Good reads from around the Web.
The UK’s FTSE 100 index has yet to surpass its pre-crisis highs. Good news if you’re investing new money – you’re getting in cheaper!
If you’re fully-invested though and you’re becoming frustrated that you didn’t put all your money into Venezuala (the tinpot dictatorship returned more than 300% last year, topping the global league) then you might direct your ire at just a handful of the UK’s behemoths.
This graph from the UK Stock Market Almanac blog reveals how much a 10% swing in any of the UK’s 20 biggest listed companies moves the FTSE 100:
Click to enlarge (the picture, not your returns)
I was pleased, though not surprised, to see so many of the blue chips I think still worth buying for income are on this list.
There are exceptions. Diageo looks expensive, and you can argue that BP and RDSB are properly priced for their dwindling assets. Lloyds currently pays nothing, but I think it will one day become a cash cow.
On the whole though I can think of worse income portfolios than simply buying this lot with an equal weighting. (That is not advice or even a suggestion it’s a good idea – just an observation.)
While the market has already come a long way in 2013 – and anything can always happen in the short to medium-term – this at least suggests it’s not overly expensive yet to me.
From the blogs
Making good use of the things that we find…
Passive investing
- Compound interest and wealth accumulation – Wade Pfau
- Choices in portfolio rebalancing – Rick Ferri
- Index funds in an ETF world [Canadian but relevant] – C.C. Potato
Active investing
- 30 sustainable UK shares for income – iii blog
- Moats aren’t forever – Oddball Stocks
- More on Apple, and free $100 bills – Musings on Markets
- Gold: The insurance asset – Crawling Road blog
- Currency wars, QE, and the bull market [PDF] – Hargreave Hale
- The best performers are rarely the same next decade – Ivanhoff Capital
Other articles
- Stock market forecast from 2013 to 2020 – UK Value Investor
- Beware of PIMCO’s ‘New Normal’ mantra – Investing Caffeine
- Why the secular bear market could continue – Humble Student
- New inflation index tracks essential spending – Tullett Prebon
- Why is he writing a blog, anyway? – Mr Money Mustache
Product of the week: Five years ago the average cash ISA paid 5.29% – today it’s just 1.79%, reports the Telegraph. RBS has a table-topping two-year fix but it pays an inflation-lagging 2.35%.
Mainstream media money
Note: Some links are to Google search results – these enable you to click through to read the piece without being a paid subscriber of the site.
Passive investing
- How smart really is ‘Smart Beta’? – Index Universe
- Why no Vanguard high-yield bond ETF? – Investment News
Active investing
- David Einhorn’s ‘iPrefs’ proposal for Apple [slides] – Business Insider
- Terry Smith: Hero, or evil genius? – FundWeb
- This rally is in its infancy – Yahoo Finance
- Buffet brand has more beans than Heinz – FT
- Seven interesting small cap funds [Search result] – Merryn/FT
- Small hedge funds outperform large ones [data!] – All About Alpha
- Value stocks are hot, but most investors’ burn out [Search result] – WSJ
Other stuff worth reading
- Fidelity has launched a half-price ISA fee deal – Guardian
- The four-day week: Less is more – Guardian
- Beware mass-market stamp duty avoidance [Search result] – FT
- Plain vanilla banking is the problem, not the solution – New Yorker
- Questioning the motives behind your financial decisions – NY Times
- Martin Wolf: Eurozone crisis not over yet [Search result] – FT
- The next US bank bailout might be different – Motley Fool
- Relax! You’ll be more productive – Farnham Street
Book of the week: Looking for a stock market diary? Robbie Burns says his Naked Trader’s Diary is sold out; there’s a Kindle edition
Like these links? Subscribe to get them every week!
Hi I’m a new investor and also an avid reader of your website.
It has certainly helped to give me a good grounding in taking care of my own investments.
I have for years saved with my building society, and bought the odd cash ISA, but it doesn’t take a financial wizard to realise that the returns are diminishing year on year.
You mention in today’s piece that you don’t think that the FTSE is overly expensive. Is there a way that an investing ‘tyro’ such as myself can easily determine this?
I am currently investing in the Vanguard FTSE 100 Index Fund (Acc).
Whilst I am happy to continue to do this, I am a little nervous due to to the index being over 6300 ?
Thank you for a great site.
Caronia
@Caronia — Glad you’re enjoying the site! Re: Valuing the market, there’s no sure way of knowing, except in hindsight. Our returns lie in the future. If earnings collapse due to another recession, for instance, then in retrospect the market will have proved expensive.
That said you can look at both sentiment and also various fundamental measures such as p/e, dividend yield, price to book value, or even market capitalisation to national GDP.
I’ve a half completed series here on this. Try typing “Is the market cheap” into the Search box in the sidebar to the right.
Hello again,
Thank you for your prompt reply,I’m on my way there now !
@ Caronia.
Assuming that you are investing for the long-term and on a monthly basis – I see no reason to worry too much. The market moves up and down all the time. Using Vanguard you will get the market return minus fund costs (Vanguard – passive = low charges). Over the long-term you will do better than the average individual who tend to use active fund management. Besides cash deposits (interest rates paid) are a complete farce. I would recommend reading Bogle’s ‘Little Book of Common sense Investing’. I personally hold Vanguard Lifestrategy 60% Accumulation Fund in a SIPP with HL (invested since December 2012) and am up by 17% (£7k). You’re already one step ahead reading Monevator and using Vanguard. Keep it up!
In capital terms the Market is still below it’s previous peak of 6999 at the end of the last century.
However, this reference point is only of interest to the fund management industry because it generate a target target it has at least a possibility, albeit small of beating.
More relevant is the fact that in total return terms the UK stock Market is up 50% since then. That just demonstrates the importance of dividends over the long term.
Hi William and Rob,I’m obliged to you both for taking the time to comment.
As a ‘newbie’ (maybe not in age but investment experience),I read as much as I can on the subject of investing.
I came across a contributor to the Morningstar website by the name of Rodney Hobson,and I seem to remember him commenting that he thought the FTSE100 was now fully valued. I assumed from this,that he thought the index might fall/correct, and rather than continue to make deposits, I should wait to see if I could buy further units at a lower price?
Remember that the index is a price, so you might theoretically deflate it. However you’d also have to deflate the earnings/dividends, which just reinforces why it’s more appropriate to look at ratios etc then particular levels.
I personally think there’s some mileage in trying to have a sense of whether the market is cheap or expensive at the extremes of greed and fear, but most of the time it’s just middling, and most people will do far better just saving regularly and reinvesting dividends most of the time.
The academic research shows the average investor slices off any enormous amount of their potential gains by terrible timing decisions.
I’m afraid you’ll find I do tend to express views now and then, but they are far from certainties. They are just opinions. I think it’s possible to tell when the market is very expensive. I’m far less confident about ‘cheap’.
Most of all though, I’m sure timing any change from cheap to expensive or vice versa is incredibly hard and very likely in practical terms impossible.
Bottom line: It’s nearly always best for most people to be agnostic, diversified, and to rebalance as a way of automatically taking risk off as asset classes advance in valuation terms.
@caronia Can I had my half pence which is to agree that you certainly can’t predict short or medium term market moves. By far and away the best strategy is to invest regularly ‘come what may’ and learn to love market dips by viewing them as a sale. It can be very very difficult when there are big falls and it is then that you learn about your risk tolerance and the importance of the psychology of investing. There are a couple of things to consider:
– if you have a big lump sum to invest you may want to ‘pound cost average’ it into the market over 6-12 months. On the average this will reduce gains but it reduces the risk of a big upsetting one off loss too.
– if you are near to retirement and have reached your investment goal you may want to ‘de-risk’ if the market has recently risen. See this piece from Rick Ferri on secular market timing
http://www.forbes.com/sites/rickferri/2012/12/10/2097/
– to pass on the two most important things I have learnt in 25 years of investing. First never underestimate the the effect of costs in eroding returns. Secondly as mentioned don’t overestimate your risk tolerance in good times. Be ‘happy’ to temporarily lose 50% of your equity holdings. If you aren’t then there is a danger you will sell at the bottom.
Finally I add my vote for Bogle’s ‘Little book of common sense investing’ plus of course the wealth of information here on Monevator (no pun intended!)
Passive Investor, thank you for your fulsome reply.
I have been adding £2000 lump sums every couple of months to my Vanguard FTSE100 fund.This is in addition to my main portfolio of investments set up by my IFA a couple of years ago.
I felt I needed to understand the nuts and bolts of managing my own money and as a result of reading this website,I opted to purchase the Vanguard fund,accessed through Alliance Trust Saving’s platform.
Whilst I understand the concept of Pound Cost Averaging, I’m still a little unsure what the minimum investment should be given that I’m charged £12.50 each time I invest?
“the blue chips I think still worth buying for income”: have you dicussed those lately?
@caronia. First you have made a great choice (same as me!) with Vanguard. The frequency is clearly a matter of personal preference £12.50 for £2000 is 0.63% isn’t a complete disaster but you could do it more cheaply. I would be inclined to make one of the following choices
1. Invest £3000 less often takes the dealing charge to around 0.4%
2. With alliance trust you can set up a regular monthly dealing option for £1.50 per month. Good if you can predict cash flows in advance.
3 Consider moving to Best Invest who will pay your transfer fees and who won’t charge you for dealing on funds but will charge you £60 per year (slightly more than Alliance Trust). It might be worth waiting before doing this as savings are marginal and it is possible that Best Invest will put up their fees this year.
I would be tempted by 2. If you go for 1 a good tip is to set the investment dates months in advance and stick with the plan to avoid temptations to predict market movements.
I know all this because for the same reason I recently moved mt wife’s SIPP to Best Invest but left her ISA at Alliance Trust.
Good luck!
Further to Passive Investor last comment: I agree setting up regular monthly investment with Alliance Trust @ £1.50 is a good deal. Personally, I use Hargreaves Lansdown. Using just one Vanguard fund – Lifestrategy 60% Equity Acc Fund – I can invest lump sums and regular monthly contributions without charge. HL only charge a £2 platform charge monthly (£24) per annum on a £47k investment.
I used to use HSBC tracker funds (7 x funds) with HL prior to the introduction of the platform charge (£2 pm per fund) – but with the introduction of the platform charge they enabled clients to access Vanguard. The Lifestrategy fund invests in worldwide equities and UK corporate bond, normal and index linked gilts. This provides me with a low cost (personal) pension on top of occupational (public) and state pensions.
Thanks chaps.
William, I did look at the Lifestrategy fund,but I’m pretty well diversified with the portfolio set up by my IFA.
As mentioned earlier, to gain a deeper understanding of investing, I decided to have a go myself with a ‘side project’ hence my decision to buy the FTSE 100 index fund. to broaden this project further, I am tempted to use the suggestion made by the Accumulator in his Slow and Steady Passive Portfolio. i.e. the Vanguard FTSE Developed World Ex-UK Equity index fund for which I will set up a regular monthly payment to take advantage of the low £1.50 dealing option.
@ Caronia
Given that you are a reader of Monevator and have a side project using Vanguard – I wonder whether your IFA recommended portfolio comprises of passive/index/etf funds or of active Manager run funds?
If you have the opportunity to read Bogle’s Little Book of Common sense Investing I would recommend it.
Hi William,
To answer your question and based on my attitude to risk at the time (medium) my IFA set up my portfolio two and a half years ago in managed funds as follows:
UK Equities 38.37%
Overseas Equities 9.81%
Fixed Interest 40.08%
Cash 2.36%
Commercial Property 9.38%
With the experience I have gleaned in that time,I realise that managed funds are expensive,that is why I am happy to invest any spare money with Vanguard.
As the early exit penalties on the above products fall away over the next few years,I will seriously look to move as much of my main portfolio into ‘clean’ products as possible.
Thank you for details of the investing book,I’ll certainly seek it out.
No mention of the AAA downgrade….? Sign of the times!
Italy matters more to trading boys it seems…
@ OldPro
As a keen reader of Monevator and Vanguard/Bogle – I’m in for the long haul and will try not to be distracted from my long-term goal. Anyway, life goes on, companies will produce things which people will need to consume or desire!