What caught my eye this week.

Perhaps the most fanciful of the many ultimately costly reasons I found for not buying my own place in London for decades – missing the entire boom, before finally doing the deed after it ended – was self-driving cars.

Yes really.

My thinking was that when AI can drive us about everywhere, there will be less of a premium on living near the action.

Instead you could fall asleep drunk in a cheap robot taxi that drives you back to your home anywhere. You could live up a mountain, miles from public transport. You could commute in a bed-car.

Location would still be important, but that would be re-calibrated. Maybe views would be at a premium, or peace and quiet, or being a drive away from several social hubs rather than being at the heart of any one of them.

I didn’t know exactly how London’s pricey postcodes would be affected. But I was wary of placing a bet.

Needless to say, while we now have chatbots that can bluster as convincingly as any sixth-former who didn’t do their homework, we’re still waiting to be ignored by a passing autonomous black cab.

So much for that great reckoning!

More recently the pandemic – and working from home  – was touted as doing something similar.

Remember the countless stories about people moving out from the cities in 2020?

Yeah, well lots of them moved back. Or perhaps found they couldn’t afford to do so, because others had rushed in to fill the spaces they’d left behind.

Bonnie’n Inverclyde

And so the UK remains a country divided by house price to average earnings ratios as much as by absolute house prices. Higher-earning bidders pay relatively higher prices for already pricey property.

Indeed this week we learned that the most affordable place to live on the basis of such ratios is Inverclyde.

No, me neither. According to The Guardian:

Inverclyde, which boasts a saltwater Lido looking out over estuary, has an income ratio score of just 2.9, compared with central London’s score of 16, the research shows.

It is closely followed for affordability by Dumfries and Galloway (3.2) and East Ayrshire (3.3).

And here’s a comparison in table form, again from The Guardian:

The salaries behind the ratios are regional. Which means that while they don’t have the granularity of the local authority house price data, we’re at least not seeing those Scottish house prices made comparatively cheaper by being set off against bankers’ bonuses in Canary Wharf.

Of course it has been like this to some extent forever. But the ratios really do look extreme now.

If you live in Hull and I live in Islington, can we even have a mutually intelligible conversation about the price of a first-time home?

How does it end? More of the same?

Perhaps tribes of highly-skilled tech workers who can work remotely could get together to set themselves up in luxury in Scotland – creating a critical mass to bring sufficient baristas and craft beer breweries in their wake.

Perhaps not. As one blogger put it during the pandemic:

The more people can be anywhere, the more they will want to be somewhere.

And with no offence to those living far from the madding crowd – hey, it’ll be me someday – I expect that for most such bright young people, London will continue to be the UK’s centre of gravity.

Whatever the ratios say.

Another membership housekeeping note

Last week’s site housekeeping note flushed out a new issue, which is that a tiny handful of Monevator members hadn’t been getting any premium emails at all.

Which is distressing. Because we’re grateful for the support of every one of our members!

The issue seems to be that if you’ve ever unsubscribed from Monevator emails, then when you sign-up for membership the system assumes you still don’t want them.

Blame GDPR and all that malarkey.

The solution is to resubscribe to our free emails. This should ensure that as a member you get all our emails – including your special member content.

I know there are some people who are better than me who like to keep pristine inboxes. If that’s you, I suggest reading the Mavens and Moguls articles by logging in on the Monevator website.

(Remember you must allow third-party cookies to log-in. But there are no ads as a member, at least).

Have a great weekend all!

[continue reading…]

There is something that fluctuates even more than the stock market in investing – and that’s investor sentiment.

Indeed once you’ve been around the investment block a few times, it’s hard to take old-fashioned textbook economics – with their purely rational Vulcan investors and perfect pricing – very seriously.

I’ve observed that just as there’s a business cycle, there’s an investment sentiment cycle. This cycle sees the emotions of investors wax and wane as they lurch from fear to greed and back again.

That’s not to say the old textbooks – or the various forms of the efficient market hypothesis – are entirely wrong.

Later behavioural economists were surely correct that investors often act irrationally and take prices out of whack.

But that doesn’t make it simple to profit from such extremes. The woeful record of most active funds that try to beat the market is proof of that.

A share’s price may well reflect everything that’s publicly known about the asset. This may even include the knowledge that half the people buying it are doing so irrationally.

Yet the price can go even more irrationally higher.

Just think of tech and meme stocks in 2021.

Hunting for highs and lows

So far so straightforward. Avoid getting swept up in a mania, invest with your head not your heart, and sidestep the dangers oscillating investor sentiment, right?

If only it were that simple.

For starters it’s only in retrospect that you can clearly read back a cycle of fear and greed – even when you understand that bull and bear markets are at least partly emotional, and you’re alert to all the signs.

You’ll often see exuberance and reckless trading years before a given market tops out. Get out too soon and you’ll miss years of gains while you wait for a crash that might never come. (Miss enough gains and it might not have been worth abstaining overall, even if and when the market does crash.)

Betting against the market is always risky, both financially and emotionally. The great economist John Maynard Keynes said “the market can remain irrational long after you can remain solvent”. But what Keynes didn’t mention was that even if you avoid betting against a crazy market, you can still feel pretty lousy in your haughty solvency for as long as everyone else is making out like bandits.

I’ve been there many times.

For instance, in the previous version of this article published in 2010 I wrote:

I’ve avoided gold miners for years, despite their popularity, because gold has long seemed detached from reality. More fool me.

The gold price looked very stretched back then. Yet powerful undercurrents of fear that followed in the wake of the financial crisis kept its price bobbing along.

My patience was even more stretched. Sitting out this market while investor bulletin boards were full of my stock-picking peers doubling or tripling their money in a year was not easy.

It wasn’t until 2013 that my avoiding gold miners was at all rewarded, as the boom ended in a bust.

Who knows what money I failed to make before then?

The real zombie investments

I’ve been through similar cycles with everything from oil companies to tech shares to bonds to Bitcoin.

This is one reason I never say never again about any asset class or investment opportunity. I’ve seen too many supposedly surefire investments flounder. Even as others rise from the dead again when, eventually, both their fundamentals and investor appetite recovers.

If you leave entire sectors or asset classes behind every time you get your fingers burnt, you’ll soon end up with nothing left to invest in. Because they will all burn you from time to time.

Better to learn your lesson and leave only your emotions behind if you can.

Peak bullshit

One of the best things about updating very old Monevator articles is that since-proven illustrations are often just sitting there on the page.

Again from the previous version of this post from 2010, I wrote:

It seems like every private investor I meet nowadays owns a portfolio of oil companies, variously prospecting in the Mongolian steppes or trying to snake a pipe under the Arctic.

These people (maybe you’re one?) will tell you earnestly that oil shares are the only game in town, and peak oil makes all other investments irrelevant.

Indeed as far as I can tell, every 50-year old man who dabbles in shares (and they’re always men and over 50 these days, which says something in itself) thinks humanity’s future is to transport bundles of copper and gold back and forth between China and India in gas-guzzling trucks at great profit to themselves, while the rest of the world burns its old Tesco share certificates and 50 pound notes for warmth.

No place for media companies. No point in buying shares in breweries or builders. No future for whoever makes those fancy leggings that all the girls in London are wearing.

These peak oil investors have endless technical arguments as to why they’re not the last punters to turn up before midnight. They are supremely confident, and they grow more confident by the day.

We’ll see, but history is not on their side – all one-way bets hit the wall eventually.

Well this mania did indeed prove a tell.

Most oil and gas producers – and other commodity producers – started a decade-long slide down soon after.

You may recall the oil price briefly went negative in March 2020? By then, the iShares basket of oil and gas producers (Ticker: SPOG) was down 75%:

And as the graph shows, prices going negative – and every oil bull checking into the slaughterhouse – turned out to be a historically good time to buy.

(Do I sound smug? I shouldn’t – because buy I did not!)

Dot come again

If you think that’s an impressive bit of Mystic Meg action, you’re going to love what I wrote about tech stocks in the 2010 edition:

For a contrasting unloved sector, consider technology companies.

It’s hard to remember a time when half the office owned shares in nonsense companies like Baltimore, Webvan, and NTX. Yet it was only a brief decade ago that the Dotcom stocks were doubling in a month on a good press release and a name change.

Today roughly nobody except institutional investors bothers with individual technology shares – yet the Nasdaq tech market in the US has been quietly beating the Dow and the S&P 500 for months.

Blimey! This is how someone gets themselves a big head. (Or a permanent place on rotation on CNBC.)

I went on to speculate that the seeds were being planted for a new boom in technology shares:

• The first shoots will be obscure magazine articles on the Nasdaq’s recovery.

• Then you’ll discover a friend or a bulletin board poster who has tripled his money betting on cloud computing micro-caps.

• Perhaps Facebook or Twitter will float for what will seem a crazy valuation, but will look positively modest a few years later.

• Some new kind of fusion or computer or website will emerge and capture everyone’s attention.

• Whereas today there’s less than half a dozen surviving UK funds focused on technology, by then there’ll be dozens. You can’t miss them – they’ll be advertised in all the Sunday papers.

• The last lemon will ripen in 2020, when even you and I will buy shares in a Korean software company that’s a rumor we heard from an old boss who’s confused it with gadget in a movie he saw on the first commercial space flight to the moon.

And then the bubble will burst. We’ll all wonder again what we were thinking, and put our savings into ‘risk-free’ Chinese government bonds and middle-class apartment blocks in New Dehli.

Okay, so I lost the plot a bit at the end there – the dangers of long-range speculation.

But I think these examples – which you’re welcome to check back on using the Internet Wayback Machine – show that it’s possible to judge what’s in and out of fashion at the extremes.

Again though, don’t confuse ‘possible’ with ‘easy’.

A cycle for all seasons

To conclude this walk down memory lane, last time I finished by reminding readers how I’d suggested in 2009 that we might be on the cusp of a new bull market:

I don’t know how the next bull market will play out. Maybe it’s not the turn of technology shares again quite yet. Maybe investors will go mad for Chinese small caps or German widget makers instead.

Oh well, I was half right!

But the important point is not that you can predict what’s coming next. It’s not even that you can be sure that cycles are reaching a peak or about to burst.

Not gonna lie, after a rotten couple of years in the market revisiting this article has boosted my ego.

But still, in practice commodity shares did continue to run for at least another 18 months after I flagged the oil and gas mania. As for the new tech boom, I certainly benefited – it did most of the late-stage heavy-lifting that took me to FIRE – but by no means was my portfolio as full of them as it might have been.

More recently I’ve been cacking things up anyway, getting back into growth stocks too soon after the 2021 sell-off and ditching UK investment trusts I’d bought to ride out the turbulence before they rallied.

Active investing is hard and best left to masochists who are wired a certain way. We’ve argued that many times.

So what is the important point?

Just that thinking about the sentiment cycle can be helpful.

Investor sentiment 101

Try to step outside of the current tumult from time to time to consider the broader currents – whatever kind of investor you are.

• You should understand your own emotions – why we all feel fearful, brave, or even guilty at different times.
• If you’re an active investor, you can potentially profit by guessing how others are feeling, and placing your bets accordingly. Never bet the farm! Stay humble.
• If you’re a passive investor, the cycle explains why you should keep on investing through the market’s ups and downs. You’re not being reckless by seeing the cycles play out and yet perhaps doing nothing different. By staying on course you’re strategically taking advantage of the oscillating and unprofitable emotions of your fellow investors.
• You might also keep an eye on technicals like CNN’s Fear & Greed index.

Always remember: this too shall pass.

Not everything changes

Think this is all too obvious?

Okay, but – for example – have you been loading up on super-safe government bonds despite their recent rotten run?

Have you been salivating as real yields on index-linked gilts turned positive?

Or have you been one of those writing in the Monevator comments to say that you don’t see the point of bonds anymore and you will never invest in them again?

Sure there are valid reasons why you might reply “not for me” or at least “not yet”.

But that bond prices have gone down a lot and everybody hates them is as bad a reason to avoid them as exists if you’re any sort of long-term, diversified investor.

It will not always be this way.

The crying game

When I first wrote about investor sentiment and emotions back in 2010, the idea that investors’ emotions constantly shifted with narrative and price remained controversial.

Yet only a few years later Robert Shiller won the Nobel Prize in Economics alongside Eugene Fama – efficient market royalty – and Lars Hansen (who we’ll get to another day.)

For Shiller to take the 2013 award along with Fama was proof that behavioural economics – and ideas like investor sentiment – are now part of the framework of modern market theory.

So much so, in fact, that younger readers might now take it for granted.

Fair enough. But let’s see if that stops investors getting carried away again in the future.

Personally I will be betting against it.

Like all financial services, investing attracts its unfair share of bad actors and inept shysters. So it’s comforting to think that if the worst happens and your investments disappear in a puff of fraud, then the UK Financial Services Compensation Scheme (FSCS) will swing into action and bail you out.

But that ain’t necessarily so.

The FSCS investment protection scheme may come to your aid. But eligible claims have more strings attached than a puppet show. 

How can you know if your investments are actually covered by the FSCS? And what further steps can you take to maximise your protection level?

Fancy hearing about a route to 100% FSCS compensation coverage with no cap?

Read on!

The FSCS investment compensation limit

The first knot to unpick is that FSCS compensation is limited to £85,000 for investments. 

The formula is £85,000 per person, per firm.

Hence £85,000 is the maximum amount of compensation you can personally claim per firm you invest with. (Assuming all the other eligibility criteria are met. We’ll get to that funfest shortly).

• The per person element means that you’re covered for up to £170,000 in a joint account. 

• Per firm means that if, in some future dystopia, two or more of your investing platforms collapsed, then you could make a separate claim for up to £85,000 to cover assets lost in each implosion. 

For example, if you had £30,000 lodged with Ee-z-eeMoney Broker$ Ltd then you could put in a claim for the full amount owed. 

Meanwhile, you’ve also got £200,000 stashed with the Hard4Profits Company. Their directors were last seen boarding a flight to Panama so you can claim back £85,000 for that mess, too.

You’re not covered for the remaining £115,000. The FSCS investment compensation limit maxes out at £85,000 per firm, no matter the value of your accounts with that firm. 

Which firms are covered by FSCS compensation?

You’re only protected if the firm that pops its clogs is authorised by the UK’s Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA).

Note, the word you’re looking for is authorised by the FCA or PRA. 

The next step is to ensure that the authorised firm is actually regulated (by the FCA or PRA) to undertake the particular service you’re using them for. 

For example, is your broker regulated for ‘Arranging investments’ (translation: executing trades) in the particular security you wish to invest in? Such as ETFs or shares?

The FCA’s Financial Services Register theoretically enables you to check these details for every firm on their books.

But in reality it’s a minefield. A fact the FSCS acknowledges by shifting the responsibility for keeping tabs to you.

The FSCS says:

Ask your firm to confirm that the activity they are carrying out for you is a regulated activity and FSCS protected.

I thoroughly recommend you do that. Then double-check your broker’s claims are verified on the firm’s  Financial Services Register page. 

There was a time when I felt confident in checking a broker’s status purely through the Financial Services Register. 

However, a firm’s status on the register is nowadays defined by specific, technical terms. I cannot be certain my interpretation of those terms is correct. 

Plus the FSCS’s “Ask your firm to confirm…” edict is plastered everywhere on the site – which suggests we cannot solely rely on the register. 

Multiple brand names, one firm 

If you decide to diversify your money between brokers, then check they are not part of the same financial group.

For example, iWeb, Lloyds Bank Share Dealing, and Halifax / Bank Of Scotland Share Dealing are all in the same group. 

This means they all count as being part of the same firm, from an FSCS perspective. So you’d only be eligible for a maximum £85,000 payout, even if you diligently split your assets across them all. 

You can quite easily check whether your broker is part of a wider group on the Financial Services Register page. 

Just search for its name, then check the Trading names section of its particular entry for other aliases. 

FSCS investment protection for fund providers

FSCS protection does not cover you for investment risk. If your meme stocks go to zero then there’s no backstop. 

Rather, the £85,000 compensation limit is there to cover you if the firm fails and can’t cover the value of your investments from its assets. Think fraud, negligence, mismanagement, and mis-selling type scenarios. (Use the Financial Ombudsman Service if you’re in dispute with a firm that’s solvent.)

And those vices can affect the companies that manage your funds, too. (What a wonderful world!)

However the FSCS scheme only covers a narrow sliver of fund manager firm situations.

The headlines are: 

• FSCS investment protection applies to UK domiciled OEICs and Unit Trusts.
• It does not apply to funds domiciled overseas. For example, in Ireland. 
• Nor will you be compensated if you hold ETFs or Investment Trusts with a fund provider that runs into trouble. 
• The same goes for individual securities like shares or bonds. Never mind crypto. 

Use this tool to check your investment type’s FSCS protection status. Here’s a list of useful UK domiciled index funds. 

If you do invest in UK-domiciled funds then your maximum payout remains £85,000 per person, per firm.1

This is separate to the FSCS investment protection you’d be eligible for if a broker broke. 

However, there is a way to invest with 100% protection…

100% FSCS protection for insured personal pensions and annuities

Some personal pensions qualify for 100% FSCS protection. (That is, the maximum compensation level is not capped at £85,000.)

The FSCS describe eligible pension schemes like this:

The FSCS protects 100% of a pension directly managed under a life insurance contract.

Essentially that refers to some personal pensions and stakeholder pensions that are offered by large insurance firms. 

The firms must be regulated by the PRA. And the particular scheme must be classed as a contract of long-term insurance to qualify for FSCS protection.

100% FSCS protection seems to be woefully advertised, given that many people would value it highly. 

Rather than plastering it all over their brochures, I’ve found pension providers typically relegate any references to a couple of paragraphs that are sometimes found in their Key Features documents. 

Here’s the kind of thing to look out for, courtesy of a Standard Life Stakeholder Pension document (bolding is mine):

Your plan is classed as a long term contract of insurance. You will be eligible for compensation under the FSCS if Standard Life Assurance Limited becomes unable to meet its claims and the cover is 100% of the value of your claim.

Watch out for clauses that warn you lose FSCS compensation if you invest in certain funds available through the pension. These funds are usually managed by another investment firm but, bizarrely, they may also include own-brand funds provided by the firm that is actually running your pension.

Talk to your pension plan provider if you’d like to know more and maintaining 100% FSCS protection is important to you. 

Bear in mind that – along with annuities – these types of pension qualify for compensation under the FSCS insurance claim category. 

In other words, pension assets like this don’t interfere with your £85,000 investment category claim should you hold a brokerage account, or other funds, with the same firm. 

FSCS protection for Master Trust pension schemes

If a Master Trust workplace pension scheme runs into problems then its trustees can invoke FSCS protection on behalf of its stakeholders. You wouldn’t claim yourself. 

However, here again, beware of warnings in the documentation about choosing certain funds that aren’t eligible for FSCS compensation. 

Defined benefit pensions

Defined benefit pensions should be covered by The Pension Protection Fund (PPF) rules. Double check that yours is.  

The top-line is:

• 100% compensation if you’ve reached the scheme’s pension age.
• 90% compensation if you’re below the scheme’s pension age.

Public sector pensions are funded by the taxpayer, so you’re fine as long as we have a functioning government (place your bets) and the Bank of England money printer doesn’t run out of ink. 

What about cash in an investment account?

Your £85,000 FSCS investment compensation limit doesn’t reduce the £85,000 you can claim for lost cash deposits.

Most brokers lodge client money with one or more big-name banks.

If a bank fails while holding your cash on behalf of your broker, then you can claim £85,000 back, while still claiming £85,000 elsewhere for missing investments.

However, if your broker money was stashed with a single institution – say Lloyds – and you also had a personal account with those self-same black horsie people, then you could only claim up to £85,000 for the two losses combined.

That’s because the limits apply per person, per firm, per claim category. (Cash is one category and investments another).

Some brokers park your money with multiple banks. They say that means your cash is equally divided between them all. 

So, if your broker uses four banks for client cash, then you wouldn’t have to worry about exceeding the compensation limit until there was more than £340,000 sitting in your account.

(If you’re – cough – an absolute baller with more than £340,000 in cash at your brokers, then I hope you’ve already ponied up for Monevator membership…)

How likely are you to need FSCS investment protection? 

Of course, the worse shouldn’t come to worst.

There are regulations in place that require fund managers and brokers to segregate your assets from their own.

If the mother company explodes, your money should be safely ring-fenced in a separate pot. You’ll get it back once the smoke has cleared. The company’s creditors have no legal right to your piece of the pie.

That’s what is meant to happen. But any system can fail. You will find a warning to that effect in the terms and conditions of any reputable UK broker. 

As Cofunds puts it:

As with any FCA regulated investment firm in the UK, while it is highly unlikely that Cofunds were to become insolvent, or cease trading and have insufficient assets to meet claims, we can’t provide a 100% guarantee that your money is fully protected.

So FSCS compensation provides a last resort backstop – just in case the next Bernie Madoff happens to be running your brokerage, while the cast of Dad’s Army is in charge of administration and oversight.

If your investment platform went pop, shouldn’t the bulk of your assets actually be held elsewhere, though? Shouldn’t your money be invested in ETFs and funds with other companies that are still in perfectly good nick? 

Yes, that’s true. Indeed, most claims that require FSCS intervention seem to involve mis-selling, where consumers took advice from a so-called investment professional.

However, the FSCS did step in to assist customers of Beaufort Securities and SVS Securities – two UK brokers that collapsed in 2018 and 2019 respectively. 

In both cases, the FSCS made good customers who would otherwise have taken a haircut because client assets were earmarked to pay the fees of the insolvency administrator. 

It turns out that administrators are not creditors. So they can dip into the pool of supposedly segregated customer assets, at the discretion of the FCA, if there’s no other way to meet the bill. 

Passively paranoid

During the wind-up of Beaufort Securities, the FCA used the FSCS scheme to ensure that most but not all customers avoided a hit.

In this case, people didn’t lose everything. But clients with a very large account balance took a haircut that exceeded the FSCS compensation limit. Whereas most customers took a percentage loss on a relatively small total account balance, meaning their share of the shortfall was inside the FSCS cap.  

So you may decide that you don’t need to fret when your account balance reaches £85,000. That you’ll only need the FSCS to cover you for a percentage of whatever amount you’re owed. 

On the other hand, my biggest fear is the (admittedly small) chance of being caught up in a massive financial fraud. 

It’s not hard to picture a scenario in which a firm tells you, “Don’t worry your cash is safely tucked away in Vanguard funds,” when it’s actually been spent on a fleet of supercars and crypto bets.

• For a full picture of why your brokerage account may not be as ironclad as you’d like, please read this piece on the weaknesses of industry-default nominee accounts. 

What should you do?

We’ve had many discussions in the Monevator comment threads about how far to go for peace-of-mind. 

Most people accept that their chance of needing FSCS compensation is acceptably low. Hence few of us open a new brokerage account for every £85,000 worth of investment assets we own. 

But anyone with a large holding would be well-advised to diversify. 

I personally operate across two different, reputable brokers. The Investor uses at least four that I know of.

Even if it all ends happily ever after, broker insolvencies can take many months to clean up. During that time your funds will be inaccessible. 

If liquidity is important to you, then you’d be wise to spread your assets across multiple platforms, regardless of the FSCS. 

Managing broker risk 

No guarantees but here’s some tips if peace of mind is extremely important to you. Choose at least one broker that is:

• Big not small 
• Listed rather than private (greater scrutiny)
• Profitable (check their annual report)
• High credit rating rather than low or no rating
• Doesn’t offer margin, loan out stocks, or run their own trading desk

Brokers can buy ‘Excess of FSCS cover’. This is an insurance scheme that apparently “protects investors for deposits above the level that the FSCS will reimburse.”

I haven’t seen any online broker advertise it as a USP, but it’d certainly offer some comfort if you find a platform that does.

Getting the answers you want about FSCS investment protection

As discussed, the FSCS expects you to contact your broker for reassurance that they are properly protected by the compensation scheme. 

However, investment platform support staff are often inadequately trained in this area. 

You may get a vague, confusing, or inaccurate reply. Ask two different people at the firm and their responses can be worryingly inconsistent. 

Moreover, while some brokers clearly explain their level of FSCS investment protection on their website, others do not. Even when their coverage is perfectly fine!

So you might have to persevere. 

A line like this may do the trick:

“Is my investment account covered by FSCS protection up to £85,000 if your firm becomes insolvent?”

Then make sure they specifically answer that question without fobbing you off with talk about cash protection, client money, or segregated assets. 

The answer you need is that your investment holdings are covered by the FSCS. 

Take it steady,

The Accumulator

1. Think BlackRock, Vanguard, or L&G, for example. [↩]