical rules.

Real commodity price trends

My Real Commodity Price Index looks at commodities priced in US dollars, is corrected for inflation so we can see real price changes, and resets the basket of five commodities to the start of 2000.

Gold even with its big falls continues to be the star performer, up to an index value of 360 from 100. As mentioned above the underperformer is natural gas. It’s moved to 122.

Wrap up

So that’s the Q2 2013 Monevator Private Investor Market Roundup. A lot of data which I hope gives a small insight into the market’s trials and tribulations. As always it would be great to hear your comments or thoughts below.

Finally, as I always say on my own site, please Do Your Own Research.

For more of RIT’s analysis of stock markets, house prices, interest rates, and other useful data points, visit his website at Retirement Investing Today.

1. Country equity data was taken as of the first possible working day of each month. [↩]
2. Published by the Financial Times and sourced from FTSE International Limited. [↩]
3. Latest prices for the two CAPEs presented are the 5 July 2013 market closes. [↩]
4. UK CAPE uses CPI with June and July 2013 estimated. [↩]
5. US CPI data for June and July 2013 is estimated. [↩]
6. The monthly data itself comes from the International Monetary Fund. [↩]

Because I practice the art of portfolio insouciance, I missed the exact moment our Slow and Steady demo portfolio hit its peak in May. The undulating graph on my portfolio tracker tells me we were up something like 22% as the rollercoaster car crested the hill.

I wasn’t watching and my stomach skipped the ride, so all I care about is we’re still up 17% on purchase, with a cash gain of £1,600 – a smidgeon better than last quarter.

It’s strange, but like tuning in for late-night sport, the emotion is flattened when you’re not viewing it live.

Here are the bare bones:

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000 and an extra £750 is invested every quarter into a diversified set of index funds, heavily tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts.

Platform choose

No doubt we will do better and we will do much worse. Our graph will oscillate like a skipping rope but let’s focus instead on something we can control – the cost of our portfolio now platform charges are inevitable.

In brief, whereas the cost of holding a fund through a broker or fund supermarket was previously hidden away in its Ongoing Charge Figure (OCF), that charge will now be explicit, and bigger for small investors.

There’s no avoiding it. The FCA1 has decreed that DIY investing platforms must switch to the new charging model over the next couple of years.

Before too long, we’ll all be buying so-called clean funds – funds that no longer conceal platform fees within their OCF – from brokers that cake on an additional charge for their services. Better that slightly pungent cherry on top than a scattering of putrid currents buried in the mix.

Old-style ‘free brokers’ that aren’t really free, selling funds with swollen OCFs, will gradually disappear, and our Monevator broker comparison table will help you hopscotch through the minefield until then.

For now, I’m going to choose Charles Stanley Direct as the Slow and Steady’s new clean fund, execution-only broker. Its 0.25% platform charge is the cheapest option available for a small portfolio like this one. At that rate, we’ll hand over £28.50 per year in platform fees if the portfolio got stuck at its current £11,408 value.

Once our investment needle reaches about £20,000, we may well be better off with a fixed fee broker. That moment looks a few years off yet.

The good news is that index fund OCFs continue to decline, going some way to off-setting the increased platform fees.

So while we’re in upheaval mode, I’m taking the opportunity to sell off most of our old funds and switch into cheaper versions, mostly from BlackRock’s Tracker Fund D range.

Here are our moves:

Old fund	TER/OCF (%)	New fund	TER/OCF (%)
Vanguard U.S. Equity Index	0.2	BlackRock US Equity Tracker Fund D	0.18
Vanguard FTSE Developed Europe ex-UK Equity Index	0.25	BlackRock Continental European Equity Tracker Fund D	0.18
L&G Global Emerging Markets Index I	0.52	BlackRock Emerging Markets Equity Tracker Fund D	0.28
HSBC Japan Index C	0.23	BlackRock Japan Equity Tracker Fund D	0.18
HSBC Pacific Index C	0.31	BlackRock Pacific ex Japan Equity Tracker Fund D	0.24
HSBC UK Gilt Index C	0.17	Vanguard U.K. Government Bond Index Fund	0.15

The total weighted OCF of the new portfolio is 0.18% (plus the 0.075 weighted stamp duty charge incurred by the Vanguard UK equity fund.)

That compares to 0.23% for the old version of the portfolio.

It’s possible to buy a slightly cheaper UK fund – the Royal London UK All share Tracker Z Fund – but I’m happy to stick with Vanguard as I suspect it will make up the 0.01% difference by keeping a tighter rein on tracking error.

Health warning!

Note that willy-nilly fund switching for a few hundredths of a basis point in cost improvement is not to be recommended. The change I’ve just made is worth all of £6 per year at the portfolio’s current valuation. You could easily lose many times that if the market spiked while you were hokey-cokeying your funds.

I’m only doing this because this is a demo portfolio that’s designed to present the best possible set-up for new investors.

You might also simplify the portfolio by ditching the separate US, Europe, Japan and Pacific funds in favour of the do-it-all Vanguard FTSE Developed World Ex-UK Equity index fund.

Or you can be lazier still and buy Vanguard’s one-stop-shop LifeStrategy funds.

Again, it’s a fraction more expensive than the Slow and Steady investments but a whole lot quicker to manage. Just add direct debit et voila – instant portfolio!

New transactions

Every quarter, we lob another £750 into the maelstrom, divided between our seven funds according to our asset allocation.

This quarter the funds we use have changed but of course our asset allocation remains all-important, as that’s what determines where we have our chips.

Here’s the skinny on our latest reshuffle.

UK equity

Vanguard FTSE U.K. Equity Index Fund – OCF 0.15% (Stamp duty 0.5%)
Fund identifier: GB00B59G4893

New purchase: £112.50
Buy 0.6276 units @ 17926.5p

Target allocation: 15%

Developed World ex UK equities

Split between four funds covering North America, Europe, the developed Pacific and Japan2.

Target allocation (across the following four funds): 51%

North American equities

Vanguard U.S. Equity Index Fund – OCF 0.2%
Fund identifier: GB00B5B71Q71

Sell: £3,272.86

Replaced by:

BlackRock US Equity Tracker Fund D – OCF 0.18%
Fund identifier: GB00B5VRGY09

New purchase: £3,460.36
Buy 2,714 units @ 127.5p

Target allocation: 25%

OCF has gone down from 0.2% to 0.18%

European equities excluding UK

Vanguard FTSE Developed Europe ex-UK Equity Index fund – OCF 0.25%
Fund identifier: GB00B5B71H80

Sell: £1,379.33

Replaced by:

BlackRock Continental European Equity Tracker Fund D – OCF 0.18% Fund identifier: GB00B83MH186

New purchase: £1,469.33
Buy 979.553 units @ 150p

Target allocation: 12%

OCF has gone down from 0.25% to 0.18%

Japanese equities

HSBC Japan Index C – OCF 0.23%
Fund identifier: GB00B80QGN87

Sell: £927.35

Replaced by:

BlackRock Japan Equity Tracker Fund D – OCF 0.18%
Fund identifier: GB00B6QQ9X96

New purchase: £979.85
Buy 702.401 units @ 139.5p

Target allocation: 7%

OCF has gone down from 0.23% to 0.18%

Pacific equities excluding Japan

HSBC Pacific Index C – OCF 0.31%
Fund identifier: GB00B80QGT40

Sell: £728.15

Replaced by:

BlackRock Pacific ex Japan Equity Tracker Fund D – OCF 0.24%
Fund identifier: GB00B849FB47

New purchase: £780.65
Buy 378.589 units @ 206.2p

Target allocation: 7%

OCF has gone down from 0.31% to 0.24%

Emerging market equities

Legal & General Global Emerging Markets Index Fund I – OCF 0.52%
Fund identifier: GB00B4KBDL25

Sell: £997.31

Replaced by:

BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.28%
Fund identifier: GB00B84DY642

New purchase: £1072.31
Buy 992.87963 units @ 108p

Target allocation: 10%

OCF has gone down from 0.52% to 0.28%

UK Gilts

HSBC UK Gilt Index C – OCF 0.17%
Fund identifier: GB00B80QG383

Sell: £2,390.65

Replaced by:

Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374

New purchase: £2,570.65
Buy 20.253 units @ 12692.95p

Target allocation: 24%

OCF has gone down from 0.17% to 0.15%

New investment = £750

Trading cost = £0

Platform fee = 0.25% per annum

This model portfolio is notionally held with Charles Stanley Direct. You can use that company’s monthly investment option to invest from £50 per fund. Just cancel the option after you’ve traded if you don’t want to make the same investment next month.

Take a look at our online broker table for other good platform options. Look at flat fee brokers if your ISA portfolio is worth substantially more than £20,000.

Average portfolio OCF = 0.18% down from 0.23%

Take it steady,

The Accumulator

1. The Financial Conduct Authority, which has replaced the FSA [↩]
2. You can simplify the portfolio by choosing the do-it-all Vanguard FTSE Developed World Ex-UK Equity index fund instead of the four separates. [↩]