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Weekend reading: Beat the market by saving more

Weekend reading: Beat the market by saving more post image

Good reads from around the Web.

The US investment advisory firm Research Affiliates made headlines this week when it predicted that American savers have a 0% chance of hitting their desired 5% or greater annual returns from a standard 60/40 portfolio over the next decade.

From Bloomberg:

Research Affiliates’ forecasts for the stock market rely on the cyclically adjusted price-earnings ratio, known as the CAPE or Shiller P/E.

It looks at P/Es over 10 years, rather than one, to account for volatility and short-term considerations, among other things.

Research Affiliates is a respectable outfit, but I’m not convinced that anything that spits out a ‘zero’ probability for investment returns should be taken as gospel. (I’m also somewhat skeptical of the utility of CAPE these days, but that’s for another article.)

What I’m sure of is that trying to do better by investing in active funds will serve most US thrill seekers poorly.

Yet as markets have climbed that has been the industry’s siren call (even as the data piles up showing ever more money ignoring them and migrating to passive funds).

Don’t beat yourself up

Remember, active investing at the stockpicking level is a zero sum game.

It’s true in theory that particularly perspicacious managers could sell out of some markets and move into others and generally juggle assets to receive better than 5% returns, but the evidence is very slim – well, non-existent – that more than a handful will manage it.

So the odds your chosen active manager will be one of the few are extremely poor.

By way of illustration, the average hedge fund returned just 0.7% in the decade ending 2014. Indexing guru Larry Swedroe has pointed out that means they under-performed every single major equity and bond asset class in existence.

Josh Brown at The Reformed Broker offered his usual robust retort to the chatter from active managers who claim passive investing “sheep” are about to be slaughtered:

If you’re a purveyor of high-cost, high-tax, high-transaction, high-bullshit, wannabe macro-genius strategies, you might want to look into the things you have so much to say about before mocking others who are doing the best they can to save and invest rationally.

You’re either pretending not to understand this in an attempt to mislead others or you’re genuinely uninformed yourself.

Save the day by saving more

As a long post by the robo-adviser Betterment spells out, the rational approach to low expected returns is not to try to find the next Warren Buffett, but rather to save more money.

It says doing better than average by even 1% a year through investing returns would require a fund investor to pick one of the one-in-three funds that beat the market in a particular year, and then successfully do it again and again for the next 10 years.

For those for whom maths is not a strong suite, let’s just say the odds of achieving that are not worth discussing further.

On the other hand, saving more is guaranteed to boost your final pot, compared to if you’d spent the money instead.

In their worked example, increasing the savings rate by just 8.5% delivered the same outcome as achieving that wildly improbable run of annually switching your money from winners to winners for a decade.

Same difference

Remember, these people are all commenting on the US market. I think our stock market looks cheaper personally and our bond market more stretched – but as always what do I know.

Anyway, many sensible passive investors are in world market trackers these days, and they are massively weighted towards the US market. So the outlook is relevant.

The bottom line is saving a few more quid probably isn’t going to hurt. The alternative responses might well do.

Note: Remember the clocks go back tonight!

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: With inflation looking set to rise towards 3%, the new two-year 0.98% re-mortgage rate from Yorkshire Building Society seems a real bargain. (Real! Geddit? Apologies.) ThisIsMoney points out that high upfront fees and a large deposit requirement means the eye-catching rate won’t be right for everyone though.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • 99% of active US funds under-perform… [Search Result]FT
  • …so no wonder the pool of actively managed money is shrinking — Bloomberg
  • Why not just buy Warren Buffett’s Berkshire Hathaway: Revisited – Mutual Funds
  • Swedroe: Trend following strategies work [Nerdy…]ETF.com

Active investing

  • Investment trusts are back in fashion [Search result]FT
  • A bunch of charts scaring Wall Street types – Bloomberg
  • The Italian banking crisis could get ugly – ThisIsMoney
  • 37 years watching the oil markets – Interactive Investor
  • The spate of big M&A deals might signal a market top… – CFA Institute
  • …then again, IPOs in London are at a four-year low – ThisIsMoney

A word from a broker

Other stuff worth reading

  • Beware this leasehold trap on new-build property – The Guardian
  • Save money in the hour you get when the clocks go back – The Guardian
  • In praise of auto-pilot investing – Morningstar
  • How to protect your home: Tips from a burglar – ThisIsMoney
  • The frugal American footballer and multi-millionaire – ESPN
  • Lucy Kellaway: Being early has everything going for it [Podcast. Search result]FT
  • Wall Street’s push to hire great coders – Bloomberg
  • Elon Musk is trying to prettify rooftop solar power – Los Angeles Times

Book of the week: I’m a bit suspicious of the growing legion of Marcus Aurelius fans, but as a long-time reader of the Roman emperor’s Meditations it’d be hypocritical of me to complain. Not least because I found them via Russell Crowe’s Gladiator! Anyway, it was Bason Asset Management’s turn to riff on Meditations this week, with insights for investors. The author suggests you go for the modern translation, so here’s a link to it on Amazon UK. I’m always wary of popular things. Perhaps this stoic bubble is an (over) reaction to the financial crisis, and it’s time to go long Caligula?

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []
{ 29 comments… add one }
  • 1 Retirement Investing Today October 29, 2016, 12:58 pm

    Anecdotally I can confirm saving more certainly worked for me. My average gross savings rate exceeded 50% for 9 years and the end result is:
    – 61% of my wealth has come from saving; and
    – 39% from investment return on a balanced low expense low tax portfolio of assets which has achieved a CAGR of 6.9% over that period.

  • 2 hosimpson October 29, 2016, 1:25 pm

    Indeed, saving more is my approach as well, and doing everything I can to lower the tax burden is a significant part of this strategy. Now that low interest rates seem to be here to stay for a while, tax is the obvious, and arguably the only available measure. To me that means filling the SIPP first and the ISA later, and forgetting about mortgage overpayments unless there are leftovers.

  • 3 ermine October 29, 2016, 3:17 pm

    It’s a bear that the toughest thing to do is the thing that does the heavy lifting. If you need compound interest to do most of the spadework for you, you’re not going to be Retiring Early 😉

    I think in a Weekend Reading many moons ago you linked to an article which was about the dirty little secret about the early retirement crew. It helps if you earn more than average, particularly if you combine that with spending at the average or less. RIT is the poster child for the combination.

  • 4 The Investor October 29, 2016, 3:29 pm

    I don’t see retiring early as the be all and end all. 🙂 This article is at least as relevant for long term seekers after long term wealth. Over longer time periods, as we’ve debated many times, compound interest works fine. What’s being discussed here is the best response to (supposed!) low future returns.

    @RIT — You keep posting after/in tandem with me on Saturday! Good luck with the rethink.

  • 5 Gregory October 29, 2016, 4:48 pm

    CAPE is like any other ratio. Sometimes CAPE works, and sometimes it doesn’t.

  • 6 The Investor October 29, 2016, 6:30 pm

    @ermine — Apols if that reply seemed a little tart. I was wondering if someone was about to jump me for my phone at the time, but had sunk cost fallacy on having typed half of my reply out and so was determined to finish it before stashing the device away. 😉

  • 7 Naeclue October 29, 2016, 6:44 pm

    Saving more can be achieved by keeping a close track on what is going out. No point saving more each month instead of paying off credit card or ruinous store card debt for example. Are you overpaying for insurance, telecoms or energy because you unquestionably accepted the quote at the end of your contract or fell into a default expensive tariff? Are you really on the right mobile contract ? Can you get a better deal on your mortgage? Are you paying excessive bank charges that could be saved by switching to a different account or bank?

    There are lots of simple things that many people can do to cut back on outgoings that would give as good if not better payback than skipping a few coffees.

  • 8 Naeclue October 29, 2016, 6:51 pm

    Another good one is to chase compensation when it is due, but you do sometimes have to work hard to get it. I have had quite a few free trips to Scotland, courtesy of our lousy rail system.

  • 9 ermine October 29, 2016, 7:30 pm

    @TI no worries – sounds like a tough Saturday evening, glad it worked out OK!

  • 10 Steve October 29, 2016, 8:14 pm

    I usually enjoy the ‘This is Money’ links, but this really annoyed me:

    —“Fit a British Standard approved alarm system. It can cost more than £1,000 to install – but if it prevents you being burgled it is money well spent. Be aware there may be annual ‘maintenance’ costs of up to £100 required for insurance purposes.”–

    Amazing how some scams are spotted and stopped, while others are allowed to continue. My parents had an installed alarm system costing them an arm and a leg and with additional annual maintenance costs. I fitted a DIY Yale Wireless system myself which cost approx 150 pounds, but I added more PIRs and contact points, so approx 250 max.

    Required fixing contacts to doors and windows that even my bloody awful DIY skills could handle. It’s far superior, being connected to the phone, and maintenance is dead easy. The two factors are communication with control console and battery life, which are monitored, and additional alarms sent if a contact is not fixed securely.

    Living in Italy, the alarm systems here are even more expensive than the UK, and what put me off was hearing how a neighbour was robbed by the guy who installed his alarm!

  • 11 Hariseldon October 30, 2016, 12:15 am

    On the accumulation of (relative) wealth

    1) Spend less than you earn, without this there is no step 2)

    2) Save as much as you can, so you don’t have to later.

    3) Initially investment returns are a fraction of what you save on a regular basis, it doesn’t take many years for the situation to reverse, this is a major milestone.

    4) Investment returns exceed your spending ( this is much easier, the less you spend! Step 1) )

    5) Investment Returns exceed your income, you can consider retiring.(about 15 years)

    6) My experience is that 9 years after retiring, investment returns significantly exceed spending, despite more generous spending.

    7) Virtuous circle.

    9 years of ‘retirement’ , the capital is about 75% ahead of where it was in 2007 in real terms.
    Spending then was around 4% of capital pa and now is around 2%

    Method , initially mostly Investment Trusts and now mostly passive equity ETF’s

    Returns around 12%pa over 25 years , clearly recent returns measured in sterling have been flattered by the relative strength of overseas currencies,( with a mostly global equity portfolio ) Its interesting that since starting in 1990 my cumulative returns have always averaged around 12% pa from 1990 ( with the exceptions of major dives in 2001/2 and 2008/9). That’s clearly not great but its been enough to become financially independent and to be able to afford most things, but my first step along the road was that when you can afford something and don’t need to borrow, you frequently decide not to buy. It makes saving much easier..

  • 12 freebird October 30, 2016, 1:50 am

    Clocks run another week on summer time this side of the pond, it’s how we ‘save the day by saving more’.

    My guess is that active investing performs better on one’s own pot than on other people’s money. I also keep a sealed trading account, funded just once with a lump sum of a year’s gross pay eighteen years ago and it’s multiplied a bit over seven fold since then. My secret? I don’t know, but I suspect it involves my lack of formal training in business and finance. Never owned an ETF or index fund. Nor do I discuss specific investments with others.

  • 13 Malcolm Beaton October 30, 2016, 10:00 am

    Hariseldon-are we following the same path?
    Retired 13 years on 4% withdrawal rate -now about 3.5%
    Been through the Investment Trust route but now in a 3 fund Global OIEC Portfolio of Vanguard Index Funds
    Capital well ahead of 2003 start
    Don’t differentiate between income and capital-run funds in accumulation mode-Sell chunks of capital as required
    Seems to work for me!

  • 14 zxspectrum48k October 30, 2016, 10:59 am

    @Hariseldon. Those are great returns but when long-dated Gilts have generated 9-10% annualized over the last 25-30 years, shouldn’t we wonder whether we might just have already PVed upfront a chunk of the investment gains for the next decade or two? Returns have been as much a function of lower discount rates than economic growth or productivity, both of which are disappointing. I find a 2-3% real return perhaps a more reasonable assumption to work with; 5%+ real returns are clearly not a zero probability then again neither are negative returns.

    ER blogs have been in a sweet spot given high returns on all asset classes in recent years. Some ER blogs still propagate the idea that you can simply retire when you hit 25 times your spending (4% SWR etc); this could turn out to be irresponsible. Even a 5% real return is only consistent with a 3% SWR, a 2-3% real return with say a 1.5%-2% SWR etc.

    More emphasis is needed on the fact that saving more is really the only guaranteed way to ER. Moreover, the blogs need to admit the positives specific to their situation (earn far more than average, childless, final salary pensions etc). In a world of stagnant wages and where supporting your children is becoming ever more critical (uni fees, house deposits etc) then amassing a “stash” for ER is a niche only available to a few.

  • 15 Retirement Investing Today October 30, 2016, 11:25 am

    I agree with you. I’ve been saying for some time that those purporting 4% SWR equals ER without stating what it’s based on are irresponsible to say the least. Personally, based on my own research I’m going to start with a SWR of 2.5% (plus investment expenses of 0.25%) and we’ll see how it goes from there.

  • 16 The Rhino October 30, 2016, 2:11 pm

    @Hari what prompted the move from ITS to ETFs? Costs? It is interesting to observe as returns start to outpace salary. Once salary gets below say 10% of total income it really brings into focus whether the time spent working is of value.

    @MB i like the minimal portfolios. What OEICS did you go for. Sounds like you’ ve got ACC versions. What swung it over ETFs as usually these are cheaper to hold?

  • 17 Neverland October 30, 2016, 3:41 pm


    1 + 2 of your list you can have some control over, but mostly its luck

    3 -> 7 are just totally luck really, which can run good, bad or somewhere in between

    I find it really funny when people pretend thats its anything else

  • 18 The Rhino October 30, 2016, 5:49 pm

    Well you’ ve got to be in it to win it as they say. If you don’ t save anything then you cant get lucky with the returns. But a 12% average over 25 years is definitely a good run of it. I would take that if it were on offer for sure.

  • 19 The Investor October 30, 2016, 7:18 pm

    I’ll just add that it is very possible for compound interest / subsequent investment returns to make a difference long before you’re old/rich. It’s hard to believe in ‘The Snowball’ until it happens, but it does happen, even in the murky markets we’ve had over the past few years.

    I do feel if I bust out the numbers like some other bloggers the point would be made quite plainly, but that’s not a road I’m currently going down here (I’ve stalled on my returns post series, let alone real money revelations!). You can see the maths for yourself though if you play with a compound interest calculator.

    Of course you absolutely do have to save hard to get the process started, especially in the first decade or so (a 5-10% savings rate isn’t going to cut it) and you do need to assume a lot of risk (i.e. equities) in at least a fair market (or be a rare market beater).

    But over a decade or so, regularly saving every year (i.e not all-in ride from peak to trough) and reinvesting income, the US and UK markets have largely delivered adequate returns for generations.

  • 20 Malcolm Beaton October 30, 2016, 7:34 pm

    Hi Rhino
    VanDevWorldexUk,VanFTSEUKAllShare and VanGlobalBondIndex-HedgedAcc(GDP)
    A High Int Building Society for a cash float and that’s it
    Did not use ETFs cos not available at the time.
    Not worth changing now-not a trader!
    Just rebalance as required and sell “chunks” of capital as needed
    I keep a years cash requirement in the Hi Int BS Acct at all times. For day to day spending-top up current bank acct from HiIntBSAcct

  • 21 The Rhino October 30, 2016, 8:11 pm

    @MB very nice, good work keeping it simple. About 1/3 each is it not inc the cash float?

  • 22 The Rhino October 30, 2016, 8:26 pm

    @TI i would concur that the old snowball is a very real phenomenon.

    Just look at RIT. He s the best part of quarter of a mill up in 9 months.

    When you weigh that up against an annual spend circa 20k the whole thing is just crazy

    It creeps up on you then blows your mind!

  • 23 Steve October 30, 2016, 9:20 pm

    –“VanDevWorldexUk,VanFTSEUKAllShare and VanGlobalBondIndex-HedgedAcc(GDP)
    A High Int Building Society for a cash float and that’s it.” —

    I do love simple asset allocation schemes like this one and this is something I have to address in the next five years, having collected an enormous number of ETFs, ITs, HY shares etc over the years. They need a savage pruning! My only worry would be having everything in one provider, i.e. Vanguard.

  • 24 Malcolm Beaton October 30, 2016, 10:45 pm

    Hi Rhino
    Asset Allocations are very variable due to different personal circumstances
    I have made enough in my “pile”
    Do not need to take any more risk
    My Asset Allocation
    26% VanDevWorldexUK
    4% VanFTSEUKAllShare
    66% VanGlobalBondIndexFund
    4% HighIntBS Acct-Cash

    Steve-Admittedly all with Vanguard-read about this outfit and their originator John Bogle
    I am as safe with them as anywhere but I take you point and keep vigilant!

  • 25 Hariseldon October 30, 2016, 10:46 pm

    Costs and the realisation that with my collection of IT’s looking through the mixture of underlying assets was not a sesnsible unified portfolio.


    The choice of investment vehicles and allocation of assets does make a difference to outcome. Many savers in that era chose endowment policies….if you choose to suggest that the outcome of an investment policy is all luck I would disagree.

  • 26 FrugalFox October 30, 2016, 11:03 pm

    I’m looking at around 55% savings rate at the moment. (This doesn’t include my work pension and my work SIPS). That is cutting it quite tight although I am pushing to hit 60%. I suppose as mentioned above not having children is a significant advantage when it comes to saving.

  • 27 ermine October 31, 2016, 12:32 pm

    > It creeps up on you then blows your mind!

    @TI I have to confess that I am also seeing some respectable evidence of compound interest, after saving the max into ISAs and elsewhere, starting from 2009. And reinvesting nearly all of it.

    But the younger me had no chance to save at that rate until he turned into the older me. And still by far the majority of the principal is from saving hard, although I can imagine that will change soon, as my investing career is almost over as far as saving.

  • 28 The Rhino October 31, 2016, 3:49 pm

    Yes I think I probably need to serve up a slice of humble pie to TI as I’m sure I’d sided with the ermine in the past about compound interest not being all its cracked up to be. Or maybe its just the brexit bounce getting me all excited over imaginary gains??

    ..Nah – compound interest is pretty good when it finally decides to turn up..

  • 29 The Investor November 1, 2016, 4:01 pm

    @Ermine @The Rhino — Yes, you do need to have a decent chunk of capital for the snowball to start visually impressing, but when it does… As I say I’m in my early 40s and I can see it already, big time. I’ve been saving longer than @RIT as I understand it but earning way less throughout and so saving less in absolute terms, so there are different ways to skin the apple.

    I still think you could have saved more when young Ermine — that you chose not to (or didn’t think of doing so) is fair enough but not an indictment of compound interest. 🙂 If you *had* been bunging lots of money into the market from the early 1990s, then you wouldn’t have “had” to take the drastic route of massive savings that you tend to talk up 20 years later. 🙂

    But as long as we all get there in the end, that’s great, and I know you wouldn’t have given up your hanging about drinking with the BBC club girls (or was that me in the early 2000s? 😉 )

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