What caught my eye this week.
I enjoyed Ben Carlson’s response to the GameStop ferment this week.
He could have dived into the minutia of gamma squeezes and Reddit lore. But instead the Wealth of Common Sense blogger and Weekend Reading favourite dived into his archives.
Ben decided to reprint a chapter of his book Everything You Need To Know About Saving For Retirement. In it he explains how he helped his then-girlfriend (miraculously now his wife) to get familiar with market volatility with data like this:
It’s a golden oldie, and foundational to long-term investing.
As Ben writes:
Many people compare the stock market to a casino but in a casino the odds are stacked against you. The longer you play in a casino, the greater the odds you’ll walk away a loser because the house wins based on pure probability.
It’s just the opposite in the stock market. The longer your time horizon, historically, the better your odds are at seeing positive outcomes.
There’s something grounding about returning to old writing and classic wisdom when confronted with a new tumult, don’t you think?
They’re more like guidelines
Of course religions have been doing this sort of thing forever. Anyone who grew up within earshot of a holy book-quoting relative can attest to that.
And indeed it’s too complacent to get religious about investing.
The US stock market doesn’t have a preordained right to 10% returns a year over the long-term – let alone to spank the pants off other markets around the world for years. Equities in general aren’t totally guaranteed to deliver higher returns than bonds, say, even if you hold them for a generation or two.
But there’s many good reasons to think they should. Implicitly, whether we invest passively or actively, we put our faith in that, and other investing ‘truths’.
The point is to – just like a church go-er trying to weigh up contradicting passages and the strong suspicion they’ve sinned – achieve a balance.
Trust in shares for the long-term, but have some bonds and/or cash.
Don’t watch your portfolio every day if you’re a passive investor. But tune in once or twice a year to rebalance and check everything is on-track.
And so on.
Amen.
Forgive me father
Okay, so Ben is not a saint. He did also deliver his own hot take on the GameStop squeeze. Several hot takes in fact, including in his podcast.
Ah well, we’re all only human.
I wonder which version his wife got this time if she happened to ask about GameStop?
I also wonder where to find these eligible people who’ll marry someone who explains the stock market to them on a date. They elude me!
Have a great weekend.
From Monevator
Fighting the Financial Independence demons – Monevator
Regulators must leave investors the chance to be spectacularly wrong – Monevator
From the archive-ator: Bring me sunshine [From February 2020, when markets took their first Covid hit] – Monevator
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
House prices falling as stamp duty boom loses momentum, says Halifax – Guardian
Energy bills to rise for about 15m UK households as Ofgem lifts price cap – Guardian
Jeff Bezos is stepping down as Amazon’s CEO – BBC
Predictions for what could be in the 3 March Budget – Which?
(Click to enlarge the good news)
Israel’s vaccine programme gives hope to the world – The Economist
Products and services
RateSetter is returning all cash to investors and becoming a lender – RateSetter
‘Buy now, pay later’ firms such as Klarna to face FCA regulation – Guardian
What negative interest rates would mean for your pension, savings, and debt – Yahoo Finance
Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade
A guide to the best UK restaurant meal kits – Guardian
New platform Raindrop claims to set self-employed up with a pension in ten minutes – ThisIsMoney
Homes on the top floor, in pictures – Guardian
Comment and opinion
The GameStop drama was misleading. The surer path to wealth is extremely boring – New York Times
The best way to manage sequence of returns risk – A Wealth of Common Sense
Baroness Altmann: UK investors need better protection from the FCA – TEBI
Friends don’t leave friends holding the bag – Abnormal Returns
You can’t control the outcome, only the process – The Escape Artist
Americans are gambling in the stock market, and much else – Slate
Larry Fink: “…in coming years, pension funds are only going to be investing in sustainable, customised indexes” [Couple of weeks old] – CityWire USA [h/t Abnormal Returns]
GameStop: Short stories
GameStop saga overhauls the hedge fund business – SL Advisors
This furor has inflicted lasting pain on the long/short model – Bloomberg
Benn Eifert on how retail trading is rocking markets [Podcast] – OddLots
Wall Street thanks you for your revolution – The Reformed Broker
The price-value feedback loop – Musings on Markets
The GameStop affair is an example of ‘platform populism’ – Guardian
Naughty corner: Active antics
A rare interview with star stock picker Nick Train [Video] – ThisIsMoney
Silver surge could signal coming commodities boom [Search result] – FT
Disruptive Innovation with Ark’s Cathie Wood… [Podcast] – via Apple
…and a disruptive model portfolio for 2021 – Telescope Investing
What do short-sellers really do? – Noahpinion
Vlad Tenev: it’s time for real-time trade settlement – Robinhood
People buy riskier stocks when trading on a smartphone [Research] – SSRN
Covid and politics
Virus cases show clear signs of fall in most of UK – BBC
One Pfizer jab gives better-than-predicted 90% protection after 21 days, but risk of infection doubles in the first eight days after vaccination [Presumably because the vaccinated become less cautious] – Guardian
Israel says vaccine has almost halved Covid cases in over-60s – Reuters
How AstraZeneca’s vaccine was hit by flawed trials, defects and politics, but might still save the world [Search result] – FT
Brexit: The economic cost of absurdity – Advisor Perspectives
Kindle book bargains
Need a Kindle? Buy a Kindle and save a ton of living space, too.
Quit Like A Millionaire by Kristy Shen and Bryce Leung – £0.99 on Kindle
Elon Musk: How the Billionaire CEO is Shaping our Future by Ashlee Vance- £0.99 on Kindle
The Six Conversations of a Brilliant Manager by Alan J. Sears – £0.99 on Kindle
The Smartest Guys in the Room: The Scandalous Fall of Enron by Elkind and McLean – £0.99 on Kindle
Off our beat
Off-road, off-grid: the modern nomads wandering America’s back country – Guardian
Insults and expletives turn parish council Zoom meeting into internet sensation – Guardian
The relentless Jeff Bezos – Stratechery
Want to get out alive? Follow the ants – Nautilus
The terrifying warning inside the Earth’s ancient rock record – The Atlantic
Americans don’t know what urban collapse really looks like – The Atlantic
Seed-sized chameleon may be world’s smallest reptile – Guardian
And finally…
“Always remember that short-term is two to three years, and long-term is 20-plus years.”
– Tim Hale, Smarter Investing
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Comments on this entry are closed.
My son opened a trading account this week – hes an independent sort financially, reddit inspired no doubt. His question to me was what would happen if everyone invested a regular amount over a lifetime, as using a 10% annual growth he was predicting a quite reasonable 300 million of a return after 100 years or so. Can every passive investor ‘win’ indefinitely?
Please do tell where I can get 10% annualised guaranteed!
@Calculus – I guess, if Global growth continued for indefinitely. But at the moment, we’re a closed system reaching (breaching?) it’s limits, so maybe we’ve reached the high water mark?
@TA – maybe Ben played the long game and held off discussing risk appetite until the second date? Of course, that risks the unnecessary expense of two dates, but maybe he just included it as a “trading cost” in his net worth tracking spreadsheet?
@Calculus — Smart kid. I do sometimes wonder if this is the flaw in the rise of passive investing, too, given that everything financial tends to have a flaw. (To be clear it would be a flaw in active investing also, since its aggregate returns *are* the market returns. However the assumption here would be passive investing makes capturing those returns so ‘easy’ that far more people invest in the capital markets).
I suppose what would happen if everyone invested in that way would be that equities would be bid up by the demand and trade at higher valuations, and expected returns would tend lower. There are people who believe this is already happening. (That expected returns now should be lower because investing is cheaper / diversification is easier / fraud less an issue / accounting standards better).
@Brod — You write:
@TA? @TA? This is the second week in a row this has happened! 😉
Not only has @TA *never* put in the hard yards to harry about the place collating Weekend Reading — preferring to dictate his passive investing and Financial Independence essays from his bed over toast –- but I think Mrs Accumulator would take a dim view of him prospecting for dating tips on this website…
Anyone else spot this in the FT?
Even professionals with a background in finance have been caught off-guard. Michael, a corporate accountant who asked that his last name not be used, said he moved his $69,000 Vanguard retirement account into GameStop shares when they fell to $230 per share on Monday. Yet as the shares continued to tumble, he offloaded his holding on Tuesday, crystallising a $42,000 loss.
“I built that . . . balance over a three-and-a-half-year period,” he said. “And in a moment of intense hype, in a moment of weakness for me, I messed it all up in a matter of a day.” The 27-year-old said he believes he can bounce back from this loss by the time he wants to retire. “But I should’ve known better.”
@Chris — Ouch! Still, better to learn that lesson when you’re 27 than 47, let alone 57… Besides the speculating on active shares aspect, the other issue is this tendency people have to go ‘all-in’ on even outlandish investments. You hear about it all the time in platforms for grievance or misadventure, such as Money Box or ThisIsMoney. Obviously it’s sad, especially when someone bet their life savings on just one spot on the roulette wheel. But never, ever do it. I wouldn’t even put all my money in Vanguard on one platform, as I’ve said before:
https://monevator.com/understand-your-investment/
> what would happen if everyone invested a regular amount over a lifetime,
What would have happened is that we would have solved the problem of poverty. The vast majority of people don’t invest in (insert passive vehicle of choice) because they don’t have any spare money.
A fair chunk of small part left that do earn enough to have spare money spaff it all on lifestyle inflation. I was that guy for a fair chunk of my working life. So your son can chill out. Investing is minority sport because of the deferred gratification, and the firehose of advertising telling us all that we’re worth it to Have It Now.
@TI – food for thought… I’m all in on Vanguard and direct on their own platform too.
BTW: Monevator did a good piece on when Vanguard platform fees get expensive… there’s a tipping point at mid five figures?
Thanks as ever…
Thanks TI, I enjoyed reading the sequence of returns risk article which again helps me feel right in including bonds in my fund of choice. I sometimes get berated for not being at least 80% in stocks and sometimes not being 100%. I know during the accumulation phase if there’s a long time span then 80% is fine for most as is 100% for some but I am happier at 60%. I think I will stay at 60% even in retirement as I will include a big buffer in my pot. I also enjoyed the how to win at the stock market article.
As for COVID, at the hospital I work in. Finally things are starting to look better. We pretty much ran out of beds on Wednesday and the sickness rate isn’t great with staff but from Thursday we have seen good improvement. Let’s hope it continues that way. We are all confident at our trust we our now past the second wave peak.
Have a great weekend all 😀
TFJ
Just how big a threat is the FCA to the public? Enquiring minds want to know.
Great set of links, once again!
@Chris. Honestly, why would a corporate accountant know anything about trading shares? I’m a portfolio manager and I don’t know anything about accountancy.
We’re all specialists. I’ve been a professional in trading and know squat about trading shares. Interest rate swaps, bonds, futures, FX spot, FX options, yes I trade those all day long. Single name stocks not once in over two decades. Don’t play unless you know you have a competitive advantage.
> I wouldn’t even put all my money in Vanguard on one platform, as I’ve said before:
This is an interesting comment and also echoed by Baroness Altmann in the TEBI article. She was talking about H-L.
But to me, the words “too big to fail” spring to mind.
The FSCA limit as we all know is £85k. So if you have a sizeable holding (say £1m to fund a modest retirement at today’s rates) then what to do? I’d need 12 accounts with 12 different (cheap) tracker funds/platforms. Actually probably more like 24 accounts (ISA and SIPP). And each time your portfolio rises over another £85k you need to find another cheap fund/platform. Etc. Aside from being a management nightmare it’s not practical because there just aren’t that many cheap funds/platforms (esp. if you consider all-in-one funds like lifestrategy). So how far should one go?
In the highly unlikely event that Vanguard or H-L somehow imploded (probably through fraud/mismanagement) the US or UK taxpayers respectively would be doing everything they could to prop them up due to the economic a-bomb that would otherwise strike, as so much money is tied up. And you can be very sure that if Vanguard imploded then others would either be caught in the shockwave eg BlackRock etc. Either directly or indirectly. Large swathes of pension funds and individual investors losing life savings doesn’t make good headlines (or re-election prospects).
But a risk is still a risk sure.
@An Admirer — As I’ve always said, I’d personally split a big portfolio between two for sure. The difference between “all your eggs in one basket” and “half your eggs in one basket and one half in the other basket” is night and day if something goes wrong.
After that it’s diminishing returns. (I would and do have several more accounts, but each to their own. 🙂 )
I agree with you about ‘too big to fail’, there likely would have to be some kind of bailout (presuming it was possible in whatever scenario caused the failure). But remember it can take a while for that bailout’s proceeds to hit your bank account. We saw that with some of the bank failures in 2008.
So you might appreciate* the liquidity of having access to a pot of cash in a still-functioning account, versus if you had everything in one pot and you were locked out for several months or even longer.
*/sleep at night, and keep your hair. 😉
This is something I also worried about. I went for three. Iweb, HL and AJ bell and specifically moved away from such a heavy vanguard weighting. I got AJ bell by accident as they provide iweb sipp. I am still very heavy vanguard though, will prob work on this over time. Agree targeting fcsc limits doesn’t make sense when your portfolio grows
Does anyone know for sure how FSCS protection works for investment platforms? I had rather assumed that since the actual shares or funds are kept separate from the company’s operational accounts in a special holding account, they would be secure if the company suffered financial failure.
Obviously there would be a shortfall if there was actual fraud (i.e. they told you they had bought funds when in fact they hadn’t) but I assume that would be pretty obvious at audit.
Really helpful discussion re splitting investment pots. Thanks everyone.
Any chance a link could be added here to the article on fees at Vanguard and the point at which they become more expensive than some other options?
Thanks again
@AnAdmirer
‘In the highly unlikely event that Vanguard or H-L somehow imploded (probably through fraud/mismanagement) the US or UK taxpayers respectively would be doing everything they could to prop them up due to the economic a-bomb that would otherwise strike’
I’ve got to admire your optimism there.
When Woodford Investment Management collapsed what did the authorities do? Nothing.
What did the government stump up when Equitable Life went bankrupt in 1999? Less than half of what policy holders lost. I think it was about a quarter in fact.
Caveat emptor.
The median household wealth in the UK is only about £300k.
The idea that government’s elected by these tax payers will make people with six or seven figure sums invested with a private company whole is very wishful thinking.
Why do you think Robinhood ran around raising $3-4bn of emergency funding these last couple of weeks?
Capitalism=/=Bail Outs
@Chris — I’ve asked @TA if we did a specific Vanguard costs article, as I can’t remember it. Which isn’t definitive, given my languorous lockdown-addled state.
However @TA did post a general article on comparing platforms to see which is cheapest:
https://monevator.com/work-out-cheapest-platform/
We also posted this article on working out whether it’s worth switching funds, which you may be conflating?
https://monevator.com/switch-to-cheaper-index-funds/
@Jonathan B
‘Obviously there would be a shortfall if there was actual fraud (i.e. they told you they had bought funds when in fact they hadn’t) but I assume that would be pretty obvious at audit.’
Its actually not an auditors job to look for fraud but to verify that accounts are true and fair.
Apart from outright fraud, if a platform fails your underlying investments should be fine (apart from the cash maybe) but you might not be able to access them for some time.
We used to use multiple brokers, but I consolidated everything down to 2 a few years ago. SIPPs are with HL, ISAs with iweb, unsheltered investments are across both. Cash is scattered across multiple FSCS protected accounts. Used to use NS&I but not since there interest rate dropped to zero! We have current accounts with 2 different providers. Investments are in OEICs with iWeb, ETFs with HL, which complements their charging structure. ETFs/OEICs are across multiple fund managers.
That is dividing the eggs as far as I consider necessary. We could easily cope with both HL and iWeb assets being locked up for months as we have several years of cash to draw on.
One thing I am very uncertain about is the status of the funds we hold in our flexible mortgage. The mortgage is largely paid off with funds in the offset account, but these funds are in excess of the FSCS limit. Santander have been completely unable to give me a clear explanation as to what would happen to these offset funds if they went bust.
@Neverland, thanks. I see what you mean that auditors aren’t looking for fraud as such, but I assume that they would want to see that client money paid in for funds and funds actually bought reconciled.
You reassure me though, that the risk isn’t of all money with them. I did suspect more than £85K cash would be an issue.
Beyond that there is the risk of failure of Vanguard (or other fund provider). Again as far as I see there should be the underlying share holdings held separate from corporate or other risk.
@TI – many thanks for the articles and for checking in with @TA.
Very helpful of you.
I’ve been following for c5years and you’ve been instrumental in shaping my financial plans and actions for the better.
And Monevator is always a great read…
Thanks again
@neverland
The FT recently reported a proposed change to require auditors to check for fraud.
https://www.google.co.uk/amp/s/amp.ft.com/content/f3a4acff-ed4b-417e-bf59-02b0c268e3d3
Thanks for the links. On the subject of going all in on Vanguard, the recent post by FvL on reducing a portfolio down to a single ETF VWRL had some interesting discussion on this in the comments https://firevlondon.com/2021/01/23/reducing-my-portfolio-to-one-etf/
On a different topic, should I be getting a cookie consent panel every time I come to this site? I accept it but it keeps coming back! I use the Chrome browser on an iPad.
@BillD — You should only get it once. I’ve only seen it once on each of my various browsers, and haven’t heard any other reports of this so don’t think it’s a widespread problem.
Do you have cookies turned off or you’re browsing incognito or similar?
@billr thanks for the link to the FvL discussion. I do smile at his justifications for such enormous complexity. I’m much closer to xxd09 in situation and attitude (but 20 years younger). I find 6 investment accounts (one each ISA, pension and taxable) plenty to monitor and think I still have too many holdings. As you might imagine, I am also almost exclusively invested in Vanguard (the exceptions being property funds which they don’t do). It does give me some pause for thought, but the alternatives just don’t seem as good, so I largely just keep my fingers crossed. I do spread across three platforms, as I think that is sensible in case of technical difficulty/cyber attack and the like.. And like xxd09, I have (or will have) other secured income streams and cash buffers, such that in a pinch I could survive even if my whole portfolio blew up, or became inaccessible for a prolonged period.
Still, maybe it’s time to have another look at alternatives to vanguard. You never know.
(Yes I do know how naff my moniker is, but I don’t want to abandon my identity. Chosen without much thought about 8 years ago, when Vanguard were a novelty that could only be bought on one platform…)
Thought the Vlad Tenev article was very self serving. Pure deflection from the stark fact that Robinhood was a company he allowed to operate in a woefully undercapitalized position. Oddly I didn’t see any issues with my JPMorgan brokerage accounts.
I operate in markets with T+0 and T+1 settlement and it’s a complete PIA. It’s difficult to guarantee settlement of cashflows T+0, never mind real-time. Errors do happen and they need to be reversed out. With real-time settlement any error would be a instant failed trade. You don’t need full settlement, just to settle margin multiple times per day, say by Asia close/London close/New York close. Competant brokers can do that already.
It’s just that Robinhood couldn’t because they operate on too thin a capital base. That’s the problem. If you buy cheap, you often buy twice. Or in this case you couldn’t buy at all. Or sometimes even sell. Vlad – just stop cutting corners!
@ZXSpectrum48k
T+0? Is that settlement at the end of the day?
@vanguardfan – possibly a useful rule of thumb could be to aim for no more than 50% with any given fund shop, but if you have a particular fondness for one then (semi) strictly no more than 2/3?
Although vanguard are great it’s probably a bit of a stretch to say you can’t get a very similar end result from someone else, particularly if you’re happy to buy a few bits and pieces and rebalance as opposed to just going life strategy.
I think I’m going to aim for no more than 2/3 vanguard going forward, cheers all for the impetus to take action!
@TheInvestor Just regular browsing on Chrome iPad with cookies enabled. I closed all the tabs and it seems to have resolved. Very odd. No issues on my main system.
@ Vanguardfan I thought my 40 or so holdings over something like 10 accounts was complex! When I consolidate my pensions this year the aim is to have 2 SIPPs to drawdown from. As I plan to use VLS60 for simplicity the investment portfolio will be around 70% Vanguard. I just want some simplicity so I can get on with life. Like you, I have cash and property outside of investments. I seem to remember the JLCollins chap did some posts about VG going bust, he is all in. Back into too big to fail territory though. If you start looking into this you are possibly going to be reliant on 3 main global players – Vanguard, Blackrock and State Street (the custodian for VG I think). I feel I can only mitigate so much of this worry in my life!
Re what happens if your investment platform fails with your ring-fenced investments intact.
There is a long-running thread on the MoneySavingExpert forums about the failure of an execution-only (and other things, but it’s the xo clients posting on MSE) broker. https://forums.moneysavingexpert.com/discussion/6032496/svs-securities-shut-down/p1 .
The Special Administrators were entitled to take their fees out of the clients funds. The FSCS covered these fees, which were losses to the clients, up to £85k each. In practice they paid the Special Administrators direct, saving themselves a lot of administration in dealing individually with each client. It was suggested that Special Administrator’s fees were unlikely to exceed 10% of assets, so a holding of up to £850k should not result in a loss.
@Neverland
> I’ve got to admire your optimism there.
I think all individual UK platforms are more vulnerable than US fundies, mostly due to scale and the fragmentation of the UK market. Equitable Life was not the same but I think you’re on the money to draw parallels at least in risk terms. Total failure unlikely but large haircuts abound, especially once people got a run going on a platform.
> When Woodford Investment Management collapsed what did the authorities do? Nothing.
Government intervention was far from necessary. I think (maybe wrongly) Woodford at its peak was around $10bn AUM. This is a long way from being a systemic threat by a couple of orders of magnitude. And the investors were different because they chose to buy in (“past performance” and all that). So caveat emptor indeed, for a range of reasons.
But
Vanguard is $6.2Tn and Blackrock 8.7Tn zone. To put that in perspective, UK GDP is around 2.6Tn. These fundies systematically prop up large sections of the global economy.
I believe the old principle would get invoked here, namely:
“When a man owes you £100, he is your debt. But when a man owes you £1m, you are in his.”
The US government could not afford not to bail them out if they failed. This is partly why regulation has increased.
@TI – oops! Sorry 🙂
@naeclue I wondered this myself in the past. I found an answer for my bank (where there were separate accounts) which corresponded to what is on this item from This Is Money. Essentially if the savings and mortgage accounts are separate then fscs limit applies on the savings as if there is no link to mortgage. If it is one account for everything then it is as if it is a current account with a huge overdraft limit, so fscs only pays on credit balances, and then only up to the limit.
https://www.thisismoney.co.uk/money/mortgageshome/article-7908539/I-mortgage-savings-bank-goes-bust.html
Rhino,
I think you’ll end up holing a mix of etfs just by harvesting the capital gains allowance in your taxable accounts. In March every year sell Vanguard, buy equivalent iShares, then next year do the same in reverse in whatever proportion. Not applicable in an ISA, of course, but few people will have enough just in ISAs to retire…
If I understand correctly, once your SIPP goes into a flexible drawdown, it pays to take the 25% tax free, stick it into taxable accounts (over the ISA allowance) and harvest the CG allowance every year, plus bed & ISA. You’ll end up paying less tax that way, right?
Perhaps some of us should look at the thought of Mike Green on passive indexing. The problem is that whilst the market has been VERY ACTIVE the last week, it is becoming more and more passive. Similar to the HF trying to buy back their shorts in GameStop, vanguard have no choice but to buy everything for its customers, whatever the cost. Well as long as there is active sellers then a price can be struck. If there is no active sellers, then no price discovery and vanguard et al will be forced to go to the moon to buy the shares for its index funds. They won’t stop and question value. So stocks go to the moon. Great you say. Maybe the bond stimulus and rebalancing of the 60/40 is making that happen now because there is no fundamental reason for the surge of the us market right now. The country is in the beginnings of a new depression.
Well the opposite will happen when demographics shift and the boomers retire and there are net outflows from index funds…there will be not be enough active buyers and then the market will be forced to clear at ZERO…vanguard won’t stop and think, why date we about to sell these Amazon shares at $10 each. It will just do it.
Low cost Passive indexing has the potential to eat itself…..scary thing is no one really knows what percent of the market has to be passive for these dynamics to play out, but as sure as night and day, the percent of the us market that is passive is growing year on year and doesn’t look like topping off..
Surely it can’t be THAT easy…
@various
Re: account/platform diversification:
https://www.finumus.com/blog/what-if-my-broker-goes-bust
from last year is probably worth a read along with the associated comments
@NewInvestor: T+0 is same business day settlement. T+1 is one business day forward. T+2 is 2 business days forward etc. Most of the biggest markets (example FX) are T+2.
Finance is basically about making sure the correct cash balance hits the correct account, at the correct time, in the correct currency. Real-time settlement (or even T+0) makes that very difficult to achieve, especially cross-border. Let’s say I want to buy a US S&P index tracker. With real-time settlement, I need the US dollars to buy that fund already sitting in a cleared USD account to do that. That’s really inefficient. With T+2 settlement, I can buy with S&P tracker with USD I don’t currently have, but then sell GBP/USD for that USD amount (also for settle T+2). Those cash balances with all net off on T+2. If anything goes wrong, I have some time to fix it.
@ ZXSpectrum48k I don’t buy that. We live in a world where I can send 6 figure sums to friends in the USA and have them cleared in to a US current account the same day for 0.5% over inter-bank rate with no flat fees.
Surely it’s just a matter of data and engineering a system that has failsafes and higher margins in periods of high volatility. Ultimately all we’re talking about here is a bunch of databases.
@David – unless I have misunderstood, I’m not sure that’s how it works. If GM is in the index the passive fund is tracking then they will hold GM shares to the right proportion according to the index. If the market price goes up a hundred fold, the passive funds holding also increases 100 times. no change. Only if there are more new buyers of the fund than sellers i.e. more units have to be created, will the fund need to buy more shares.
That’s how I think it works anyways.
Andrew. Are you sure you have a matured USD cash balance on the same day?
Let’s say you want to move £100k from your HSBC UK to your JPMorgan US account. You sell GBP/USD today (6-Feb) but that is for spot settle (T+2, 8-Feb). It doesn’t actualy become a matured USD cash balance until 8-Feb. What allows you to see these balances appear (and utilize them) is that there is trust between those two entities. But that trust is backed by collateral. HSBC and JPMorgan have credit lines and those lines collateralized. Typically with an amount that is a function of 2-day VaR+gap risk.
The issue here is not technology, it’s credit risk. That’s the problem with FinTech. They tend to ignore little things like credit risk. And then it blows up.
@David @Brod — Yes, as @brod says market-cap weighted passive funds are neutral to market-cap weighted indices. Active funds set the prices, trading among themselves.
Also I wouldn’t hold your breathe waiting for demographics to change market dynamics particularly. In the US, for example, Millennials are entering their peak earning years and are naturally buyers for any Boomers selling to fund retirement. Perhaps even more so. I believe demographics is a factor for very long-term market returns, but it’s wicked hard to disentangle and likely operates through economic growth as much as anything (which is also hard to disentangle from market returns, due to markets (over) discounting superior growth prospects etc).
However I do believe one can see fund flows distort areas of the market. For example the ARK range of ETFs (link to Cathie Wood, ceo, interview above) are attracting ginormous flows in the US at the moment. These are very much active funds, and the managers have no choice but to mostly buy more of the stocks they already own if they keep accepting new AUM (which as an ETF…) or else I guess dilute the funds’ offerings by adding new companies not currently held.
I believe they’re very smart investors (who isn’t at the high-end these days) and I have had more overlap than I’d like with their holdings over the past 2-3 years. But anyway if you look at the stocks they own, while they’ve been operationally very impressive in 2020, their multiples have expanded at a far faster rate. So either the market is right in seeing at the least more 2020-style growth to come for several years, or else investors are getting a bit carried away…
…or the direct flows of money into ARK funds is boosting share prices. (i.e. They are driving up their own positions, attracting more flows, driving up their own positions, etc)
@hosimpson – sorry, I’m no expert on the SIPP drawdown stuff, I intend on crossing those hurdles when I come to them, which is a way off yet..
Good shout on the CGT harvesting. I need to up my game in this dept and get a proper process on the go, especially since the ETF GIA portfolio experiment back in late 2019. What are you cycling between from vanguard and ishares? Is the bulk of it pairs of all world etfs and gilt etfs, a la lars/hale style portfolio?
Rhino,
Currently I’ve only switched a bit of VWRL with HMWD (HSBC MSCI World) to get some capital gains crystallised. They track the same benchmark, so I’m guessing should be essentially the same ETF. I think HSBC uses optimised sampling as opposed to full physical replication that Vanguard use. You’ll have to decide whether this is worth a 0.07% difference in the management charge. The tracking error under stress in a turbulent market might end up costing more than that, but then again, it could be binary. I guess it depends on how long you’re going to hold it and how anal-retentive you are 🙂
You can use Morningstar to find ETFs, basically search for what you want to sell, note the benchmark, ongoing charge, etc. then click on the Morningstar Category in the table and that gives you a full list of ETFs.
I look for something that tracks the same benchmark and has a low ongoing charge. There’s no easy way to search by benchmark, you just have to click on an ETF from the Morningstar Category list, see what benchmark it tracks, and decide if you like that one.
https://tools.morningstar.co.uk/uk/etfquickrank/default.aspx?Site=UK&Universe=ETALL%24%24ALL&category=EUCA000555&LanguageId=en-GB
It would be nice if TI or TA did an easy to use comparison table of equivalent ETFs 🙂
This has been requested before, and I know @TA has pondered it. I’m almost worried that if we make it too overt the rules will be changed somehow!
Personally I would have zero qualms about swapping two ETFs with more or less the same name on the tin to help defuse CGT, even if they did have very slightly different internals or fee structures. Far better do that than not touching anything and paying a CGT bill in years to come, which is a nailed-on known cost, and one of the most frustrating taxes to pay in practice, whatever one believes in principle.
With Rishi Sunak (understandably) looking for targets, CGT has been tipped to double sooner or later, which makes it even more important.
@David #37 and @Brod #41: Unfortunately I can’t find the original attribution (link rot 404 type error), but here’s a nice summary of Michael Green’s views: “Green estimates that when an incremental dollar is put to work with an active manager, it has an average effect on aggregate market capitalisation of $2.50. The multiplier occurs because the number of shares available is smaller than the total number of shares outstanding, and a buyer must often pay a premium to induce a shareholder to sell. However, Green estimates that when a passive fund receives an additional dollar, the automatic decision to maintain balance by buying in proportion to market capitalisation results in an increase in market cap of more than $17! Passive funds have a much greater impact on prices because active investors can be patient in deploying their capital and are sensitive to the prices they pay. Passive funds have little discretion whether and at what price to buy — they must buy if they have inflows. Perversely, passive funds’ demand for a stock generally grows as the price increases because the weighting of the stock in the indices they track increases. So long as such funds have inflows, they do not sell. Leverage linked to low interest rates turbocharges these unhealthy dynamics. Balanced funds are forced to buy stocks because their bonds have risen in value. Pensions and endowments are forced into equities to replace lost yield. Stonks’ increased values are used for collateral for loans to buy more stonks. Cheap money leading to excessive speculation contributed to the 1990s dotcom bubble, the 2000s housing bubble, and now the stonk bubble. The real risk to markets is that passive flows go negative (if widespread lay-offs lead workers and employers to cut their 401K contributions). If that were to happen, passive fund selling would quickly overwhelm the market. Such a crash could resemble 1929-1932 in magnitude but at 2021 speed .”