Some good reading from around the Web.
After this week’s post on historical house prices, reader Guy asked if it was sensible to use a Real Estate Investment Trust (REIT) to save for a deposit on a first home.
The big problem with this strategy in the UK is there are no residential REITs!
Some companies have made noises about launching them here, but currently all our REITs invest in commercial property – and the prices of offices and warehouses don’t move in tandem with suburban semis and Rose Cottages.
There are residential REITS in the US, however, and coincidentally Mike at Oblivious Investor looked at this same question from a US perspective this week.
Mike concluded that it’s better to save for your house in cash, warning:
A REIT fund will likely earn you greater returns than a savings account would. But when I say “likely” here, all I mean is “greater than 50% probability.” It’s not at all something you can count on. And it makes the worst-case scenario significantly worse (home prices increasing while the value of your savings is decreasing — something that can’t happen with a savings account).
Of course, you could always do what I did: Save in cash for years, get fed up with chasing London prices, invest your warchest in shares and bonds and so on, and become obsessed with investment.
That can work – I could buy a modest first London home now without a mortgage. But there are other downsides, such as boring people at dinner parties with your talk of total expense ratios and DIY Guaranteed Equity Bonds.
Still, it makes a change from the usual house price chat!
Investment and money blogs
- Review of Thinking, Fast and Slow – Swedroe / CBS
- Idiot noise traders – The Psy-Fi blog
- How I got away with not saving in my 20s – Simple Living in Suffolk
- How much diversification is enough? – UK Value Investor
- Follow the script – Beddard/iii blog
- Everyone should use the overnight test – Bucks Blog
- The liquidation of government debt [PDF] – BIS
- How compounding fees bleed retirement accounts dry – Wade Pfau
- Self-indexing: Cause for cheer or concern? – Index Universe
Deal of the week: Gillian Tett’s excellent dissection of the financial crisis, Fool’s Gold, now costs just £4.99 on Kindle
Mainstream media
- Bond fund managers face a scary future – Wall Street Journal
- Gold bulls driven by emotions – Wall Street Journal
- Rich hedge fund managers, poor clients – The Economist
- How ‘flippers’ made the US property boom/bust worse – Slate
- Why we shouldn’t guarantee all bank deposits – Salmon/Reuters
- UK government to tighten screw on top pay – FT
- Cash offers for current account switchers – FT
- Fund manager success is down to luck – Merryn/FT
- Mortgage squeeze fuels surge in buy-to-let – Telegraph
- Virgin launches ‘gimmick-free’ savings accounts – Telegraph
- Gold mining shares target rich seam – Independent
- Five questions on becoming self-employed – Independent
- There’s never been a better time to change careers – The Guardian
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London and Stamford already have some blocks of residential flats in their portfolio, but I still wouldn’t invest in them to save for a house deposit.
IG Index does a UK House prices index spreadbet, though note you’ll have to roll over the spreadbet each year, and there is a lack of transparency as to what exactly they mean by house price (what index etc).
There’s something to be said for it for people who are fearful of house prices running away from their deposit, ie they save 20k=10% and wake up in six month’s time to find 20k is only 5%, if for some reason they expect house prices to double… They do of course need to understand how spread betting firms make their money and feel comfortable with the risks.
I think the Monevator way of buying a house scores, personally. If you’ve saved up enough of a war chest to buy a house cash then you save on all that interest, and miscellaneous shaftings like mortgage indemnity guarantees, arrangement fees, churning fees, though of course you’re paying rent at the same time which defrays some of that interest. Nevertheless, you must be doing something right, because you’re competing with those foreign cash buyers, and keeping up!
@ermine — I should clarify, it is a home / flat I could buy in London, but not a house in Knightsbridge! 😉
So it’s not you who’s the mystery buyer for the penthouse suite at One Hyde Park or The Shard, then…?
Howdy, thanks for the link. I think that any kind of volatile investment is probably too risk for something as short term as a house deposit. Even if you’re window is 10 years then unless you really know what you’re doing (and even if you do!) REITs and the stock market and any of that stuff might just be trouble. Especially if you’re saving from scratch.
Typically with a substantial portion of a fund being drip fed in each month, that incoming money is the big driver of growth rather than the investment vehicle. So I’d probably just say stick it in a fixed term bond or something and be happy with 3 or 4 percent a year and the knowledge that you won’t lose money.
@ermine — Afraid not! Sometimes I think I should move further out from London, but further UP doesn’t really solve anything 😉
@ investor
have you read ‘Thinking, Fast and Slow’?
I’m just finishing off ‘black swan’ which I really enjoyed. I think there is a lot to be said for Taleb’s ideas, just a bit unfortunate his personality gets in the way at times (some sections are unbearable in this respect)
I notice he is a collaborator with Kahnemann which makes me think this might be a useful read also.
Taleb hinted at a black swan investment strategy, but I find it difficult see how it would work in practice.
Anyone incorporate it into their portfolios?
Here’s a good video featuring a Kahnemann lecture:
http://monevator.com/2010/03/03/wasting-money-on-memories/
And a short primer on behavioural economics:
http://monevator.com/2010/07/27/behavioural-finance/
Taleb’s ‘Fooled by Randomness’ and Black Swan really opened my eyes to the dangers of complacent bankers, who previously I’d just considered grossly overpaid. This was before the credit crisis, too.
Unfortunately he’s achieved his fame and the public’s ear well after the crash proved his point, and some other little-read book by someone entirely unknown is doubtless pointing to the next and different disaster to come!
@investor
cheers for the links… I think Taleb is almost certainly right, which is sort of exhilarating and terrfiying at the same time.
Question is, armed with that knowledge what is the plan of action? – I think it probably differs slightly from the general thrust of advice delivered here.
By that I mean a portfolio with a greater % in lower risk fixed income assets (say 95%) and 5% in highly speculative assets (exactly what these assets should be I don’t know). This is what Taleb hints at.
But I’m not convinced this really works, chances are the 95% will deliver a poor return and the 5% will deliver nothing.
I’m starting to think Ermine is right i.e. you’re very best financial option is to maximise earnings… compounding interest is perhaps a white elephant to which we cling a little too tightly
@Investor,
Why aren’t their residential REITs over there? You would think there is the demand given the sophisticated UK investment market?
@Evan — As far as I’m aware our commercial property sector was just structured (/listed) differently by tradition. We didn’t even have REITs until early 2007 (unfortunately they were introduced at the very peak of that bubble, and the much-hyped tax advantages pushed the last few breaths into the bubble before it burst).
REITs do seem to fair differently outside of the US. The Japanese residential REITs have been a decidedly murky affair, for example.
@Ben — Well, Taleb would agree as I read him to an extent, in that he might think for instance that graphs showing the resilience over time of the US or UK stock markets for the past 100 years are meaninglessly reassuring unless you also think of graphs of the pre-revolutionary Russian market, say, or asked an early 20th Century property investor in China what he thinks of the safety of such an investment!
i.e. Entire markets fail, but we forget due to survivorship bias.
On the other hand, averaging into investments over the long-term via a tracker is a sort of Taleb-ish acceptance that you don’t know the future and you’re not as clever as you think, so just play the percentages as best you can, and have a plan B and C.
The stuff he was really angry about were for instance bank-issued securities that were assumed to be impregnable, and levered up to the gills on the perceived security of a bank, who he correctly saw as hugely over-geared punters on booms. Think, with hindsight, those dubiously constructed mortgage backed securities and the like. Retail equivalents might be guaranteed equity bonds that are assumed to only fail in utterly unlikely circumstances that are, in fact, quite likely. (Taleb is effective at revealing how ‘long tail risk’ is really often as bushy as your local fox!)
Regarding the general thrust of this blog, you must take your own perception of course, but I think I’ve stressed many times in the past that every investment can fail you and promoted massive diversification. I have celebrated cash-heavy portfolios many times. I’ve also suggested in comments to readers that they spread their money even between different index trackers and fund platforms, once they have a worthwhile lump sum, such is my paranoia! 😉
Taleb had a hedge fund that tried to put his theories into practice (basically treasuries teamed with out of the money options and the like, as I understand it) but I *think* it was wound up after mediocre returns (or reception).
Re: Ermine, I certainly agree getting a load of income in is a grand plan. But I just don’t really see his overall point — investing a little regularly from an early age doesn’t preclude late radical saving at all in any way, it just gives you a massive extra string to your bow. Saving £50 a month for your life isn’t going to do enough for anyone except perhaps a newborn, on that we’re agreed.
Thanks for the follow-up on my questions the other day, interesting to read the further comments on here. I’m not sure I’m sophisticated enough yet to follow Ermine’s suggestion but I will keep investigating!
Best regards,
Guy
@investor
I particularly liked Taleb’s observation that every few decades the banks lose more in a single ‘event’ than they have ever made previously in the history of banking up to that point. I think thats astounding; not just the fact that its happened, but the fact it keeps on happening…
@ben – The bankers themselves, as with the fund managers, make on the ups and don’t lose on the downs. As long as this remains true, we’ll continue to see mad gambling to try and boost bonuses, which will always come crashing down again.