Monevator reader James has a question about Junior SIPP asset allocation as follows:

In the good times I opened SIPPs for my children and I followed my standard policy of buying Vanguard Lifestrategy 60/40.

However, buying an investment to hold for 50 years or more is obviously very different from buying one for my elderly self. What are the considerations and options?

The Internet is weak on this one. But I have strong views!

Invest 100% in a global equities tracker fund. Then leave it to grow knowing you’ve done the best you can. 

My reasoning is straightforward.

A Junior SIPP banks on the power of compound interest to multiply the pounds you invest with love into a legacy your child can enjoy when you’re gone and can do no more.

Play with our compound interest calculator. You’ll see that this money multiplier is twin-engined. Compound interest needs both time and a suitably high rate of return to truly work its magic. 

The most exciting stuff begins to happen after 40 years. That is when the trail of wealth arcs up like the trajectory of a rocket ship – rather than a biplane bumping along the turf.

Even then, you’ll want to target the highest rate of interest (or rather investment return) you can reasonably hope for – without resorting to magical thinking. 

And as far as I’m concerned that amounts to the 5% annualised return (after inflation) delivered by world equities for over a century. 

Investing returns sidebar – All returns quoted in this piece are real annualised total returns. That is, they’re the average annual return (accounting for gains and losses) realised in a given time period. These returns include the impact of reinvested dividends and interest, but strip out the vanity growth delivered by inflation that does nothing to grow your actual spending power.

Bonds have historically generated an annualised return of 1.5% after inflation. That rate of return will not compound quickly enough to make your kid comfy in their old age. 

Here’s the graph of compounding bond returns. You’ll notice there’s no magic hockey stick effect – even after 60 years:

Time is on their side 

It’s natural to be protective of your child’s money and to be more cautious with it than with your own.

But your child should have a lifetime of investing ahead. That makes their risk tolerance and time horizon very different from yours. 

The kiddiwinks can’t touch their SIPP money until their late-fifties at best.1 The way the political weathervane is spinning, they may even be in their sixties by the time they’re permitted their allowance by our benevolent AI carers in the far future.

Tack on a 40-year long retirement and the contributions you put in now could still be making a difference in 90 to 100 years’ time. 

Gulp.

The key point is that your child does not have a short-time horizon problem. So they don’t need to diversify like you do. 

Most adults save for retirement over 30 to 40 years, tops. Even if you eat risk for breakfast, you should be easing back on equities for the last ten to 15 years. 

Otherwise, cop a lost decade or two in the middle and the time-pressure is enough to make anyone panic. Hence the investment industry hit upon bond diversification to hold the crazy in check. 

But this rationale does not apply to a child who doesn’t need the money for half a century or more. 

If a big, bad bear market comes along – it won’t touch them in the long run. Junior’s pension money can be underwater for ten, 20, even 30 years and it doesn’t matter. 

In fact, it may even help. The shares you bought will keep spinning-off dividends, which will be reinvested to rack up even more shares bought at bargain prices. 

Meanwhile, lower returns in the present mean higher expected returns in the future – hopefully as your child hits their peak earning years. 

Who’s gonna freak out? 

Think about this, too: when your child’s equities are hit by a market convulsion, who’s gonna hit the panic button? 

Not them. 

They’re playing with Peppa Pig when it happens, or their mobile – or later with somebody else still many decades away from even thinking about thinking about retiring.

And when they do start work, they’ll be auto-enrolled into a pension fund that handles diversification automatically. 

What are the chances they’ll even pay attention to the annual statements until their thirties begin to wear thin? 

All you have to do is remain a steadfast steward of their SIPP until they hit 18. From that point on, they take charge. But they’re going to have better things to do. Much better.

If a temporary -50% portfolio blast probably isn’t going to bother them, then there’s no need to let it bother you. Historically, the market has recovered. 

There’s a useful side argument here, too. Even with compounding, your efforts are likely to be the icing on a cake paid for by your child’s own lifetime of labour. And as mentioned, the bulk of their funds will be diversified by their friendly workplace pension company pals. 

That relieves you of the pressure to play it safe. You may as well use your money to swing for the fences. (While still taking the sensible precaution of diversifying across every major stock market on Earth with that global tracker fund. I’m not suggesting taking a mad punt on crypto here). 

It may help to conceptualise your child’s own future saving efforts as providing the floor that will underpin their retirement prosperity. In this model, your ultra-early contributions can form part of an ‘upside portfolio’ that will go towards the fun stuff. 

Seen like this, you can again afford to take more risk on their behalf.

Take comfort in capitalism 

Market history shows that the longer the time period, the more likely it is that investment returns will converge upon their historical average:

Data from MSCI. April 2023.

The chart shows the best, worst, and the simply average annualised results for every MSCI World rolling return path since the index launched in 1970. 

The average annualised return across all 53 years is 4.5%. 

But you can see on the left-hand-side that the average result exists within highly volatile polar extremes in the short-run. Returns range anywhere from 62% to -46% for a single year. 

However these extremities are planed-off over time. There isn’t a single, negative timeline that lasts longer than 14 years. 

Simply put, the longer your child remains invested, the more likely it is that they’ll get the average return. 

Of course, there are markets with worse rolling returns out there if you want to frighten yourself.

We could talk about Japan’s shocking losses. 

Or the German equity path that remained in the red for 79 years. Two devastating defeats in World Wars and hyperinflation will do that. 

Less obviously, there’s an unbelievable French stock market timeline where you didn’t make money for 135 years. 

The whole world is rooting for your kid

The solution in those grim outlying cases wasn’t to invest in the bonds of the blighted countries. Bonds were devastated, too.  

The answer was to invest in the world. 

Throughout history, someone somewhere has always held the baton for progress and kept humanity moving forward.

Whether it be the Greeks, the Romans, Byzantines, Arabs, Chinese, Enlightenment Europeans, or the Americans.

(Full disclosure: the author may or may not hold positions in some of these civilisations. Past performance is no guarantee of future success. Just ask the nearest moai.)

We can only focus on what we can control. If there is a global bear market that lasts 50 years, then 30% bonds and 10% gold almost certainly isn’t going to rescue anyone’s pension. 

And so I circle back to 100% global equities and backing three wonders of the modern world: Capitalism, compound interest, and a low-cost index fund. 

Take it steady,

The Accumulator

1. The Minimum Pension Age is currently 57. [↩]

What caught my eye this week.

A decade ago the UK had barely come down from the buzz of the 2012 Olympics. Riding high on the global stage, we attracted bright young things from across a moribund Europe. A start-up culture was catching fire in London that finally offered an alternative to decamping to Silicon Valley.

The UK was not without problems, but it was easy to feel lucky to live here.

Sadly, for every advance in this life there seems to be a counter-reaction.

Within a few years, the US had followed the triumph of electing its first black President by sending to the White House a dangerous blowhard better suited to the side of a box of fried chicken.

Meanwhile, a slim majority of Britons were convinced by a Band of Bullshitters into voting for Brexit – the most bone-headed policy since that Roman Emperor made his horse a consul.

And slowly, surely, the economic consequences of leaving the EU have been coming through.

Not with a bang, but a whimper.

Falling investment, perpetually slower growth, dire politics, and what is starting to look like the return of Britain’s age-old inflation problem.

Cost of Brexit: over £100 billion a year in lost economic output and counting.

All bad enough. But it seems some people now want to throw our pensions onto the bonfire too.

London’s gurning

Stepping back, there’s been lots of talk recently about the plight of the London Stock Exchange.

The LSE seems unable to win big new listings. Most recently chip design giant ARM said it will float in New York – despite direct pleading intervention from successive UK Prime Ministers.

Other London-homed companies are moving their listings. There appears to be a gloomy acceptance that the LSE should give up on having a listed tech sector at all.

In November the London Stock Exchange’s total market capitalization fell behind Paris for the first time since Bloomberg began crunching the numbers in 2003.

We’re also losing much of the less-glamorous but highly functional activities that helped the City boom for 30 years, with euro banking and clearing operations migrating to the EU.

Brexit fans may snicker at London’s plight. But City salaries help support a higher tax base and more generous welfare state than would be possible if London were “taken down a peg or two”.

As I’ve noted before, Britain is relatively poor for an advanced economy, on a per capita basis.

Yet for nearly a decade we’ve been making decisions like we’ve money to burn.

Dad’s barmy

Faced with this slow puncture draining the vitality from our economy, the rational thing to do would be to try to reverse it.

The Windsor Framework for Northern Ireland was a small step. But as Rishi Sunak revealed in championing that region’s advantages in having a foot in Europe, we’d be better off going whole hog. Reversing our hard Brexit and re-entering some combination of the Single Market and the Customs Union could staunch the bleeding. The politics of EU membership may still be impossible, but we need the economics.

Alas we’re not there yet. Brexit benefits may be as thin on the ground as Brexiteers who haven’t yet left office in disgrace, but the UK isn’t a Mad Max wasteland  – which is apparently the high bar set for judging the benighted project.

Instead, in what would be a doubling-down in Britain’s lurch into Banana Republic governance, there is talk of corralling British citizen’s pension assets into investing in British companies.

Apparently some people look at Britain’s diminished status since 2016 and scratch their heads.

What on Earth happened to turn global capital against us?

Has the weather been particularly bad? Was it the death of David Bowie?

Wait! What about Brex… traitorous UK pension funds!

From the Financial Times:

The proportion of all UK pension fund assets invested in equities was 26.4% in 2021, down from 55.7% in 2001, according to the OECD. By contrast, Canadian funds had 40.6% in equities and Australian schemes 47%.

“We have trillions of pounds sitting in pension funds that are not being used to invest in companies, drive growth or do a whole range of things that the economic viability of the country depends on,” says Immuncore’s Sir John Bell. “We need to find ways to release this capital.”

Please read the full article: Britain’s ‘capitalism without capital’: the pension funds that shun risk. It gives a good and balanced take on the malaise.

I pulled the quote above simply to illustrate that there are credible voices – inside government and out – who see your pension not as your buttress against an uncertain old age, but as a pot of loot to be raided in order to prop up an ailing British economy.

I’ve heard it suggested in the past few weeks that pension tax reliefs should be apportioned relative to the share of UK assets that a pension fund is invested in.

And that Local Government Pension Schemes should be compelled to invest in British equities, as well as in expensive long-term infrastructure problems.

This is all bonkers.

Bye Britain

The way to encourage investment into UK assets is to make Britain an attractive place to invest. As opposed to giving the world the impression we’re being run by a bunch of senior prefects at a public school for the banter.

As for British pension funds, we should solely want them to invest for our collective financial futures wherever they see the best risk-adjusted returns.

Not where some government diktat demands they put their money. That’s the economic policy of a military junta, not the birthplace of the industrial revolution.

Perhaps UK pension funds should own more equities. We saw with the LDI crisis during the Mini Budget (yet another showcase for global Britain) that index-linked gilts at all costs is no panacea.

But equally, not owning UK shares was absolutely the right move over the past two decades. British pension fund managers who shunned the UK stock market did their charges a favour. They dodged a market that went nowhere for 16 years, before the Brexit vote tanked the currency to boot.

Now, I happen to think British shares may do better going forward.

That’s not because Britain is about to boom thanks to our bureaucratic borders and crown stamps on pint glasses. More than 75% of FTSE 100 earnings are generated overseas.

Rather, UK shares still look unloved – that is, cheap – and successive mid-sized British companies are being taken over by overseas competitors, helped by a still-weak Sterling.

(No, I don’t recall seeing that in the 2016 literature either. Ho hum.)

At the same time, a more normalised regime for interest rates and inflation would be a better backdrop for the more defensive style companies that remain on the shrinking UK stock market, which could help returns too.

Our pensions are not their playthings

Barry and his mates down the golf club are welcome to invest their own ISA and SIPP money in UK companies if they want to.

No doubt they’ll be buying a round of G&Ts whenever a quality British company they own is acquired by an overseas predator by night, while fuming at breakfast over another story about Britain selling off the family silver in The Telegraph.

Blimps gonna blimp. But they can keep their hands off our life savings, thank you very much.

Have a great weekend.

[continue reading…]

The trouble with bull markets is making money can seem too much like fun. Meanwhile plunges in a bear market at least get the pulse racing. But investing is boring when markets do nothing, month after month.

Welcome to the investing doldrums.

There’s a section in the Russell Crowe nautical adventure Master and Commander which finds Captain Crowe, ship, and crew literally going nowhere.

Listless on the ocean, day after day, the drama of a sailboat clipping across the seas has been forgotten. A storm would be a relief. Fatalism descends. Dying of thirst on a floating island in the middle of nowhere is not what anyone signed up for (or was press ganged into.)

If the ship doesn’t get going again, they will all go mad or cannibalistic.

Wait, was that a breath of wind? No, just another sighing sailor.

Eventually one of the younger officers is branded a ‘Jonah’ by his superstitious shipmates. The unlucky fellow is harried into jumping overboard, clutching a cannonball.

Grim, but just like that the sails bloom and the ship gets going.

Correlation is not causation? Tell that to a parched seaman when the wind is at his back again.

There be dragons

Of course we’ve all read – or even written – about how good investing should be boring. Get your excitement from your PlayStation or a skiing holiday.

Right, right.

Except you’re reading a blog all about investing. I think it’s fair to say we’re all a little bit more… invested about investing here.

Also, as enlightened 21st Century folk conversant with behaviourial economics, incentives, and ‘nudge theory’, we know the most important thing is to avoid the inner urge to throw anything – or anyone – overboard, just to relieve the tedium.

But just because we know what we should do – stick to our best plan until the breeze picks up again – that doesn’t mean we will.

Some of you are still shrugging. So much, so obvious.

Good for you! Read on for reinforcement, or head out with the other swots for an early break.

However my emails, comments on Monevator, and our Google Analytics dashboard tells me people are getting a bit fed up.

Newer investors ask if it’s fatal they missed the gains from the low interest rate era. Older hands wonder if an unpleasant sequence of returns is derailing their early retirement schedule.

Savings accounts look juicy. And cash doesn’t put the willies up you by lurching into the red. Should we prefer that to all this investing malarkey?

Or what about Bitcoin? The crypto-cockroach is up 75% since New Year’s Eve.

That’s more like it! Maybe this index tracking thing has finally run out of road?

Bonds? Don’t talk to me about bonds. Sixty-farty portfolio more like.

Batten down the hatches

I understand the discontentment. Depending on what you invest in and how, your portfolio may have gone nowhere – or worse, down – for a year or more.

Not much in the grand scheme of things. But also not nothing in a 30-year investing window.

My own portfolio got within a couple of a percent of its (short-lived) all-time high as far back as March 2021. More than two years ago. Despite a bounce in the past six months, I can well imagine looking back at returns that tread water for four or five years from that giddy 2021 spring.

I don’t expect it, but it’s possible. Especially given the regime change to higher rates and inflation.

So don’t be dismayed by macho commentators saying they’re not bothered. Their stance is 100% correct – but there’s no need to be pig-headed about it.

Nobody gets into investing without wanting to make money. It’s better to admit that it sucks when investing is boring or worse. Feel the frustration. Then take counter-measures that keep you going, rather than chucking in the towel.

No doubt we all have a famous investor, money blogger, or economic pundit who we’d have walk the (metaphorical) plank to get our portfolios advancing.

But enough about Nouriel Roubini. What are some practical approaches you can take when you’re mired in a similar going-nowhere market?

Let’s consider a few things that might help, depending on whether you’re a passive investor or a naughty active sort. Followed by some general pointers for all of us.

Passive investing isn’t meant to be exciting…

…but it can be even more challenging when it’s dull as dishwater.

If you have a simple portfolio – a LifeStrategy fund, say, or a two-fund equity/bond split – then checking in when markets are drifting for years can make you feel like a hamster on a wheel.

You’re working hard. You’re stashing away your savings. You see very little to show for it.

You can’t force the market higher. But here are some things you could do.

Look at long-term charts. Remind yourself indices can remain underwater for years. A long trough is not unusual. Doing this won’t help your lousy returns, but you’ll take them less personally.

Count your blessings units. Your portfolio value might be frozen in amber, but is there a more positive metric you could track? Maybe how many units you’ve bought of your tracker funds or how many shares you’ve racked up of your favourite ETF? Or even just the total amount you’ve saved to-date. It is all laying the groundwork for gains when prices surge again.

Remember you’re invested in companies. Now and then I edit my co-blogger The Accumulator’s copy because his talking about ‘Value’ doing better than ‘Small Cap’ gets too much for me. I understand why we talk about baskets of shares this way. But as an old-school stockpicker I think of my investments as companies first, even when in a fund. Why is this relevant? Well, you may struggle to see why an index should rise again. But you might find it easier to imagine that entrepreneurs will keep striving, scientists innovating, and economies growing. These1 are the reasons why markets go up over time. It’s not just numbers.

Recall the worst is probably past for bonds. I will repeat myself on bonds. Yes they had a terrible 2022. If you owned them then you’d probably rather you didn’t. But that is water under the bridge. The fall in bonds last year set the stage for higher returns going forward – or at least made more deeply negative periods less likely. Bonds should help your overall portfolio return from here.

Don’t forget about income. Talking of bonds, they now sport higher yields. Dividend yields are up too. The mainstream indices may go nowhere, but income will trickle in. Reinvest it. The FTSE 100 index was all-but-flat over an interminable 20 years from 1999. But with dividends you still more than doubled your money. Not amazing, but far better than nothing.

Consider complicating your portfolio. A last – heretical – idea. Most people will do best with an all-in-one fund precisely because such funds hide how the sausage is made. The investor won’t know what is doing well – or badly. So they won’t take wealth-damaging actions in response. However it’s possible you’re somebody who would actually do better seeing a circuit board rather than a black box. An advantage of our Slow & Steady model portfolio is we can monitor the workings. It’s not lifeless inside, even when on the surface nothing is happening. Maybe you could break out some of your equity allocation to a value and/or momentum ETF? Or follow an even more explicitly diversified approach? Or set aside 10% as a speculative sub-portfolio? Doing so may reduce your returns. But if it keeps you interested in investing, it could be a price worth paying.

Active investors can always do something

I stopped prevaricating with a foot in both camps and became a fully active investor early in the 2007-2009 financial crisis. I discovered ‘doing something’ best-suited my personality. It also gelled with my deep interest in economies, innovation, and the markets.

However the greatest strength of active investing is its biggest weakness. In theory you can trade your way around the worst and own the superior stocks in any market. But in practice most fail to do so. They make matters worse.

For instance last year has been dubbed an annus horriblis for UK fund managers. After moaning about ‘dumb’ money pushing prices higher in the long bull market, a majority of active funds failed to beat their index-tracking equivalents when the music stopped in 2022.

So most people will make things worse by stock picking or market timing. But we’re different, right? Or you’re having more fun investing actively. Fair enough, as long as your eyes are open.

Look below the surface. Indices don’t matter nearly as much when you invest actively. There’s always lots of commotion at the company and sector level, even when markets are flat. Last year was great for energy firms, for instance.

Monitor your watchlist. It’s surprising how much any company’s share price moves in a year, between its highs and lows. In confused and direction-less markets, you may find a favourite and typically expensive firm trading cheap for a bit. But you have to be looking all the time to spot these opportunities.

Rotate or recycle. Most of us have shares we know aren’t going to shoot out the lights, but we keep them for their steady qualities. Often they’re interchangeable for another. Procter & Gamble flying while Unilever languishes? There might be a good reason. Or it might be fickle fashion. Consider a swap. The same can hold true for whole sectors.

Look for anomalies. Things get normalized in bear markets that would seem odd when investors are confident. Massive discounts on riskier investment trusts, for example. Or housebuilders or gold miners trading contrarily to the goods they produce. Often there will be cyclical factors to take into account. But sometimes if you correctly judge which signal is superior you can find a bargain.

It’s always a bull market somewhere. I forget who said this, but it’s true. Obviously be mindful of flitting from fad to fad, and being the last buyer left holding the bag each time. But if you can alight on a durable bull market and you know your onions, it can be hugely helpful to have a big whack of your portfolio going up when everything else is doing nothing. Bleeding obvious I know, but you would be surprised how many active investors keep plugging away at the same crumbling coal face for years, rather than seeking a more promising seam to mine.

You probably want to keep thinking long-term. Most successful active investors seem to be long-term players, not frenetic traders. So while I think these trading strategies can be useful, I’d employ them within a framework of trying to tend towards my best portfolio of my best long-term ideas. Unless it’s your strategy and you’ve evidence you’re good at it, beware of ending up with a basket of crappy cheap companies that you have no faith if (/when) things go south. Remember, winners win. Most of the market’s return comes from a handful of great companies. You should be loathe not to own them.

How we can all keep the momentum going

However you invest, the big picture is as eternal as an avocado bathroom suite in Swansea.

Try to be happy. Expected are returns up. Yes you’d rather your portfolio’s prospects had risen for good reasons – higher company earnings or a booming economy – rather than because everything fell a lot last year. Nevertheless those falls blew away a lot of the valuation froth in shares and bonds. It’s reasonable to hope for better returns over the next ten years, compared to 2021.

Save more. You can’t make the market dance to your tune, but you can laugh in its face and throw money at it. Stagnant or even declining markets are a saver’s friend. They let you buy more assets for your money. If you’re under-40 you might even hope global markets drift sideways for 20 years.

Think long-term. The past 12-18 months doesn’t really matter in the grand scheme of things. Save and invest for another 20-30 years and you’ll struggle to see the wobble in your records. True, this is harder if your time horizon is shorter. All I can do is remind everyone that’s why your portfolio should be appropriate for your age (or perhaps your relationship with regular paid work).

Make money through cost reduction and tax mitigation. You can’t control the markets. But you can make sure you’re investing efficiently. Check out our broker comparison table for starters. If you own expensive funds, at least know why. Being optimally-efficient with your taxes, too, can move the dial. Defuse capital gains, for example, if you have unsheltered assets.

Check your portfolio less frequently. An easy way to feel better about a portfolio with a slow puncture is not to know what’s going on. Check in once a year and at worst you’ll get one shock a year. More often you’ll be pleasantly surprised. Most readers will want to look at their portfolios more often, but remember the more frequently you do, the greater the odds of being upset.

Check your portfolio more frequently. Do I contradict myself? Of course! Only recommended for investing nerds who feel out of control when losing money. Proceed with caution, but it’s possible seeing daily gyrations will help you grow a tougher shell, and also further stoke your resolve to put more fresh money to work. That’s what happened to me.

What’s the worst that can happen? It may help to run some numbers on how bad things can get. Look at the most rubbish markets of all-time and apply what happened to your situation. Could you live with it? You wouldn’t be happy – but it probably wouldn’t be the end of the world. Facing your fears can rob them of their power. Imagine if your portfolio was cut in half. How would you feel? The answer may prompt you to take action – but before you do, try the same exercise tomorrow. It may lose its sting, whilst also making run-of-the-mill gyrations of 5-10% feel piddling.

Hold fast

Getting through a miserable period in the stock market is not rocket science. Most of the pointers above may seem obvious to you.

However good investing is simple but not easy.

Very few of us will look back and see brilliant decisions or insights as the making of our investing fortunes. Rather it will be sticking to it through the good times and bad – adding new money, gradually compounding it over the decades – that will deliver our financial freedom.

Choppy markets can make you seasick. Frothy markets can blow you off-course.

When investing is boring, the biggest risk is it can all seem rather pointless.

Do what you can to remind yourself why you’re investing, why you read Monevator, and where you’re hoping to end up.

I’m confident that sooner or later we’ll be going that way again.

Whether you’re a passive or active investor, let’s hear how you’ve been facing the mediocre market of the past 18 months. Even if I suspect for most loyal readers it’s been business as usual. (Quite right too!)

1. And inflation. [↩]