What caught my eye this week.
Sensible readers who passively invest and so haven’t been following the gyrations in the markets this past week, please jump to the links below.
Oi! That includes you, Accumulator!
Right. I presume I’m now addressing only those readers who have ignored our exhortations to invest purely into index funds like Saint Accumulator – those who instead get up to naughty active activities like yours truly.
In which case, I’m curious: How was it for you?
For my part I’ve had one of the toughest 10 days or so that I can remember, investing-wise.
At the worst point my portfolio was down by nearly 10% in barely a week.
That’s not the end of the world – I’ve seen far worse – but what was infuriating is that I’m running the lowest equity exposure in my tracked portfolio since, well, forever.1
True, I was still well over 70% in pure equities. Ben Graham – who advocated 75% at the most bullish times and 25% at the least – would have frowned, given that I have slowly been decreasing my exposure to shares partly on account of my nervousness about the rampant complacency others were showing concerning the risks of shares. (Especially in the US, but also here whenever we made a case for cash or bonds.)
Still, I’d hoped mine would prove to be a pretty eclectic 70% collection of shares, as it had in the past, and hence it wouldn’t simply shadow the market down. That proved optimistic.
Most times over the years when markets fall 5-10% quickly, I’ve owned some small caps or thinly-traded larger companies that don’t move much at first. Many a pleasant 30 minutes I’ve spent trying to grind out a few points of gains or risk reduction by rejigging between them in a sell-off.
This time, none of that. Almost everything was down – on Thursday in some cases by 7-10% on the day.
Had underlying markets become more (or less?!) efficient since the last lurch down? Was I unlucky? Or was there something different going on with this fall?
One aspect wasn’t a mystery. I knew I was running some chunky additional risk with my active stock selection.
If I were marketing my portfolio as a fund, I’d perhaps spin it as a ‘barbell’ approach of low volatility assets mixed with ‘strong conviction holdings in global disruptors’.
But what it boils down to is I own several outsized shareholdings in tech shares that have multi-bagged. They are taking forever to whittle down, because I own them outside of tax shelters for historical reasons. And that, as I’ve written before, is a massive pain.
There are paperwork hassles. There are capital gains taxes to consider. Also, I am trying harder not to sell my winners too soon, because sins of omission have cost me much more over the years than sins of commission. (That is, I’ve forgone big gains by selling too soon and putting the money raised into some turkey.)
I knew this risky exposure was there. It was another reason why I’d been de-risking the portfolio where I could inside my tax shelters. But clearly I miscalculated somewhere because when the markets fell, I still went down with it.
Remember – I felt I was running less risk versus the market because I held fewer equities.
What’s more, historically my portfolio has been less volatile than my underlying equity benchmarks – even with the concentration risk and sector risk I manage, and even when I’ve been near-100% in shares.
Hence I really felt it in the nads when it all came to naught in the falls.
It’s not a disaster. I was nicely up against three of my four benchmarks year-to-date (YTD) when the rout started, and I’m still ahead of each of those by several percentage points. I remain down against the world index YTD, but the gap didn’t really widen. I’m underweight the US/dollar, and I think the under-performance here in the last couple of years will probably reverse if and when pound recovers.
We’ll see, but anyway I know I shouldn’t feel too bad that a bit of mean reversion has caught up with me.
So why do I?
Partly I think it’s because my purposeful risk reduction hasn’t paid off.
This slightly gives me the willies.
Lord make me a passive investor, but not yet
I have an existentially bleak view about active investing. In fact I’d bet I see active investing as far harder than almost any active investor you’ve met, despite what I feel is my creditable record.
In the middle of last week’s sell-off I described what I believe is required to even try to beat the market nowadays to a friend asking for advice on Facebook. He persisted even after I told him my only advice was – as ever – to invest in some select index funds every month from his salary and come back in 30 years.
He said he’d seen the news, and wanted to know if it was a “buying opportunity” because in his opinion the market had been too calm before.
Didn’t I have anything clever insights, he wanted to know? As usual I got the impression he felt I was blowing him off by urging him into passive funds. Keeping the good stuff to myself!
Eventually I snapped. Me in blue:
Often I tell friends I won’t know if I was a successful active investor for another 40 years, whatever my track record is to-date. It’s that uncertain, and luck is so hard to disentangle from skill.
As that renowned day trader Sophocles wrote:
“One must wait until the evening to see how splendid the day has been.”
I know I’ve not been obsessed over the past nine months, if I’m honest. I’ve spent countless weekends shopping for home furnishings. It’s ages since I read an annual report in bed gone midnight – something I used to do more weekday nights than not.
I thought about putting everything into a Vanguard LifeStrategy 60/40 when I bought the flat near the start of the year, and taking a year out. Perhaps, on this evidence, I should have.
I guess I also have to acknowledge that the mortgage I’m now running to sit in this flat that I’m typing from has probably turned some of my dials to new settings.
For as long as I’ve been investing, I’ve had a relatively monstrous buffer between me and the streets. Long-time readers might even recall that I really started actively investing when I decided to put my house deposit to work in equities, rather than in property, way back in 2003.
Don’t get me wrong, there’s still a big buffer in place. I feel secure… a healthy monthly cash flow from earnings in the front line, cash deposit ramparts, NS&I saving certificate moats, and a five-year fixed rate mortgage that means I’m safely inland from raids from along the coast. My assets well outweigh my debts.
Still, mine is not the fortress balance sheet it once was.
Effectively, like anyone with an investment portfolio and a mortgage, I can consider my portfolio to be levered up. (Because I could instead use the portfolio to pay down the debt.)
This was by design, but it would be foolish to deny there’s a price to pay.
Finally, while I’m sharing, there’s also the fact that while I’ve suffered bigger percentage losses in a week – far greater in the financial crisis – this was the biggest in cash terms.
I’m ten good years on from 2008, and hence I have more money exposed to the shredder. It’s harder to be as gleeful at the prospect of a bear market as I used to be.
Perhaps that’s why my back pain returned on Thursday. Like George Soros’ gnomic spine, mine tells me when I’m stressed, which is handy because I seldom feel stressed much.
I felt it this week.
A warning to recalibrate before the big one? Or have I just got to get my money-losing muscle memory back?
Something to ponder.
How was it for you?
Preparing for retirement: Finding a path to a flexible income and lower taxes – Monevator
From the archive-ator: Volatility, inflation, and asset class returns – Monevator
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!2
Will Chancellor Philip Hammond cut pension tax relief in the Autumn Budget? – MoneyWise
High Street sales decline for eighth month in a row – ThisIsMoney
Brexit uncertainty has crushed the housing market, says RICS – Guardian
Treasury weighing up tax break for landlords who sell to young adults – JW Hinks
This Texas finance professor sifts data for signs of rigged markets – Bloomberg
Residential retail bubbles around the world [Graphic and analysis] – Visual Capitalist
A million-plus Britons live in “food deserts” [Surely shops respond to demand?] – Guardian
Treasury admits ‘no consensus’ for wholesale changes to pension tax breaks – ThisIsMoney
The death of the IPO – The Atlantic
In essence, holding gold is a bet on a weaker dollar – Capital Spectator
Products and services
Natwest and RBS launch 1.5% savings rates, with a catch – ThisIsMoney
Lenders slash buy-to-let interest rates as demand falls – ThisIsMoney
Profits slide at big six energy firms as 1.4m customers switch – Guardian
Comment and opinion
Time horizons Vs endurance – Morgan Housel
Latest from the 89-year old founder of Vanguard Jack Bogle – Humble Dollar
Is the best predictor of future stock market returns useless? – Of Dollars and Data
What everybody is getting wrong about FIRE – Mr Money Mustache
Diversification pros and cons in three slides [Geeky but excellent] – Alpha Architect
Why stock pickers must hunt for ‘extreme returners’ – James Anderson
Great discussion about hard money, gold, and Bitcoin – Invest Like The Best
Meet the FI Family: Mr and Mrs Young FI Guy interviewed [Podcast] – UK FI Pod
Just another panic attack in the market [For investing nerds] – Calafia Beach Pundit
John McDonnell is not offering workers real share ownership – Guardian
What should you consider in a ‘forever home’ [US but relevant] – Morningstar
Is Hargreaves Lansdown’s dividend yield too low for income investors? – UK Value Investor
Life advice: Don’t follow your passion – Scientific American
Hammond says double bonus from Brexit deal would bolster Budget [Search result] – FT
On Brexit, Tory ‘ultras’ are gaslighting half the country – Guardian
No-deal Brexit will leave households facing higher food prices, restricted travel, medical shortages and curbed consumer rights, Which? warns – ThisIsMoney
Brexit as revolution [Transcript, PDF] – Sir Ivan Rogers (Former UK ambassador to the EU)
HMRC chief faced death threats after opining on customs costs – Civil Service World
Polls suggest many Leavers want Brexit whatever the outcome – YouTube
Kindle book bargains
The Templars: The Rise and Fall of God’s Holy Warriors by Dan Jones – £0.99 on Kindle
Over and Out: My Innings of a Lifetime by Henry Blofeld – £0.99 on Kindle
You Are a Badass: How to Stop Doubting Your Greatness by Jen Sincero – £0.99 on Kindle
Way of the Wolf: Straight line selling by Jordan Belfort – £0.99 on Kindle
Off our beat
Amazon owes Wikipedia big-time – Slate
Off our beat: Environment special
Why you have (probably) already bought your last car – BBC
What would real ambition in tackling dire climate warnings look like? – Vox
We need to act now on climate change, or we’re screwed – DIY Investor UK
47-year old plastic soap bottle washed up on beach still looks brand new – BBC
The biggest threat to long-term wealth [Oldie from me!] – Monevator
“In my view, risk is primarily the likelihood of permanent capital loss. But there’s also such a thing as opportunity cost: The likelihood of missing out on potential gains. Put the two together and we see that risk is the possibility of things not going the way we want.”
– Howard Marks, Mastering the Market Cycle
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- Or less glibly since 2007. But in those days I treated my entire net worth as one big investment pot, so it’s not really like-for-like. [↩]
- 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”. [↩]