Plus some good reads from around the web.
Given the competing attractions of street parties in the rain and watching News 24 to spot Prince Philip putting his foot in it, I doubt many will see this edition of Weekend Reading.
Although you are here. Thank you! I won’t overstay my welcome.
Here’s my bit for the Jubilee – a bunch of statistics about investing over the Queen’s 60-year reign, followed by the usual roundup of links.
The UK stock market’s glorious 60-year run
- £1,000 put into the UK stock market six decades ago would now be worth in excess of £1 million, assuming all dividends were reinvested.
- That’s equivalent to a compound return of 12% a year.
- £1,000 of gold bought in 1952 would now be worth £81,360.
- Shares were cheap in 1952. Glaxo Laboratories (the forerunner to GlaxoSmithKline) was on a P/E of 2! Low valuations do wonders for future returns.
- British Motor Corporation, formed in 1952 by the merger of Austin and Morris, controlled 50% of the UK car market, and was valued at £35 million.
Source: Telegraph and The Motley Fool (see links below).
Savers victorious
- Savings now stand at an average of over £150,000 per household, including pensions, investments and deposit savings, compared with just below £50,000 in 1951 (at today’s prices).
- Households have saved an average of 6% of their net income since the 1950s.
- Contrary to how I think it should work, we save more in the bad times. Households saved just 1.2% of income in the 1950s, compared to 7.4% in 2011 and 12.2% in 1980 – both periods when the UK was in recession.
- Wealth in the UK wasn’t evenly spread then or now. In 2011, almost one in three UK households had no savings, while a further fifth had less than £1,500.
- Household savings recorded their biggest rise in value in the 1980s, with a real increase of 115%.
- Savings fell 12% in the 1970s in real terms due to ruinously high inflation.
- Deposit savings’ share of total savings has fallen from 42% to 29% since 1951. Pensions and life insurance’s share has more than doubled from 24% to 53%.
- The gross interest rate offered on no notice accounts has averaged 6.01% over the past 60 years. But in real terms, savings rates averaged 0.29%.
- 1950s ‘Savers’ clubs’ were popular ways to save for Christmas and holidays, even though they paid no interest!
Source: Lloyds TSB.
House prices since 1951: We are not amused
- House prices across the UK have nearly trebled over the past 60 years, up by an average of 186% in real terms.
- Prices have risen at an average annual real rate of 1.8%, slightly faster than the 1.6% per annum average rise in real earnings.
- In nominal terms the average UK house price has increased 7,278%, from £2,200 in 1951 to £162,338 in 2011.
- London has seen a real rise of 189% in just the past 40 years.
- House prices recorded their biggest increase in the 1980s, with a real rise of 42% between 1981 and 1991. That’s greater than the increase of 30% during the last ten years.
- The worst performing decade was the 1950s. House prices declined by 7% in real terms.
- House prices have been the highest in relation to people’s earnings over the last ten years. Prices averaged 4.8 as a multiple of gross annual average earnings between 2001 and 2011, peaking at the highest level in the past 60 years at 5.8 in 2007.
- This compares with the average ratio of 3.9 since 1951.
- Property values were lowest in relation to earnings in the 1990s, when the average house price to earnings ratio was 3.4.
- The number of houses built each year has fallen by one-third since 1951.
- In 1947, more than four in ten households lacked a fixed bath or shower. By 1991, this proportion had fallen to just three in a thousand.
- Nearly two in three households (64%) were without a basic hot water supply in 1947. By 1991, this proportion had fallen to one in a hundred.
- Home ownership has more than doubled over the past 60 years, from 32% of all households in England in 1953 to 66% in 2010-11.
Source: Halifax / Lloyds TSB press release.
Oh, and finally English farmland is up 10,745% over the past 60 years, according to agents Frank Knight.
Enjoy the bunting!
From the blogs
- Financial independence: 23 years later – Mr Money Mustache (guest post)
- A good enough portfolio really is good enough – Oblivious Investor
- Why nobody knows if you should buy Facebook stock – Rick Ferri
- Information begets efficiency – Five Cent Nickel
- The wrong way to use a tracker – The Psy-Fi blog
- Your disaster fund and the best places to hide your money – Len Penzo
- Westfield shopping centre on a £1.75 budget – Simple Living in Suffolk
Book of the week: “God save the Queen”, sang the Sex Pistols. “The fascist regime”. If all this flag-waving makes you want to dye your hair green and urinate on a red post box, then read the classic England’s Dreaming by Jon Savage. It’s only 99p on Kindle
Mainstream media money
- Facebook IPO a brilliant disaster – New York Times
- Jubilee special: 60 years of British blue chips – The Motley Fool
- European shares: A moment for contrarians – The Economist
- India’s economy in difficulty [like China’s and Brazil’s] – The Economist
- Data from US, China, and Europe raise fears of a slowdown – FT
- Mortgage woes for expats returning from Spain and Greece – FT
- Buy in Europe while others are panicking – FT
- Interesting value-index tracker (but it’s a synthetic note) – FT
- Interactive Investor (iii) has introduced quarterly fees – FT
- Investment trust’s record over the Queen’s reign – Telegraph
- Should you try to squeeze a pension from your home? – Telegraph
- Tenants in regulated ‘Fair Rent’ properties sitting pretty – The Guardian
- Hargreaves Lansdown evidence on workplace pensions [Dry!] – Parliament
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Comments on this entry are closed.
BUT … Since 1900
In simple cash terms, £1 put into the British stock market – and with dividends re-invested year in, year out – would now be worth £22,432. But over the same period, prices have increased 77-fold.
BUT, in real terms, the same £1 investment – again, with dividends re-invested – is worth a more realistic £291. That is a healthy enough gain – and far outstrips the returns from investing in bonds.
But the vast majority of the gain on equities comes from reinvesting dividends. If investors spent the dividends as they came in rather than putting them back into shares, the £1 stake from 1900 would now be worth just £1.80p after adjusting for inflation.
GOLD price in 1900 was $19 and is now $1,650
@Max — Absolutely, reinvesting dividends is key to the mega-numbers we see bandied about. That said, shares (and property) do offer a realistic possibility of spending your income while maintaining your capital’s real worth, unlike cash or bonds.
1. Ah, yes, Interactive Investor: VERY disappointing (as is the quality of the relevant ‘FT’ report you link to, but that’s another story). No, I don’t want to trade continuously, Interactive Investor – that’s why I chose your self-select ISA. It was cost-effective for buy-and-hold, passive investors. Not anymore. I should have seen this coming, having experienced several problems with the new, in-house platform and associated customer service. Where should we go now?
2. That Hargreaves Lansdown submission on workplace pensions is ridiculous on the importance of charges – funny that. For example, consider their evidence that investors “aren’t that concerned about charges” (paras 41-43). The only reliable inference from those data is that the public don’t understand the effect of charges on long-term performance. We [the public] SHOULD be concerned about charges. It’s in the company’s interest, of course, that such ignorance persists – their business model is predicated on it.
Thanks, an entertaining roundup of the “long view”, even if it’s a bit too long for most of us.
>Contrary to how I think it should work, we save more in the bad times . . .
Human financial frailty in a nutshell.
> If investors spent the dividends as they came in rather than putting them back into shares, the £1 stake from 1900 would now be worth just £1.80p after adjusting for inflation.
Alternatively, spending the income seems reasonable if the capital is preserved against inflation, which is what I am hoping to do 😉
I love your blog and it has shaped a lot of my investment decisions. Thank you. I would love to know what you think of this: http://earlyretirementextreme.com/the-major-risks-of-buy-and-hold-index-investing.html
In the post, the author writes about risks inherent in index tracking for the long haul. I know that the writer goes against a lot of what you’ve been saying, but I don’t know how he is wrong. If you have a moment, perhaps you could take a quick look at it and pick it apart as I lack the knowledge to do so myself.
Many thanks again for everything.
@Henry — Jacob wrote a lot of excellent and provocative posts, but that doesn’t mean they were necessarily right. That post is basically conjecture that demographic trends will doom developed Western markets to long-term decline. There’s no *proof* of this, and other writers/academics have countered the opposite. Besides all that, the US (where he’s writing) isn’t even in long-term demographic decline and nor, possibly, is the UK, though Europe currently is. (It is immigration that saves the UK and US bacon).
He’s correct though that there’s no guarantee index investing will work, any more than there’s a guarantee that any other selection method will work. What we do know is by definition being active in the market is a zero sum game (for every winner there is a loser) plus everyone investing has to pay costs. Since other research shows there’s no reliable way of identifying someone as a ‘winner’ as opposed to a loser — and the costs are a certainty — the passive indexer’s response is to accept average performance and reduce costs as much as possible, and to hopefully come out rather ironically ahead of those who try to get ahead of the market.
Personally I am not a pure passive investor by any stretch (I trade shares, and also invest in investment trusts, alongside my passive index holdings) but I am not really persuaded that there’s a better approach for most people, or me for that matter. I invest actively knowing full well the risks and low probability of beating the market over a sustained period.
If you could picks superior stocks reliably or identify winning fund managers or trade in and out of the market profitably, all those strategies would beat index investing. But there’s no way of knowing who can do any of that *in advance*. (It’s obvious Buffett, say, did in retrospect. But the past is no guide to future returns, etc). So the passive strategy says there’s no point paying for it.
One modest alternative/additional strand if you’re nervous though might be to target income instead of capital gains. Even if stock markets languish for decades, provided the income holds up you would steadily buy yourself a hopefully rising income stream from the equity component of your investment.
All just my thoughts, not personal advice. 🙂
Re “Buy in Europe while others are panicking”
I’ve got something of a war chest saved up in cash (over 95% of my investible assets are parked in instant access cash accounts). Perhaps I’ve been reading too much Zero Hedge but I still think I’ll keep my powder dry for now.
I don’t have much faith in my market timing abilities but in my opinion downside equity risk far outweighs upside at the moment.
Trouble is, if one rules out equity for the time being, where are the opportunities until the world either blows up or picks itself up?
Bonds are almost certainly in a bubble, as are UK property and gold (perhaps gold less so if your liabilities are dollar denominated, but I’m pretty much all sterling).
I had wanted to start a portfolio along the lines of Harry Browne’s Permanent. I know where I want to get to, but like the Dave Allan joke, I wouldn’t start from here.
Re: Interactive Investor
The email from Interactive Investor justifying the charges was a masterpiece of new speak.
“We believe that customers should be engaged with their investments and actively manage their portfolios”
Pretty much flies in the face of every piece of research I recall reading !
I particularly enjoyed the choices of doing nothing and incurring charges …or doing something and incurring charges.
The only dilemma about transferring is I feel I’m playing russian roulette with my next broker over introduction/increase of charges.
@The Edge of Cultivation
If you want a diversified portfolio then you have to accept that some of the assets are ‘in a bubble’ when you buy them. However in hindsight it’s not the ones you thought.
For HB Permanent Portfolio thoughts and rationale perhaps look at
http://www.gyroscopicinvesting.com/forum/
ZH is entertaining but prolonged exposure does make me want to sit in my cellar, polishing my cans of beans.
Hi Nathan,
1. Totally agree about the wording of THAT email from Interactive Investor. The sentence you quote in fact made me laugh out loud when I first read it last Thursday.
2. What about its subject line? “Pricing Changes” – sounds so innocuous…
Just wanted to say thanks for clearing that up. Investing is really confusing – whenever I feel like I’ve come up with a reasonable strategy I read something on the web that (very convincingly) blows holes in my plan. Now I’m starting to think that almost any plan – and not fiddling with it – is better than no plan and whatever path I choose, the future me would wish he could get into a time machine and tell me to do things differently now.
I think there is a huge gap in the market for a financial advisor who is truly an expert, truly impartial and truly cares. I’d pay thousands to speak to someone like that.