The Investor is unwell, I mean on holiday. Definitely not too drunk to write his column this week. Nuh-uh. No way, Jose. Nope.
Hi! The Accumulator here. Just covering while my good friend The Investor is having a nice rest.
OK, links is it? I’ve got loads. Because we’ve been planning this for weeks. Sure have.
Anyway, one article that sobered me up this week is a penetrating critique of defined contribution (DC) pensions written by the esteemed William Bernstein and Edward McQuarrie.
They elegantly show that most people relying on DC pensions to provide for a successful retirement need:
- Much higher savings rates than is commonly admitted
- 100% stock portfolios throughout their entire investing lives (accumulation and decumulation combined)
- A dose of luck: in the form of a benign sequence of returns and average historical return rates (Woe to thee if you’re below average.)
The savings rates required to retire on a portfolio of low-risk assets (e.g. index-linked government bonds) are just not doable for most people. From the article:
Grim indeed: using historical data, our analysis shows that not until the savings rate approaches 25% does the saver have more than a 50/50 chance of success, and to approach certainty requires savings rates in the 40% range. Lower savings rates require a market return that has seldom been on offer.
To bring savings rates down to something half manageable, it’s 100% equities all the way:
It turns out, counterintuitively, that only one maneuver improves the success rate, and that’s a 100% stock portfolio both during accumulation and retirement.
Even then you need a 20% savings rate to push down your chance of retirement ruin to 4%.
How likely is it that the majority can achieve that? We’ve known for a long time that the median UK pension pot is ridiculously underfunded. And those who struggle to save likely face bleak retirements, or a working life that stretches far into old age.
Bernstein and McQuarrie’s prescription:
The current system doesn’t need more nudges; it needs dynamite and rebuilding from the ground up on the DB [defined benefit] model.
That isn’t going to happen here. Nor in the States. Indeed, the authors’ aim seems to be to push back against libertarian forces who seek to dismantle all forms of social insurance, and leave individuals at the mercy of the market.
Whatever you think of the politics, the underlying research paper by Bernstein and McQuarrie is a clear-eyed education in investing risk. Most of all, it relentlessly strips away the many myths that comfort us when we look at a global equities returns chart and notice that it’s done pretty well for fifty years.
Have a great weekend.
From Monevator
FIRE-side chat: after the rollercoaster – Monevator
SIPPs vs ISAs: battle of the tax shelters – Monevator
From the archive-ator: Bear market recovery times – Monevator
News
Crypto ETN ban could be lifted for UK retail investors – Which
Revenge tax menaces foreign holders of US assets – FT
Pension reforms ahoy. Just what we need! – This Is Money
UK Tesla car sales down by a third: analysts stumped – Guardian
Another fintech snubs the London Stock Exchange – FT
Source: This Is Money
Tesla price plunge: a textbook case of idiosyncratic stock-risk – This Is Money
Products and services
Banking switch offers are hot right now – Be Clever With Your Cash
Best mortgage rates for first-time buyers – This Is Money
Hack: How to ‘spend’ on your debit card without spending – Be Clever With Your Cash
Avoid these travel insurance nightmares – Which
UK property hotspots – This Is Money
WASPI women: watch out for scam websites – Guardian
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this link. Terms apply – Charles Stanley
Care-home fee black spots – This Is Money
Get up to £100 as a welcome bonus when you open a new account with InvestEngine via our link. (Minimum deposit of £100, T&Cs apply. Capital at risk) – InvestEngine
Nintendo Switch 2 review – IGN
Homes for sale in cultural hotspots, in pictures – Guardian
Comment and opinion
US safe-haven status in peril – Paul Krugman
FIRE sceptic rethinks their biases – Morningstar
How to avoid the big investing mistakes – Behavioural Investment
How to rationalise dreadful investment losses [Satirical] – Acadian
The UK doesn’t have a productivity puzzle – FT
Investors do better in target-date funds – Morningstar
Does small cap value improve your safe withdrawal rate? [Plus ERE vs The Golden Butterfly portfolio] – Early Retirement Now
Value is working quite nicely outside of the US – Morningstar
Sage investment wisdom from Benjamin Graham x Jason Zweig – TEBI
Common FIRE traps not to fall into – The Purpose Code
The dangers of home bias versus the UK growth agenda – Archie Hall
Choosing where to live after financial independence [Slides – US but translates] – Harry Sit [Video version – Harry Sit via Bogleheads]
Naughty corner: Active antics
To earn the big bucks you’ve got to take the big losses [Research paper] – Morgan Stanley
Using ChatGPT to optimise your trading strategy – Quantpedia
Don’t bet against AI stocks say Wall Street analysts – Sherwood
Hedging AI risk – AWOCS
Life is harsh (and short) for underperforming funds – Jeffrey Ptak
Bitcoin ETFs are up! – Humble Dollar
Pudgy Penguin NFT ETF = End Times – FT
If you like risk, you’ll love Bitcoin treasuries – This Is Money
Kindle book bargains
How to How the World by Andrew Craig – £0.99 on Kindle
The Algebra of Wealth by Scott Galloway – £0.99 on Kindle
The Big Short by Michael Lewis – £0.99 on Kindle
Skunk Works: A Memoir of My Years at Lockheed by Leo Janos – £0.99 on Kindle
Or pick up one of the all-time great investing classics – Monevator shop
Environmental factors
Green-hushing: ESG survival strategy in the Age of Trump – Semafor
Why batteries make a renewables-powered energy grid affordable [US but translates] – Construction Physics
Hybrid electric vehicle sales rocket in the US – Sherwood
Robot overlord roundup
How AI is infiltrating the movies – Vulture
Why AI isn’t leading to mass sackings (yet) – Dwarkesh
Not at the dinner table
Trump vs Musk: Gasbags at dawn – CNN
Apparently we’re at war with Russia – Guardian
Reaction to the UK Strategic Defence Review [Podcast] – Chatham House
Trump family get into bed with crypto bros [Voms] – WSJ
Off our beat
How Ukraine’s audacious drone attack stuck it up Putin’s bombers – CSIS
The genius myth [Paywall] – Atlantic
Contrarian views on the big five mass extinctions [Paywall] – New Scientist
And finally…
“Owning the stock market over the long term is a winner’s game, but attempting to beat the market is a loser’s game.”
– Jack Bogle, The Little Book of Common Sense Investing
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McQuarrie 05/2025 paper (pp. 10-11): “use
two benchmarks: the 6.6% average real rate of return on stock investments in the US over the past two centuries, and the 4.4% average real rate on World ex-USA equities since 1900, per Siegel (1994 / 2022) and Dimson, Marsh and Staunton (2025).”
By those metrics it looks grim.
But there may be a third way, beyond increasing your savings rate and / or accumulation period and / or decreasing your consumption and / or your time in decumulation: namely using part of your asset allocation to play ‘Bessembinder roulette’.
The only way to achieve a higher return than the market is to assume some concentration risk (or to use leverage, but God only help you doing that); but not so much that it ruins you if/when it fails.
As Bessembinder shows in his studies: 50% of excess returns (equities over T-bills) comes from just 0.25%/0.3% of all listed firms.
Finding one of those is like finding hen’s teeth.
But if you do…
So say put 80% of your portfolio and your future investing into VDEV/VWRL/Vanguard Global All Cap, and the last 20% into the best, most thoroughly researched, long term buy and hold idea that you’ve got for a life changing single stock name.
If you lose on the single name then you’ve still got 80% of what you would have had you been 100% passive.
Obviously not great, but no disaster either.
And if you win….
Since IPO in 1999, Nvidia has had a total return of around 3,700x; and since 2006 it’s around 329x.
While predicting Nvidia’s ascent to an AI behemoth from the vantage point of its IPO would be an act of sheer prophecy, by 2006, the picture had changed dramatically with the launch of CUDA (Compute Unified Device Architecture), such that a thoughtful and technically-astute observer could have reasonably foreseen that Nvidia was positioning itself for a dominant role in the future of high-performance computing and, by extension, the nascent field of machine learning.
Analysing DC schemes and contribution rates and concluding they need to be well funded to be successful is no great surprise. The industry has been banging that tub for years, including legislatively here in the UK via schemes like NEST. But then leaping to conclude DB is the way forward isn’t logical to me.
The effect of tax breaks and policy were entirely ignored also. Of course people want the assurance of DB but the whole point of why DB was abandoned over DC is the cost – money doesn’t magically appear out of nowhere. There is no free lunch. Someone has to take risk somewhere. Choose how to pool that, sure. But the benefit level needs to fundamentally linked to personal contribution level over the person’s entire lifetime to avoid imbalance. Trying to escape that invariably leads to other problems.
I found your FIRE interview on the Australian superannuation system most illuminating and sensible in that regard. It tries to strike a better balance between personal contribution and wealth, while still providing a tapered minimal backstop.
@ The Accumulator – congrats on the promotion for the weekend and your pick of the links.Strangely in among the heavier articles i found the Targeted dated story the most interesting,the last time i looked a couple of years back it seemed only Vanguard offered them via diy platforms but may have changed.
While pension funds offer their own glide type products etc it seems that target dates have not really caught on over here.Even Fidelity who are One of the biggest providers of them in the States seem to prefer adding the word retirement to their Multi Asset Allocator Growth fund and having Two identical funds for some reason.
@TA:
Interesting paper from William Bernstein and Edward McQuarrie. However, it is not really all that surprising for the reasons given below.
B & McQ make two critical assumptions, namely that: a) DC is the only source of retiree income; and b) retired lifestyle costs are same as before retirement minus the cost of DC plan contributions.
Back in 2019, Pfau, Tomlinson, et al in the Stanford Spend Safely in Retirement Study (SSiRS) concluded that if middle income workers optimise US social security (ie delay taking it) it could provide them with between two thirds and 80% of their retired income needs. So removal of SS (as assumed by B & MCQ) will have a huge impact; and indeed it does as B & McQ demonstrate over some 100 plus pages.
For me, the most eye catching figure in all of this has always been the relative generosity of US social security!
Loved the ‘Common FIRE traps not to fall into’ – The Purpose Code article – couldn’t agree more.
I’ve always been more interested in the FI than the RE.
To call for DB schemes is to call for somebody to pay a subsidy. Who?
Since “the State” is broke the subsidy could come only from cutting other expenditure. What?
Do Americans do things differently to us?
Say they leave university at 21, this presumes retiring at 51. I had a 30 year working life, but I consider that I retired early. A conventional working life is much closer to 40 years than 30. If you want to retire after working a quarter less than most people, it stands to reason you have to do something different to the norm, and yes, they have summarised that reasonably well. I’m not under the impression that Americans generally retire earlier than us.
@dearieme > To call for DB schemes is to call for somebody to pay a subsidy. Who?
It doesn’t have to be the State.
In your case I believe, and in mine, DB is deferred pay from while working.
I knew we were going to have a good discussion about this 🙂
Re: cost and subsidies – When every individual must bear the cost of being unlucky then the bar is set very high to avoid falling into that trap. But a collective approach smoothes away the outliers.
The extremely lucky subsidise the extremely unlucky. Everyone can enjoy a reasonable outcome. We do this all the time. Home insurance, NHS, State Pension. Japan does this for social care.
In the case of an annuity, the subsidy works in reverse. The extremely unlucky (those who die early) subsidise the extremely lucky (those who live to a ripe old age).
@John Charity Spring – all good points but despite tax breaks and auto-enrolment, individual risk remains and can be better solved by a collective approach. I agree the Australian system seems to strike a better balance.
DB pensions allow for the impact of personal contribution. The State Pension does too. You could also still include a DC component for the well funded.
@Al Cam – at some point your retirement expenses are going to be your working age income minus savings. The more you must save – or the less you earn – the more likely that is. I don’t think the authors’ concern is for the well paid or those receiving higher rate tax reliefs. It’s also worth bearing in mind that recommendations to delay US social security max out at age 70. In other words, it’s a manoeuvre more easily afforded by the well-resourced and healthy. People with good options.
I’m not sure how our State Pension compares with US social security? I keep stumbling on articles suggesting the UK is about as miserly as it gets among our peers (or wished for peers).
@Howard – that’s essentially what happens I think. People take big bets. Often they don’t pay off. Situation is worse. It looks like there’s a better way.
@klj – ha, ha – thanks. I’m hoping to get demoted again in time for next week 😉 Yes, you’re right, Target date products do seems to be largely confined to pension schemes in the UK. A few Target Date ETFs have emerged, too – in Europe and the States – but not here as of yet. I do think they’re an excellent idea for anyone who just doesn’t care about investing, or doesn’t trust themselves.
@Ermine – perhaps 30-years is a good average for the accumulation years?
Lots of people likely don’t start saving for retirement until nearer 30 (or beyond!). Many are probably in insecure employment for a long time. Perhaps don’t have access to pension schemes.
Others are in grad school etc so perhaps don’t start earning until age 27 or 28. Many women will take time out to have kids. Some will suffer bouts of unemployment. Finally, a substantial slice are probably forced out of work early due to ill-health – their own or a family member’s.
Every study shows that 100% diversified stock portfolios always do better than anything else over 25-30 years, bonds can just reduce volatility. Consequently it always has made perfect sense to have a 100% stocks allocation throughout.
And the “attitude towards risk” question always asked is somewhat stupid. We all want the same from long term investments, a fair return with minimal chance of failure.
A diversified 100% stock portfolio has always been the way to go, why I haven’t done that is another matter.
I remember being told by an HR bloke long ago that I needn’t worry about pensions until I was 38 !
Of course that was in the times of dB pensions and pre-Gordon Brown.
I always wondered how you could work and earn money for say 45 years and somehow save enough to fund a further 20 odd years of leisure. Now we know you can’t really.
Of course if you are employed by the state and have a dB pension you might think not your problem.
However if you have a clear disparity between comfortable retirees living off the unfunded civil service pensions, a group of retirees struggling on dc schemes, plus workers paying taxes to sustain both, you might wonder if there is a fight coming.
@ Mr O
Perhaps it was also in the times you could put in over £200k a year, so could just stuff your pension in your final few years of work when hopefully children had left home and had fewer overheads. They used to think about these things and try to help people.
@TA (#8):
Try: https://researchbriefings.files.parliament.uk/documents/SN00290/SN00290.pdf
AFAICT, the paper’s primary purpose (although IIRC not explicitly stated) is do not mess with US SS – IMO the rest is just noise around the edges.
The current UK SP system is effectively flat rate and means tested – ie you get the same out no matter how much you pay in, which IMO makes it pretty mean. Prior to 2016 there was at least an element that was earnings related. Anyway, the current UK SP system has been around for some ten years now and finally people are slowly waking up to what it is – must therefore be about time for another change that will no doubt also promise far more then it ever can deliver!
@Mr O (#11):
Re: “However if you have a clear disparity between ….”
Maybe, but it has been a heck of a long time coming.
My (largely, but not entirely, tongue in cheek) proposal is that the next set of pension reforms start with MP’s pensions ONLY and that the changes be put to a national referendum that can only proceed if a clear majority (say 60%) of the population eligible to vote (ie not just those who can be bothered to vote) agree; otherwise MPs pensions stop entirely! That might help focus some minds?