What caught my eye this week.
Things are looking up for investors. Not because the markets have got off to a strong start in 2023 – the gains logged so far could reverse in a day – but because the pain of 2022 has set the stage for higher future returns.
This is often overlooked during a bear market, probably because those paying the most attention have already invested a decent sum of money. It hurts to see it hammered.
In contrast, those 20- and even 30-somethings who most benefit from the falls have often yet to realize they need to invest for the future. And they aren’t paying attention!
Or, if they are putting money into a workplace pension or similar, for many the sums at stake won’t seem life-altering or worth the headspace.
But those of us who understand compound interest know better.
Let’s say a 30-year old has amassed £50,000 in global equity tracker funds across their tax-efficient pensions and ISAs.
Assuming the future looks like the past in terms of returns, say 8% annualized, their pot might compound to around half a million pounds after 30 years – with no further contributions.
Perhaps if you told them that their future self had a future half a million quid on the line, gyrating with the markets whims during 2022, they’d have been more interested?
Probably best you didn’t.
I get knocked down, but I get up again
Back to 2022, and recall that those who can save meaningful money typically do so throughout their lives.
Let’s assume for the sake of simplicity that our young-ish saver adds another £5,000 every year to their initial £50,000 pot from age 30.
At the same rate of return, adding £5,000 a year, they should end up a millionaire by 60.
(Yes, a million will be worth a lot less in 2052, due to inflation. Trust me you’d still rather have it.)
In this case they’d already saved £50,000 by age 30. But over the next 30 years they’ll save and invest another £150,000 in our simplified illustration.1 Most of their earnings and savings are ahead of them.
For anyone in this position, market falls are good news. They lower the price of new purchases. Which in turn improves the odds of higher future returns.
Let’s assume the 30 years of £5,000-a-year saving came after a 20% bear market that took their initial pot down to £40,000 – but that future returns would afterwards be 1% higher. In this case they would end up around 14% better off than if the bear market had never happened.
Again, all very over-simplified. Some mathematically inclined readers are cross I’m using arithmetic returns and a compound interest calculator, others that I’m not belabouring sequence of returns risk, that I’m suggesting that a mere 20% correction would juice returns for three decades, or that I’ve talking about nominal rather than real returns.
Yes yes. This is a friendly illustration you can enjoy with a cup of coffee on a Saturday morning, not a dissertation. Besides, even if I wrote 5,000 words it wouldn’t change the point.
Which is that falling prices are good when you’re putting more new money to work – whether you’re buying a house, a hamburger, or another dollop of your fav index tracker.
Vanguard expected returns
So what kind of future returns can we expect from here?
Nobody knows in the short-term, but industrial-strength modelling can give credible ranges of probability over longer time frames.
Which is exactly what fund behemoth Vanguard has done for equities:
And also for bonds:
Sorry about all the small print clutter but it seemed best to include it – you know what giant corporations are like.
Remember too that these are expected returns, within ranges of probability. Note the outliers. Nothing is certain.
With all that said, these expected returns are much higher than what Vanguard was forecasting a year or two ago. Especially for fixed income.
Tubthumping
I doubt that after a terrible couple of years for bonds, the average investor would think that UK gilts are likely to deliver 4.3% a year over the next decade?
No, but as I wrote last November, bonds actually got more attractive – not less – thanks to the sell-off.
Again, these are all nominal returns. For sure if you believe inflation is going to stay above 10% for the next few years then you shouldn’t touch bonds with a barge pole.
However me and more importantly most economists think we’ll be back down around the Bank of England’s 2% target in a couple of years, if not before.
Enjoy that thought, the other links below – and the weekend!
p.s. Want more expected returns? GMO did a good job calling the 2021 exuberance. Here’s its new forecasts [PDF]. Note these are real returns this time.
From Monevator
Asset allocation quilt: winners and losers of the past ten years – Monevator
FIRE-side chat: retiring early to travel the world in a motorhome – Monevator
From the archive-ator: How would you spend and save if you knew exactly when you were going to die? – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Rents rising at the fastest pace for seven years – BBC
Cost of a ‘basic’ lifestyle soars almost 20% as inflation hits poorer pensioners – This Is Money
Student maintenance loans to rise by just 2.8% next year – Guardian
HMRC to clamp down on tax refund firms with shady practices – Which
BOE made £3.5bn profit on its emergency bond-buying programme – Professional Pensions
Baillie Gifford admits ‘humbling year’ after $14bn loss on Tesla and Shopify [Search result] – FT
Smart products are abandoned by big brands after as little as two years – Which
JPMorgan shutters website it paid $175 million for, accuses founder of inventing accounts – CNBC
The desire of EU citizens to quit the bloc has shrunk since Brexit – Guardian
Products and services
Get back into the savings switching habit as interest rates surpass 4% – Guardian
The bank of mum and dad mortgages – Yahoo Finance
Special offer Attention stockpickers! The Motley Fool is offering £50-off a year’s subscription to its Share Advisor service, with a 30-day subscription refund guarantee. Terms apply – The Motley Fool
Switching can slash mobile, broadband, and pay TV bills by £250 – Which
AirBnB urges lenders to allow mortgage holders to officially rent out rooms – This Is Money
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Homes for sale in UK financial districts, in pictures – Guardian
Comment and opinion
Hard-learned lessons – Humble Dollar
You won’t detect the next fraud – Ted Seides
The art and science of spending money – Morgan Housel
The CGT regime needs root and branch reform [Search result] – FT
How do [US] stocks, bonds, and the 60/40 perform after big down years? – AWOCS
Tim Harford: what economists get wrong about personal finance [Search result] – FT
Are falling interest rates responsible for stock market growth? – Of Dollars and Data
Too trusting – Humble Dollar
Who do so many investors believe they’re above average? – The Evidence-based Investor
A brief history of London’s Big Bang [Podcast] – A Long Time In Finance
Crypt o’ crypto
The complicated battle for control of the massive Grayscale Bitcoin Trust – Blockworks
Bitcoin back above $19,000 on cooling inflation – CNBC
Naughty corner: Active antics
Finding value amid the discounted investment trusts [PDF] – Numis via RIT Capital
Do active funds need a new fee model? – Behavioural Investment
Terry Smith’s annual letter to Fundsmith investors [PDF] – Fundsmith
How to get the most out of an annual report [Search result] – FT
Beating the UK stock market indices in ten hours a year – Lewis Robinson
Cliff Asness on FTX, hedge funds, and the value spread [Podcast] – Infinite Loops
Tesla: a stock for our times – Morningstar
Cathie Wood: what the market overlooked in 2022 – Ark Invest
Is the golden age of biotech stocks over? – Stat
Kindle book bargains
What Should I Do With My Life? by Po Bronson – £0.99 on Kindle
The Investment Trusts Handbook 2023 by Jonathan Davis et al – Free on Kindle
Stuffocation: Living More With Less by James Wallman – £0.99 on Kindle
Factfulness: Ten Reasons…Why Things Are Better Than You Think by Hans Rosling – £0.99 on Kindle
Environmental factors
Digital traders want to go fish – Wired
US government approves world’s first vaccine for honeybees – Guardian
An Australian park brings back rats – Hakai
Ozone layer slowly mending, will be healed by 2066 – NBC News
Off our beat
Key insights from the longest-running study on happiness [Podcast] – Art of Manliness
The last thing Britain needs right now is Rees-Mogg’s ‘Brexit Freedoms’ Bill – Prospect
“Truly a renaissance of social media hot takes”: how US state agencies got funny – Guardian
Global cities ranked by number of millionaires [Infographic] – Visual Capitalist
Are our brains wired to ‘quiet quit’? – Harvard Business Review
AI and the big five tech companies – Stratechery
The truth behind ten of the biggest health beliefs – Guardian
Why do kids hate music lessons? – The Walrus
And finally…
“To build wealth it didn’t matter when you bought U.S. stocks, just that you bought them and kept buying them. It didn’t matter if valuations were high or low. It didn’t matter if you were in a bull market or a bear market. All that mattered was that you kept buying.”
– Nick Maggiulli, Just Keep Buying
Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Interactive Investor. We may be compensated if you pursue these offers, but that will not affect the price you pay.
- In practice the amount they save would usually rise at least with inflation, and often far more with raises. [↩]
Those returns look too good to be true to me, but they are much more than historic averages so if they come out there has rarely been a better time to be contemplating retirement in the last decade of financial repression.
I think Sunak/Hunt/Stride and their quest to cajole the middle aged back into their cubicles to be milked for taxes are doomed.
These sorts of simplified articles are actually the very thing that has made Monevator the wonderful resource that it is.
Somebody once said (supposedly – and at least this time it wasn’t falsely attributed to Einstein…) of chess, that it is an ocean in which an elephant may bathe but from which a gnat can safely drink.
Very much the same with Monevator. In catering for the elephants, the gnats are not overlooked.
In the investment world, we start out as gnats, but hopefully grow into elephants.
This made sense when I wrote it!
While the Vanguard expected returns for all the bonds look quite good (assuming inflation does fall!). The projection for Gilts seems poor in comparison to the others. An expected median return basically the same as cash but with an expected median volatility almost the same as EM sovereign bonds! If I was an active investor (and believed every forecast that came along 😉 ) I would be thinking of dumping all my Gilts for Global Bonds and cash.
I wonder what the reason is for expecting such volatility in UK bonds? Other than the now usual doubt over where this country is going? That seems too political and subjective a reason to have factored into a study like this. Maybe the extra UK volatility from 2022 feeds into the projections?
Can anyone give an argument for still holding Gilts as opposed to Cash and Global Bonds?
@Moo — As someone who has believed forever that cash is underrated as an asset class for private investors, I hear you. However remember that volatility goes both ways. If UK government bonds were volatile in an upwards direction when your equities are going down (versus cash going nowhere) then you’d be glad of the volatility. Also worth remembering the capital is volatile with bonds, but the income isn’t, and that you can work out roughly a known return when you buy bonds presuming you hold etc. Versus cash where if efforts to curb inflation could, say, tip us into deflation and we could be back to near-zero rates in a couple of years. (Not predicting it, just saying). FWIW personally I still favour a cash/bonds/other stuff split for the ’40’ in a 60/40 portfolio in the current environment, but I’d certainly have a good dollop of government bonds (fixed and index-linked) in the mix at these levels now.
@ChesterDog — Cheers! I do think getting the big things mostly right is more important for most than worrying about the small things, if the latter leads to paralysis or confusion or drifting into overly-expensive professional guidance or worse.
@Neverland — Well the latest theory doing the rounds last week was that the 50-somethings had been driven out by an excess of ‘wokeness’. Which I find laughable, but there you go. I’ll linked to Merryn S-W’s take as a firewall to the real thing: https://twitter.com/MerrynSW/status/1613570796538019842
That linked Prospect article is well worth a read, since this cretinous piece of legislation that will affect us all (and not in a good way!) seems to be proceeding largely under the radar at the moment.
It would be a tragedy if, as we hobble away from the scene of our first self-inflicted injury, we were to now shoot ourselves in the other foot.
@Chesterdog , that’s a new one on me, I quite like that phrase.
You could almost butcher an old classic to fit the expected returns scenario too.
Hard times create strong returns, strong returns create good times, good times create weak returns, and weak returns create hard times.
Re: the over 50’s ‘wokeness made me leave the workplace’ idea, my instinct too is to find it laughable.
However, given how amorphous this confected term is, it could almost stretch to the idea of reorganised workplaces, KPI’s, 360 degree feedback, a working at home culture (which I’ve definitely seen described as woke somewhere). which makes some people miss the atmosphere in the office. In which case, perhaps a modicum of substance despite the general awfulness of the term.
Nonetheless, I did enjoy the top rated comment in reply to Merryn by @Typeforvictory:
“Well if I’m not allowed to grope the secretary and mock Jake for being in a wheelchair, I’m done. I’ve no choice but to retire to the home I own on my gold plated pension to play golf and object to new housing developments.”
Vanguard offer a decent cash rate (c.3% for ISA and 3.15% for SIPP). Not well publicised. Never makes the headlines from writers on other money related sites (i.e., Kempton or Stevenson) as focus is on HL, AJB, ii, CS, WO and so on. If bonds still concern you, why not operate a barbell of VWRL/VEVE and cash to your chosen percentage….
Oh, meant to reply to this @Neverland: “Those returns look too good to be true to me, but they are much more than historic averages.”
Per Dimson et al (Credit Suisse Yearbook) *real* long-run global equity returns are 5-6%, UK a little higher. Add on 2-3% for inflation and global equities don’t look out of line. Vanguard’s UK expected return from equities is higher than historically we’ve seen but the UK market is widely believed to be on a big discount to global markets, on account of international capital fleeing the country post our glorious Brexit.
@Far_wide – yes I thought the @Typevictory comment was a belter.
@old_eyes, Merryn didn’t quite seem to see the funny side of it 🙂
To be honest though, if people want a frank discussion about these sort of issues, then we all either need to agree a real meaning to the word or, perhaps more realistically, choose another word.
I think in reality though, the right wing press prefer the ambiguity. It’s just a big catch all word that covers the biggest social issues and also still somehow facilitates easy point scoring on someone who likes eating avocado on toast.
The markets definitely feel like a soaking wet John Prescott these days.
@ Moo – You can also buy and sell individual Gilts through the major platforms (I tend to use ii, but they all do them – just make sure they’re not charging you 0.45%/y holding fees like some HL accounts). As discussed previously on here, if you buy the low coupon Gilts they’re pretty much tax free. e.g. the TN24 Gilt (0.125% coupon, expires 31/1/24) is 96.53 mid and can be bought at 96.55 which equates to ytm of 3.63%. You’ll receive 2 tiny interest payments (0.125%/2 = 0.0625% each on 31/1/23 and 31/7/23) which are taxed as interest (same as cash savings). The rest of the return is a capital gain as the bond redeems at 100 (par) on 31/1/24, this ‘capital gain’ is totally tax free in the UK as UK debt.
The yields got quite a bit higher during the Kwasi days, but even at 3.63% is pretty hard to beat for most taxpayers. Plus of course you have the option to sell the Gilt in the future if your plans change and you want your money back (though the price might have one against you, e.g. if projected interest rates move higher).
@ Moo – Even better you can buy individual Index-Linked Gilts, normally also for standard dealing commissions (e.g. £5.99 with ii), though this usually involves a phone call. I’ve been building a ladder of the low coupon ones with a roughly 5y average term length (mainly using the TR24, TR26, T28 and T29 linkers). Same maths on the tax side and paying about RPI -0.1% at the moment (so a lot more than CPI!) for the 3y to 6y part of the curve (TR26, T28 and T29).
Usual linker caveats apply. For retail investors it’s probably best to plan to buy these to hold to maturity, the price swings in the interim can be violent leading to big mtm profits/losses. Not an issue if you hold to maturity, you’re guaranteed whatever you paid for them (the RPI -0.1% at the moment). Downside to that approach is that if prices go back to RPI – 2% (where they were for most of the last 10 years) then won’t be able to roll the maturing linkers at as favourable terms as you could now lock in buying longer linkers (eg the low coupon TG36 or T44 are currently both RPI +0.1% ish). You pays your money, you takes your choice..
Note also that UK Linkers are not floored, so if inflation turns to deflation you lose money (if RPI goes down between now and the end of the term, or your holding period)
It’s not so much wokeness keeping me from the workplace, it’s more the old chestnut of ageism. I’d quite like to “get with the kids”, I’m a bit of a liberal, I like to think I’m as open-minded and sensitive as the next millennial and that I could still contribute in constructive employment . I feel that it’s not that I don’t want to join them, it’s more the feeling that they don’t want me to join! While I’m eager to convince myself that sixty is the new forty, I feel that just doesn’t apply when it comes to finding employment, and this suspicion goes some way to prevent me from seeking it out.
Not read the post yet but had to share this. I thought it was your average poor example of FIRE discussion in mainstream media when they claimed state schools as a £28k/year money saving hack.
However the line “We’re investing less during Leah’s maternity leave because we still want four nice holidays in foreign countries” had me actually laughing about the joke being played I wish them well and hope they get round to reading all the chapters in whichever book I fear they only read the investment related chapters of…
https://www.thesun.co.uk/money/18596740/couple-retirement-plan-kids-work
Re: woke workplaces. I am a simple person with an equally simple maxim: Whenever one finds themselves on the same side as David Icke, one should pause for thought.
“..their future self..” – thinking about this..
At 59 I’m already the early-ish retired future self in this scenario. Looking back the equivalent of the £50k the 30 year old me had would have mostly gone on a house deposit. Then the outgoing payments of the mortgage, eventually taken off the table early with lump sum payments off the capital. Anyway, I didn’t start paying serious money into ISAs until maybe 2001 onwards and didn’t use the full annual ISA allowance until later. Got a bit diverted by cash ISAs to be honest. I did at least have money going into pension investments with the employer match.
So what I’m thinking without running the numbers from records is that most of my accumulated and accumulating / gyrating investments and cash bucket for my retirement stash built up from 45 onwards in the last 10 years before leaving employment. I think because mortgage was paid off, higher salary in later years, no kids and not having an inflationary lifestyle mentality. I suspect it may be the same for others here who have walked a similar path, unless you made out like a bandit early on?
So for today’s 30 year olds, how’s it going to work in this environment if you want to own a house, have a family, car, working healthcare etc? Good luck and get a job or other employment that pays well! You’ve got to be able to keep your head above the water level financially to stash some cash into investments early on.
Thanks for the links, which I’m still reading. The Housel article on spending it struck a chord for me – changing from a saving to spending mentality is hard. Started by sometimes picking up the whole bill for meals with friends so that I can at least make sure a decent tip is left! Also, it feels good to do that if you can.
Terry’s comments about soap in his Unilever rant had me laughing out loud.
Real long term returns of 5-6% globally??! Even more for the UK???!!! For the same sh!thole of a country we live in? What the hell are you smoking?
120 years might be considered long-term, but taking a look at the whole history of global industry (post the start of the industrial revolution / 1750), there is no precedence for being entitled to any sort of equity returns for much of the period since. Even data going back to the start of last century is fuzzy and muddled so assumptions have been used.
Are you honestly willing to bet the exceptional advancements of the 20th century will be repeated this century? I highly doubt it. Even if we do get 5-6% returns long long term (perhaps if we get lucky with renewable energy – which I highly doubt), this might only be realized after even the youngest who frequent this blog has died off. What the hell would be the point in investing then? And more importantly, would you have the cajones to withstand the volatility and second guessing of strategy for your entire lifetime?
We have a supply of energy crisis. Everything about the global economy is underpinned by energy. The neoliberal capitalist system we are in today is close to its expiry date. And this crisis is what will end it. Too many financial claims relative to the current and potential output. And output will be dragged down by the energy limitations.
As I said last year, Putin is a master chess player. He is intentionally playing the long game and will come out as the winner. He knows full well the predicament the West faces. There is no escaping this fact. The West, with their tail between their legs, will end of doing a peace deal with Russia, exchanging Ukraine for energy supply.
And you know what? This is just such an exciting thing to watch unfold. It really makes you understand the fragility of our economic and societal systems. And it comes down to arrogance and complacency by humans. Hypocrisy and self interest. Many just don’t seem to want to understand this, extrapolating the past 50 or so years of fanatic economic boom.
All bad things must come at an end and rightfully so.
@No Free Lunch — As you like, you might be right. I heard much the same thing in 2002 and in 2009. Doesn’t mean we’ll always recover but yes, basically historical returns going forward for the next 10-20 years is where I am putting my money and where I’d say the balance of probabilities lies.
The big risk factors for me being climate change and nuclear war, both of which have the potential to take most of the pieces off the board. In the very long-term AI. But ignoring those existential risks, I don’t see a reason to panic. I certainly see as much innovation in the 21st Century as the 20th, if that’s the central thrust of your bear case, and to be honest likely substantially more. AI alone should unlock multitudes.
Do us a favour and come back in 5-10 years with a mea culpa if this doesn’t turn out to be the end. That’d be a first. 🙂
@The Investor – Surely you can’t seriously be comparing what I say to what others may have said during 2002/2009? Two years which experienced a bottom in bear markets at levels which were considered good risk-reward in 2002 and 2009 being a once in a generation buying opportunity?
We live in a completely different world today in terms of markets and the economic and social underpinnings. Even after last year’s draw-down, I am not so sure you can say today’s markets represent a good risk-reward buying opportunity.
And that is looking at markets in isolation to the rest of the many many outside variables. As I say, there are some pretty serious issues we seem to be heading towards, much of it driven by the energy scarcity issues that most of the West seem oblivious to until recently. Prosperity per capita can be traced back to have peaked in much of the West in the 2000s, UK probably around 2005, with the GFC massively accelerating the ongoing decline. You, like many others, seem to be way too focused on Brexit as the cause of all our ills and blinded by the very real decline we have been experiencing many years before 2016. I say this as someone who didn’t care to vote in the referendum because, in case you might not have noticed, I really don’t give a flying sh!t about this country.
To me, it is quite obvious we are heading into a world where:
– discretionary spending will have to be reduced in the name of energy conservation and conservatism
– the bottom 20% say, having experienced a decline in their standards of living for 15+ years, won’t have none of it – so there might be a potential for social unrest – but the pandemic has been a good test to show civil obedience can be achieved, which will almost certainly be necessary in the years ahead
– GDP in aggregate will therefore show real terms decline at some point in a secular fashion
– Financial capital will therefore need to be corrected for in this new scarcity world we are finding ourselves in (too much claims on less and less produce) – which means low prospective returns going forward, maybe even negative in real terms
Climate change and nuclear risks are outlier/tail risks; the very real probable risk is the move from abundance to scarcity tied in with geopolitical tensions with the East/Russia. And further tied in with the decline in the West’s standard of living for more and more people and all the issues that result from this.
@Porlock_Vale — I almost couldn’t engage with the Prospect piece, it’s so depressing. Sadiq Khan made a stab at coming out and calling on politicians to wake up for the Brexit delusion, but given the Brexit supporters still seem (a) mostly still delusional and (b) big enough group still to swing a vote, I’m not holding my breath. He’s not my favourite politician but kudos to him anyway, naturally enough the usual crowd came out and blamed the likes of him (and me) for undoing their glorious Brexit. As opposed to, you know, reality.
@far_wide — We’re going to stroll into Herodotus here, and the rise and fall of civilizations. 😉
@WCTL Flashheart — Indeed that’s news to me. Presumably it has to be a separate cash ISA? I understand why it’s so, but it’s such a shame you can’t get competitive cash rates in a stocks and shares ISA to save on faff-age.
@Vroom — Very interesting to hear hands-on individual gilt trading experience. Myself and @TA were knocking about an article outline for an index-linked gilt ladder for the five minutes when the idea was really attractive. Do you have any interest in writing a guest article about your experiences / offering tips? It’d be interesting to learn from someone with a lot of hands on experience.
@Jim McG — Why are you seeking it out, I thought you were retired for good again? 😉 (Not updating the blog though I see…!) Maybe you should try to do a bit of freelance or contracting? I really think it’d suit your situtation. A bit of income coming in to take the edge off the drawdown, a bit of structure/eustress, and enough workplace to remind yourself why you don’t want more. 😉
@Steve B – Well to be fair £28,000 a year will go a long way especially in kids’ pensions. I don’t mind how they rationalize spending / saving money personally. 🙂 It is odd to see all these articles around though.
@G — Fair.
@BillG — I think I’m unusual in that I did a lot of saving on a moderate income in my 20s / 30s, as much discussed here over the year — although to your point the first tranche of that was towards a house deposit, it was only when I didn’t buy that I parlayed it into my DIY bedroom hedge fund / Warren Buffett wannabe obsession / this blog 😉
@Simon T — Yes I pulled that out on Twitter. I am more towards the end of the spectrum that the typical anti-woke people complain about than not (only just but that direction) but I do feel it went too far in the past couple of years in these corporate reports, where it’s basically substituting for business basics at times it seems.
@No Free Lunch — Yes, I am have heard this kind of thing many times over 20 years as an investor during bear markets. Long apocalyptic speeches about the big picture, seemingly little real understanding of the detail. Presumably emboldened by recent declines. Maybe you think that’s unfair, fair enough, I am generalizing and as I say you could be right, I’m not here to change your mind. 🙂 I do agree with you markets aren’t screaming cheap, although outside of the US I think they’re fair to good value. Anyway that’s enough of this sort of conversation for our blog for now thanks, it can easily crowd out the moderate conversation of those of us who don’t believe the end is nigh. Cheers!
@No Free Lunch
“Putin is a master chess player. He is intentionally playing the long game and will come out as the winner.”
Thanks for that, my first really really good chuckle from this blog in 2023.
On a serious note doctors appointments are hard to come by these days, you do really need to ring up at 8 am to get that appointment for your meds.
@Investor responding to No Free lunch.
Yup, agreed – the answer to most questions about the future really should be – ‘I don’t really know, if you were to push me I suspect this will happen’.
The more certain someone is about the future, the more uncertain one should be about their prediction.
I recall a lot of people, me too I guess if you pushed me, that expected the Ukraine / Russia war to be over by now. Somewhat unexpected outcome where we are today.
Now it appears to be the ideal conflict for the US. They get to degrade one of their core opponents with close to zero risk to their population. And economically because of their efforts in tapping into shale gas twenty years ago, they are not suffering nearly as much as we are with respect to energy prices. Obviously there is the unquantifiable tail risk that those in charge in Russia push the button but there appears no prospect of that as yet.
Sparschwein in another comment thread posted a very interesting podcast that is worth listening to ‘https://rationalreminder.ca/podcast/224 ‘.
The basic gist being equities are likely to give you the best outcome but there’s a wide variability and a meaningful chance that over a lifetime period you can get wiped out due to a tail risk event.
For those with a decent pot to play with, I don’t think there’s enough focus given on managing tail risk. Probably because it’ really tricky – global equities, gold, overseas property, swiss francs, you kind of quickly run out of many options – commodities, buying out of the money puts (?) Hard to put into practice meaningfully.
No Free Lunch – if that’s your view – how are you asset allocated? 150% gold and 50% short sterling? History isn’t on your side globally if you are guns, ammo and baked beans. Or ru just trolling from the sidelines 🙂
Also listening to the above podcast, I was struck by how google translate facilitated the exploration of data in various europeans countries. A very minor example but I’m by no way bought into the fact that our best growth days are behind us? Isn’t it equally possible that as access to education becomes a level playing field so more of the brightest sparks fulfil their potential some of whom would never have done so pre the internet? Who knows as ever……
I picked up that finumus may do an article on investing through a LTD company…+1 to that, would be interesting to read about anyone’s experiences here whose done that.
I continue to think global equities with a healthy dollop of cash, gold and $TIPS or some overseas currency plus a paid off property is broadly speaking the best way to go.
@ The Investor. “Presumably it has to be a separate cash ISA?” Not in this case. It’s good news (albeit not widely broadcast as I mentioned)…..
The equation (confirmed to me by Vanguard) is BoE rate minus 0.25% and minus 0.15% account fee for a SIPP (so currently 3.1%). For an ISA they retain an extra 0.2% so it’s ‘only’ 2.9%.
Am I sure? Yep. We (me, wife and kids) are all with Vanguard. I have each of their accounts linked to mine. For example, I can see the cash credited on the 1st of each month in my ISA and wife’s ISA and SIPP. Kids are fully invested.
Hence my point. The focus ‘on the airwaves’ always seems to be on the big brands. They will gleefully write to you to tell you ‘we’ve increased from 1.5% to 2%’. To the contrary, zero comms from Vanguard. Just extra interest payments as the BoE raises rates. I’ll take the latter every time! Hence my barbell point about 1 x equity fund and 1 x cash balance….
@WCTL Flashheart — That is very interesting, thanks for sharing. (Mind you, Vanguard definitely counts as a ‘big brand’ — it’s got more than $7 trillion assets under management from memory! But yes, they spend woefully little on marketing in the places where they should. Like on this blog haha.)
Doubling back to the recent ChatGPT discussion, this /. post https://news.slashdot.org/story/23/01/15/1831203/cnet-used-ai-to-write-75-articles talks about CNET having used AI to write high double figures of personal finance articles since November last year.
@xeny — Interesting. It’s been clear for at least a couple of years that a lot of the links on Google Finance to various stock ticker related articles are at the least ‘automated’ to a template if not full AI.
@WCTL Flashheart thanks for this info and formula. I was looking exactly this inforation on Vanguard’s website and they don’t have it as detailed. Why are they hidding this?
It is very needed/useful informaton for anyone who wants to go partially into cash (istead or just bonds) as part of glidepath to avoid sequence of returns risk.
PS
Are there any accumulators on this forum? 🙂 If there are, I have a question for you: does equity prices going up make you feel sad? Am I the only one who thinks 2022 was great for equity investors?
Thanks, Monvevator team for all your work. I’m a 27-year-old, with not many friends interested in this field and it’s so helpful to have this online community. I just posted this in another article but realise that it is over a week old and not sure if people will see my post.
I am potentially considering buying my first home. It is daunting considering buying a house in these economic climates but a good opportunity has arisen near me and I am seriously considering it. Previously I had been very much in the Index fund camp and not looking to buy.
It would be great to hear people’s opinions (I know every situation is unique), but:
-Would you take out money from an S&S ISA to buy a home?
-Would you stop making contributions to an S&S ISA and put it all into mortgage repayments? I.e. continue investing vs pay the mortgage early. I’m hoping to try do both.
-Are there any helpful resources/monevator articles exploring the above scenarios?
@SeekingFire. More of a reader than someone who comments but I do agree there is little focus on tail risk. It seems all about maximising growth.
At this time, my current net wealth number is likely to outstrip future earnings by a multiple. I’m not “deaccumulating” as such but protecting against a large downside feels more relevant to me than an extra percent or two in returns. I’m simply don’t want to lose to take say 40% and have to hope it comes back.
I took action after seeing a comment from another poster (ZX) who talked about Brevan Howard and how that was negatively correlated with equities. Doing some research I could see exactly what he meant. So I sold much of my bonds and some equities to buy that. It’s saved me a very substantial sum (especially vs the linkers I held) and resulted in the portfolio actually coming in flat/small up for 2022.
I just don’t feel an 80:20 portfolio is right for me anymore. I want much more diversification than that can provide. A bit of everything but with a focus on not losing a substantial amount. I’d be interested in seeing ideas that could help with that.
Great posts as always!
Re Armageddon-a basic human default stance throughout our history-Malthus etc
Re the stockmarket -that other way of expressing the human condition-opportunities always occur after a downturn-unless the end has indeed come!
With global bonds down 13.2%,S&P down 19.4% and MSCI EAFE index down 16% the only way is up!
Interestingly MSCI beating S&P this year and Bonds arguably doing their thing protecting portfolios ie losing less than equities in a downturn
Interesting times but the usual stockmarket cycle will probably continue to repeat itself as usual
xxd09
@BenezC – you pose an interesting conundrum that I think will be shared by many.
We are looking at this same situation with my 22 yo son currently.
Our (rough) plan is to continue to max his LISA each year and use that for his deposit, probably in 2025.
Continue to add to his Vanguard account any surplus cash at the same time.
He already has a cash emergency fund that is sufficient for him.
Buy a property that –
He can see himself living happily in for 3+ years
Needs modernising ( I have skills that I can teach him to do this, paying forward what my Dad taught me)
Has sufficient room to be able to accommodate lodgers (ideally two), mindful of the tax implications.
(for info we live in the South West)
The income from the lodgers (if we do this right) will cover the mortgage and provide a small buffer fund.
He will stop paying into Vanguard and the LISA so will be able to cover the other living costs and the modernisation as and when he can afford it.
Although, knowing how how feels about saving I expect he will maintain a minimum £100 pcm for the positive psychological effect.
He gets job related bonuses occasionally, they will probably go into Vanguard as well.
When the house is finished and if –
The right opportunity comes up
Market conditions are favorable
He will probably repeat the process.
Just for info his salary is circa £25-30k – so not a high earner.
From discussions with others I know many disagree that this is a good plan.
Horses for courses IMO.
Good Luck
@BenezC — Glad you’re enjoying our articles. As you intuit we can’t give any sort of personal advice, and even if we could a person would need to know far more about your situation — which itself suggests some of the things you should be thinking about. (E.g. Job security, salary situation/predictability, other savings, other resources in a crisis (e.g. parental support), investment aims, etc).
This article should help you think about the pros and cons, although note it was written when rates were still very low which must colour the analysis somewhat:
https://monevator.com/pay-off-mortgage-or-invest/
Finally, I’d say people do talk a strong game about why one should invest or pay off the mortgage first, but in practical terms more of them do both. (E.g. they have a pension and a mortgage, but when they’re in the ‘pay off first’ they often mentally allocate the pension to a bucket other than investing!)
For what it’s worth I personally think the case for paying off a mortgage sooner rather later is much stronger — generally speaking — with rates at 5-6%! (Might sound obvious but remember expected returns on investing have gone up too).
Good luck with your house purchase!
@Fage — It’s a huge subject and a difficult one. You’ll find many Monevator articles in Weekend Reading links exploring ‘beyond the 60/40’ diversification over the past two to three years as I’ve been alive to the issues. But I don’t think you’ll find anything definitive, especially for private investors. Managed futures and certain macro funds, which @ZX used to allude to among other things, are indeed a potential very useful portfolio addition, but they have their own issues (principally inaccessible to most everyday investors who would be anyway poorly placed to evaluate them and their charges, or whether the likely (long run, all-in) lower returns were worth it in return for hopefully lower volatility, as you enjoyed in 2022).
I tried to write a follow-up after warning things would get ugly here: https://monevator.com/quantitative-tightening/
…but I felt it was too hard to be definitely useful with respect to the passive audience, though in the ‘old days’ I’d have written something with less concern thinking of active investors who can take the rough with the smooth. The BHMG fund you allude to has long been on my radar, and a holding on/off, but even by Feb 2022 it didn’t look a no-brainer (was already on a double digit premium to net assets, which is not anything intrinsic to the strategy, it’s just an artifact of demand and liquidity, and could reverse and compound losses if the fund falls out of fashion/performance, as has happened before).
Of course the fund continued to do very well, as you state, and it would have been an ideal portfolio addition even with the premium. But I didn’t feel Monevator was a place to start informing everyday passive investors about whether or not it was time to trade out of a listed macro hedge fund. 🙂
The good news is many of the (sometimes ‘pseudo’) diversifiers are cheaper now, after the falls. That includes bonds of course, but at least until recently other kinds of specialist trusts with somewhat interesting correlation statistics (e.g. infrastructure trusts were finally on a discount).
The bad news is the complicating factors have not and will never go away.
I have nothing at all against people exploring and adding these funds, but it’s really something individuals need to bone up on and understand the pros and cons for themselves, as you’re doing. And I remain unconvinced that for most casual non-interested everyday investors, deviating that far from a standard equity/bond split will serve them well *over the long-term*, provided they can pay the necessary price of accepting volatility and not selling after unusual sequences such as 21/22 for government bonds (and better yet rebalancing).
Others think we should be stridently arguing for an opposite approach. I respect the alternative approaches (I myself have nothing like a simple 60/40 portfolio and never have, but I’m an active investor) but when it comes to the website and how we should best help normal people position themselves for a lifetime of successful investing, where investing is low down on the priority list, there are multiple downsides with straying far from the industry-standard advice.
@ TI – thank you for the offer, but I’m short on both time and bandwidth for writing articles at the moment alas. Also far from convinced I’m more of an expert than yourself and @ TA on Linkers, it wasn’t what I traded ‘back in the day’ so I’ve been scouring the web (including Monevator!) for pointers myself. Happy to share knowledge and read/edit/suggest potential improvements to what you’ve written if that would be useful?
As you say they’re not as attractive as the crazy Kwasi days, but RPI flattish & basically tax free on a ladder with an average term of 5 years or so still isn’t to be sniffed at. If we could get anything like that on granny bonds many of us would be filling our boots?
@Vroom — Fair enough. Thanks for the offer, perhaps we’ll run an article to sanity check by you as there’s such a divergence between what’s possible on the platforms etc.
@The Investor. This is quite a good read on why the permacrisis might be different this time:
https://www.linkedin.com/posts/adam-lent-5b461a196_permacrisis-climate-environment-activity-6997838793730859008-T0Mg/
I think it’s a bit better argued that the one earlier in the thread (even if their heart was in the right place).
@G — Morning! No argument that the climate crisis / environmental threat is real. I cite it in my reply up the thread, and said it was the biggest long-term threat well over a decade ago now:
https://monevator.com/environmental-degradation-and-wealth/
What IMHO it is not going to do though is stop the S&P 500 going up 50% or whatnot over the next five years. It’s a long-term existential threat, and to the extent that one can do anything about it as an individual from a financial perspective, following catastrophic prophets in the midsts of bear markets has never historically been the winning strategy.
I skimmed the article and I think he’s too gloomy about alternative energy FWIW. The downsides of tidal, solar, wind and nuclear to me lie in the ecosphere impacts (whole life) not in their inability to massively supplant burning fossil fuels (some of which will continue indefinitely for sure). Cheers!
@The Investor
Re your reply to Fage (36)
Is some sort of segregated area of Monevator for more active investing discussion something you would consider? An ‘erratic and unstable portfolio’ to compliment the Slow and Steady perhaps. I jest but for those of a more active predilection it would be really interesting to hear what you and others are doing from time to time if such discussion could be labelled with sufficient health warnings so as not to undermine the broader message.