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Weekend reading: Honey, I shrank the financial advice

Weekend reading

Good reads from around the Web.

Morgan Housel at the US Motley Fool did a smashing job this week in whittling 5,000 years of financial advice down 61 pithy one liners.

Here are some of my favourites:

1. Dollar-cost average for your entire life and you’ll beat almost everyone who doesn’t.

3. Every five to seven years, people forget that recessions occur every five to seven years.

15. The more you learn about the economy, the more you realize you have no idea what’s going on.

16. Start saving for college before your kid is born, and start saving for your retirement before you graduate college. You’ll feel silly when you start and like a genius when you finish.

24. Respect the role luck has played on some of your role models.

28. Read last year’s market predictions and you’ll never again take this year’s predictions seriously.

34. You can probably afford not to be a great investor — you probably can’t afford to be a bad one.

40. Admit when you are wrong.

47. During the last 100 years, there have been more 10% market pullbacks than Christmases. Everyone knows Christmas will come; think of volatility the same way.

48. Don’t attempt to keep up with the Joneses without realizing the Joneses aren’t any happier than you are.

56. Most people’s biggest expense is interest, which comes from living beyond your means, and buying things they think will impress others, which comes from insecurity. Avoid these two and you’ll grow richer than most of your peers.

57. Reaching for yield to increase your income is often like sticking your hands in a fire to warm them up — good in theory, disastrous in practice.

Morgan wrote his one liners with a US perspective.

Any British ones we can add?

Please share them in the comments below!

From the blogs

Making good use of the things that we find…

Passive investing

  • 3-to-1 odds favour index investors – Rick Ferri

Active investing

Other articles

Product of the week: With eight days until the ISA deadline, The Telegraph rounds up the best cash ISAs. It’s a sign of the times that the best rate is just 2.25% from a three-year fix.

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

  • 3 reasons ETFs are so inexpensive – ETF.com
  • What British investors could learn from America – Telegraph

Active investing

Other stuff worth reading

  • Regulator may now free 30 million in zombie pensions – Telegraph
  • React to reality, not the image of it – Richards/NYT
  • Robert Shiller’s Nobel knowledge – Wall Street Journal
  • Why economic stability is destabilizing – BBC

Book of the week: If you’re in the mood for a bit of doom and gloom, you could do a lot worse than Tim Morgan’s Life After Growth. Our wealth is based on exploiting finite energy resources, reckons Tim, and that era is ending. I would argue with much of the prognosis, but worth reading.

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  1. Reader Ken notes that: “FT 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”.” []

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{ 20 comments… add one }
  • 1 Under The Money Tree March 29, 2014, 9:58 am

    Mine would simply be “Take Action”.

    It’s amazing how even with tiny amounts, over time a decent portfolio you can build. For years I have been trying to get a certain family member of mine to take action and there is always an excuse not too. I find this so frustrating!

  • 2 neverland March 29, 2014, 10:58 am

    I would add just one specific to Britain:

    “Your house is not your pension”*

    *Unless you live in Zone 1-2 of Central London and are quite happy to retire to Hull (home of one of Britain’s greatest universities)**

    **General Melchett

  • 3 Tony March 29, 2014, 11:20 am

    The article about why ETFs are so inexpensive doesn’t seem very relevent to the UK, the tax situation here is completely different.

    One thing I don’t understand: the writer states that ETFs are cheaper than funds because ETFs have “authorised participants” with “deep pockets” who absorb the trading costs…so how do the APs get paid?

    The Rick Ferri article is excellent, as his stuff usually is.

  • 4 The Investor March 29, 2014, 12:51 pm

    @Tony — Yes, I did hesitate to include it for that reason but (a) two-thirds of the article *is* entirely relevant (b) 15% of readers are from the US (c) most weeks I come across very little in the UK media about indexing or ETFs, so I can’t afford to be picky.

    It is a factor I consider, fear not! 🙂 I rarely include the excellent Oblivious Investor’s articles at the moment, for example, because he’s now deep into the detail on his blog and about half his posts are about specific US products. I agree this one was borderline as it may some confuse people.

    Authorised participants make their money by arbitrage (profiting from small differences that arise between the value of the ETF and the value of the underlying securities).

    p.s. Rick Ferri retweeted The Accumulator’s article on expected returns this week. We swooned! 😉

  • 5 Tony March 29, 2014, 2:51 pm

    Thanks, TI!

    I still don’t quite understand your arbitrage explanation.

    If I buy a fund, the price = the NAV (at the daily valuation point).

    But if I buy an EFT, you seem to be saying that authorised participants are able to extract value from differences between the NAV and the ETF’s price. So doesn’t that value have to come from me, the buyer (or seller)?

    I’m probably missing something…but what is it?!

  • 6 The Investor March 29, 2014, 8:33 pm

    @Tony — I don’t think you’re missing something. 🙂 You originally noted the article said they don’t pay “trading costs”. That doesn’t mean they don’t profit from others in the market (ETF buyers/sellers and underlying security buyer/sellers).

    This might help: http://www.ici.org/viewpoints/view_12_etfbasics_creation

    You can sometimes see the process in action when it fails, and bid/offer spreads balloon out on more illiquid ETFs at times of crisis.

  • 7 Phil Netherwood March 29, 2014, 11:29 pm

    Seen the consequences of this financial truth being ignored far too often: Don’t put off dealing with money matters you need to plan ahead for.

    Many of us do either because we don’t like to contemplate why or we may have to spend money on something we need rather than want.

    For example there’s no point thinking about insurance when the proverbial hits the fan & even more bluntly it’s too late to write your Will when you’re dead!

  • 8 Tony March 30, 2014, 2:41 pm

    TI, thanks for your reply and the link.

    So, are we saying that, in the UK at least, an EFT might have a lower headline TER but investors lose that benefit because authorised participants’ arbitrage strategies lead to increased tracking error, with the increased tracking error balancing out the lower TER?

    I believe Vanguard have a number of index trackers, particularly in the U.S., which are available both as funds or as ETFs. Does one class tend to do very slightly better than the other (leaving aside American tax rules)?

  • 9 The Investor March 30, 2014, 8:57 pm

    @Tony — To be honest, I don’t know, I’d be reaching from here.

    I am sure it’s unlikely to be material for most investors though — it may be an issue if you’re dealing with the more illiquid ETFs, as mentioned — and decisions such as whether you’re comfortable with how the ETF is structured would be more important to my mind, as well as how you plan to buy and hold your trackers from the cost perspective.

    If you put a (nerf) gun to my head I’d hazard that sometimes the ETF buyer/seller is effectively getting a worse deal, and sometimes a better deal, depending on the price of the underlying securities. Equally, sometimes it will be the owners of the underlying securities who will be getting a worse deal — because for example they (notionally “they”) buy a basket of securities for a slightly higher price than than they would have paid if they had bought the ETF. Arbitraging these tiny differences is where the profit is for the authorized participant. I’d guess it closely approximates neutral for long-term (i.e. more than a day in this context!) liquid ETF investors.

    But I’m far from an expert on the mechanics of ETF creation/destruction/arbitrage. I personally wouldn’t sweat it, and doubt any disadvantage that *may* arise amounts to more than few basis points a year.

  • 10 Tony March 30, 2014, 9:28 pm

    OK, thanks, TI.

    I’m currently getting started on moving my stuff from the 0.45% bandits to (probably) I-Web and changing to 100% indexed rather than 80-odd%, so that’s why I’m currently interested in the differences between funds and ETFs.

    But I suppose it is a bit nerdy to worry about the odd basis point!

  • 11 The Accumulator March 30, 2014, 10:12 pm

    Hi! Arbitrage keeps the ETF on track by ensuring that its NAV closely matches the value of the underlying shares. You’re right that arbitrage profits will come from investors who buy ETFs at slight premiums to NAV but then you might buy at a discount too. I’ve never read any research that concluded that investors are getting a raw deal with vanilla ETFs because of this mechanism. Bear in mind that there are plenty of hidden costs with mutual funds too e.g. hidden spreads contained within the unitary pricing of OEICs plus the costs of trading – all this emerges through tracking error and most broad market, vanilla ETFs track their indices well. You will see much wilder swings if you choose thinly traded ETFs that track esoteric, illiquid indices, so stick with the mainstream stuff. Big financial institutions often create ETFs because they can profitably put illiquid stocks to work as collateral and tax-arbitrage dividends across territories. That’s part of the reason multi-nationals like Deutsche Bank and Societe Generale got into synthetic ETFs.
    Bottom line: choose the tracker that best suits your purpose. If there’s nothing to choose between two types then I usually go for the index fund but I have no qualms about broad market, vanilla ETFs.

  • 12 dearieme March 30, 2014, 10:25 pm

    (i) What reason is there for confidence that ETFs will survive a big market pullback unscathed i.e. will still track their benchmarks, and still be tradable? Is there any particular reason to fear that they won’t?

    (ii) Can someone please elaborate on “There’s no question that this mechanism works best for equity ETFs, compared with fixed-income ETFs, where turnover and cash-based creation/redemptions are more frequent.” It’s a TIPS ETF and a short-duration corporate bond ETF that I have my eyes on at the moment.

  • 13 The Accumulator March 31, 2014, 8:25 am

    @ Dearime – I suppose the confidence is that most performed OK in 2008 – 9. There are more esoteric ETFs out there now which may not do so well. Certain fixed income ETFs departed from their NAV moorings at certain points in the crisis when their underlying securities became illiquid. In other words, when the market wasn’t giving clear price information on the assets those ETFs tracked then market traders responded with huge spreads to cover the pricing uncertainty. If you weren’t trying to trade at that point then you weren’t affected.

    @ Tony – I forgot to say that standard advice for avoiding periods when ETFs are trading at premiums or discounts to NAV is to trade when the market underlying the ETF is open (e.g. trade your US ETF when the US is doing business as market makers are getting live pricing information at that point rather than guessing at values) and avoid trading first thing when market makers are still feeling their way a little in terms of price discovery.

  • 14 Tony March 31, 2014, 9:43 am

    Thanks, TA, both your replies on the ETF v Fund question make sense to me.

  • 15 SemiPassive March 31, 2014, 12:16 pm

    Dearieme, re: short duration corporate bond ETFs, held one for a few months but have since sold due to following observations
    1. When the equity markets rise, it either goes down or doesn’t move
    2. When the equity markets go down, it either goes down or doesn’t move 😉
    3. The yield is barely stronger than cash or the FTSE100, and still not risk free.

    I came to the conclusion it was a pointless diversifier that didn’t work (eg not negatively correlated with shares) and offered a poor risk/reward ratio. I would rather hold cash. Or even gold perhaps.

  • 16 dearieme March 31, 2014, 2:38 pm

    Thanks, Acc & SP.

    I suppose the new NISA rules will make it simpler for us to hold cash at non-zero interest rates.
    By that I mean we could hold cash at a juicy(!) 3%-4% p.a. in interest-bearing current accounts, knowing that we’ll be able to shift it into ISAs at a higher annual rate when we want to. It takes longer to trade sovereigns, though.

  • 17 Jonathan March 31, 2014, 4:05 pm

    Morgan Housel’s Forty-fifth tip:

    “45. Annuities: A product mixing the complexity of high finance with the sales tactics of used-car salesman has an entirely predictable outcome.”

    I don’t get it. What’s the beef with annuities?

    They do what it says on the tin — provide an income for the rest of your life. They insure against longevity. They pool the risk of longevity.

    There’s certainly some issue with under-informed retirees accepting uncompetitive quotes from their pension fund providers, but that’s not an annuity problem per se.

    Annuties look like a pretty good match to the liabilities of retirement. Others seem to believe that they can predict how long they’ll live (of course they can’t), and that annuity purchases should be postponed as long as possible (of course one shouldn’t, if one wants maximum lifetime income, because of mortality drag — annuities should be purchased as early as possible).

    Housel’s prejudice against annuties has me scratching my head. Perhaps he’s talking about some other financial product in the US, which happens to have the same name.

    However, Dirk Cotton (The Retirement Café blog) seems to have no problem with annuities: http://theretirementcafe.blogspot.de/2014/02/untangling-retirement-strategies-life.html

  • 18 SemiPassive March 31, 2014, 4:15 pm

    Agreed, much easier to move cash into ISAs in future at a faster rate. And thus more tempting to overpay/save within an offset mortgage now and get a higher effective interest rate tax free in the meantime.
    Though – back on topic with point 1 in the above article – I still agree whole heartedly with dollar cost averaging your entire life into tracker funds, rather than ploughing in too late and risking buying in at historical highs.
    Load up on property and shares early on in life, and cash later on – apart from an emergency fund of course.

  • 19 Neverland March 31, 2014, 5:07 pm

    @Jonathan

    I would agree with you about annuities being unfairly blackened. They have been crushed as a product by four countervailing forces, only two of which the insurance industry could have controlled:

    – rapacious fees, all the insurance industry’s fault
    – lack of a transparent and well understood market for customers, all the insurance industry’s fault
    – 300 year low interest rates on government debt, the government’s decision
    – longevity rising faster than pension ages, the government’s decision

    Just for the first two I think the pensions industry has received their just desserts with the evisceration of a big all too profitable business stream for them

    However, I do wonder how well people will use their new found freedoms

  • 20 dearieme March 31, 2014, 11:09 pm

    People of a Certain Age will find that the annuities to buy are (i) extra pension, by deferral of their state retirement pensions, and (ii) possibly extra S2P via NIC3A.

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