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Weekend reading: Looking down when the tide goes out

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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:

(Click to enlarge)

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.

Home alone

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.

Losing loadsamoney

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?

From Monevator

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

You’ll get £100 [and I’ll get a cash bonus] if you invest £1,000 with RateSetter for a year – Ratesetter (or see this article for more on the risks and rewards)

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

What would you do with £1 million? – FIREStarter, indeedably, Quietly SavingMs ZiYou, Saving Ninja

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

And finally…

“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

Like these links? Subscribe to get them every Friday!

  1. 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. []
  2. 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”. []

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{ 86 comments… add one }
  • 1 MrOptimistic October 12, 2018, 7:37 pm

    Thanks for the post, I’ll read it again and get back! You, who have ‘ youth’ on your side worry to much. Not sure I endorse your use of ‘ gnomic’ though.

  • 2 The Investor October 12, 2018, 7:58 pm

    Hah — I’m not as young as I was though. 😉

    I’m using gnomic in the sense of “difficult to understand because enigmatic or ambiguous.”

    But I agree it is one of enigmatic, ambiguous words.

  • 3 Faustus October 12, 2018, 8:09 pm

    Appreciate your candour about the emotions associated with active investing. For those who weren’t invested throughout the 2007-09 bear market this week has been a very useful lesson.

    On the Moneywise article, meddling with the pension tax relief system could well spell the death knell for pension saving amongst younger generations. Unless you enjoy generous employer contributions, private pension saving only really makes sense for middle/higher rate taxpayers who know they will pay less tax in retirement than now. Otherwise ISAs offer similar benefits with the trump card of instant access rather than waiting decades to access your capital (and the government chipping away at all the benefits in the meantime).

    Fortunately, it appears from the Government’s response to the Treasury Select Committee this week that they recognise the complexity and pitfalls of fundamentally messing around with tax relief system. Hammond is much more likely to go for the easy win of reducing the annual contribution limit or the threshold at which this is introduced. Hopefully he feels that he has more than enough headaches to handle at present.

  • 4 David October 12, 2018, 8:57 pm

    I must admit I hadn’t heard about the markets being down. It doesn’t seem to have made the headlines. I just downloaded my SIPP and ISA statements and they are down around 6%-7% since I last checked the values on 30th September. I’m mostly in a diversified mix of global trackers. It doesn’t seem “real”, but I guess when I next calculate how many years of annual expenses I have saved up I might feel differently.

  • 5 diy investor (uk) October 12, 2018, 8:58 pm

    Just clicked through to your 2010 article on global warming TI…a great read, thanks. Seems like not a great deal has changed in the past 8 years!

  • 6 John B October 12, 2018, 9:27 pm

    The second week of October isone of my quarterly dividend weeks for my Vanguard trackers, and I was more looking out for my cash than the market as a whole. It was going into p2p, perhaps it will go in a supressed global tracker now. Big absolute number falls, but I’m not worrying, my buffer is big, and its been lovely weather…

  • 7 ermine October 12, 2018, 9:51 pm

    Blimey, hopefully the rout proper has yet to begin. We are nowhere near the sort of thing that made your younger self once say who isn’t buying the market now. I have a load of cash that wants deploying into that sort of thing.

    Different times, eh, as the song said, “ten years get behind you…” 😉

  • 8 The Investor October 12, 2018, 10:11 pm

    @ermine — Who knows, but as a UK-orientated active-ish investor after income as I perceive you to be, I wouldn’t get super greedy personally. The FTSE 100 is already back below where it peaked at the end of 1999 (yet again!) and there are plenty of credible equity income trusts yielding 3.5%-4.5% on discounts, double digits in some cases. Of course in a mega smash they could still lurch down another 20%+ but the truth is many have been falling all year already and you can wait a long time for “the big one” and then have to move fast. Of course one could always do a dribble now with an eye to a splurge later. 😉 What was different about this week really was the bottom fell out of growth stocks in the US/elsewhere. Most of the world has been crappy for most of the year. Perhaps we’re on the cusp of something bigger but to be honest it doesn’t feel that way to me. But who knows! 🙂

    Thanks for the comments so far, all.

  • 9 YoungFIGuy October 12, 2018, 10:29 pm

    Wouldn’t have even known the market was ‘down’ but for the commentators telling me ‘not to panic that the market is down’. Hmm…

    (thanks for the link, now people can now both read and hear that I talk nonsense).

  • 10 dearieme October 12, 2018, 11:22 pm

    “How was it for you?” I’ve no idea: I haven’t checked. We’re not short of money this month, therefore we won’t be selling shares, therefore there’s no need to check. My next scheduled check will be on April 5th/6th.

    Of dollars & data “Can you imagine how hard it would be to sit in bonds for 4 years while your friends (some of them dumber than you) got rich along the way?” Why would I care? Moreover I don’t share the common American assumption that rich = clever.

    “Geeky but excellent”: indeed it was.

    “How to Stop Doubting Your Greatness”: cynical snort!

  • 11 Keith October 13, 2018, 1:02 am
  • 12 Mathmo October 13, 2018, 1:48 am

    Thanks for the links, TI, and thoughts on this week’s hiccough.

    I look at drawdowns not like a newspaperman seeking sensationalist headline %ages from the peak — as discussed before: you’d need to be particularly “lucky” to buy at the peak — but rather how far back in time you’d need to go to be reset. In this case — it’s just back to the end of April. I bought some on the way down as it went through the end of June having had a quite word with myself in March for missing the buying opportunity. And that was a much bigger dip, so not sure what it is about your allocation, TI, that means you’re feeling more bruised now than at Easter.

    Fascinating then to read the articles last week (“are you ready for the crash” and “the crash might not be coming”) just before this little bump. And this week I particularly thought the dollars&data one — returns are low when the trade is crowded — is a particularly interesting way of looking at variations on simple % rebalancing (which you might otherwise do with Schiller etc). It almost is a contrarian rebalance (many think they are, but looking at the tech bubble graph in that article, which of us would have?). His core message of “stick to your strategy” is one that I keep learning again and again.

    So I too have been making the Augustinian passives prayer, and the revelation of AGBP in these comments pages as the store of value I was looking for has been a great help in allowing me to increase my exposure to some apparent crazy equity valuations and feel good about it. It responded well this week to the blip (and not at all to the huge bond withdrawal) and I assume will resume its gradual slide downwards just as equities resume their relentless march up, enabling me not to care about PE ratios.

    Enjoyed the electricity article — not least for the fact I’m fighting SSE at the moment who would like to put my electricity prices up 30%. Given I realised from reading that I pay twice the cap value, I’m wondering what I need to do to get myself onto a default tariff to qualify for a cap…

  • 13 AncientI October 13, 2018, 3:27 am

    My portfolio took a massive hit this week and its very painful seeing all the previous 6 months gains vanish in days. Ive found the tone and narrative around equities very negative recently and I think this is to blame for the sell off as much as anything.

    “stocks are over-valued”
    “the bull run is 10 years old!”
    “a correction is long overdue”

    This whole thing has got me thinking… why exactly would people sell their stocks anyway? ( and contribute to the dip ) I mean immediately after you sell, your in cash…….great so now what? are you going to stay in cash forever? when do you buy back in? …..what if the market starts to creep back up just after youve cashed out? ….. now your losing even more money!

    I like the point that dearieme makes…. I.E. unless you intend to spend the money when you cash out what is the point of selling your stocks? Perhaps if every investor thought rationally like this then this correction would never of happened.

  • 14 Ms ZiYou October 13, 2018, 7:18 am

    Yeah, it’s the first time I’ve had real money in the markets when it’s gone down – and I have impressed myself by remaining reasonably calm even though I was down about £40k at one point.

    Really selfishly I kinda want a crash now while I’m still working, does that sound bad? The sequence of returns risk is the main concern in my early retirement plan.

  • 15 The Investor October 13, 2018, 7:24 am

    @AncientI — I know that feeling. Hope the weekend provides some respite! To be honest I see volatility as a feature, not a bug, of equity investing. If nobody sold except to raise cash when needed, I believe share valuations would get very expensive (which is what happens really during a bull run.) They’d be perceived as safe without dips, and those of us who’d taken the time and trouble to learn and put up with volatility could not expect to be rewarded much more than for owning bonds and cash.

    So in principle I’m pretty happy with regular mini-crashes along the way. It’s the price we pay for the extra gains. 🙂 As I say in my piece, I’m mostly annoyed at myself for getting the mix wrong despite having made active choices in anticipation.

    @Mathmo — Right now I’m back to January. I was of course hit by the spring volatility, but it wasn’t so fast/steep for me. With my active hat on, I do tend to think in terms of drawdowns from the peak. Not because it’s practical to time a sell at peaks (nor that I’d ever think I could or would do so, wholesale) but because every day as an active investor I have the option to rejig my portfolio. If I don’t and it falls and I should have, that’s on me. (Though the blame warranted may be very tiny with short-term volatility being essentially random!)

    @Keith — Cheers, I’ve added to the links. Looks a thoughtful read, but we should steer clear of that subject in the comments this week I reckon. Last week’s ding dong was enough to be going on with for a while. 😉

    @dearieme — It’s nice to think I wouldn’t care but sitting out the housing market for 15 years has made me somewhat humble. Yes, I did it (unfortunately, in retrospect) but it definitely came with mental baggage, plus an opportunity cost.

    @YoungFIGuy — Was hard to decide between this or the dieting post this week, but the guinea pig chat swung it. I’ve a soft spot for those little muppets!

  • 16 John @ UK Value Investor October 13, 2018, 7:50 am

    My portfolio was down by about 5% over the last couple of days and about 10% down from its peak in June.

    It’s a pain, but I try to ignore short-term share price movements because they’re mostly irrelevant. It’s far better to focus on the performance of the underlying assets (e.g. companies, property, whatever) and the income they generate, rather than whether or not their price is up or down by 5% or 10% this week.

    And of course as a value investor you should never forget the Templeton saying: Trouble Is Opportunity.

    “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” – Sir John Templeton

  • 17 ZXSpectrum48k October 13, 2018, 10:03 am

    I lost 1.8% of NAV from Sep peak to Friday close which is a chunky drawdown for me. I’m far more risk averse than most here targeting a 2 Sharpe on my portfolio (10% return, 5% vol, 5% stop reset annually). If I lost 10% of NAV, I’d throw myself off a bridge! Only 25% of my portfolio is listed equities (my limit is 50%) but I have smalls in govt and corporate bonds and they also took hits over the last month (US bond yields up 35bp , HYG down 2%+). I’ve use 200-day moving-average trend smoothing to manage my equity exposure (buy above 200-day/sell below). That kicked me out of many equity markets earlier this year. The Friday close on the S&P was 2767, the 200-day is 2766. I’m going to hold here unless we see a decisive break lower since I don’t want to chop myself up.

    I think the trigger is the rise in US 10-year real yields, which are up 30bp (vs. US core cpi, 80bp vs. headline) in the same period, and are now close to a 4 year high. A similar spike in real yields was coincident with the fall earlier this year. Real yields were being kept in check by trend curve flattening but that has stopped/reversed slightly. Fed guidance is moving the market to price a later, more restrictive, terminal rate at a level above R*.

  • 18 Amit October 13, 2018, 10:06 am

    I have noticed that after a few years of accumulation and contributions, the only stats I care about are: the overall corpus, and the overall gains. Even in time like these, I actually feel thankful to my past self for starting to invest early and to my current self for continuing the discipline.

  • 19 WilhelmMeister October 13, 2018, 10:29 am

    @Investor – thanks a lot for a really interesting post. I have always enjoyed your posts over the years and I’ve learnt a lot from them. Sorry to be a cassandra, but isn’t 70% equity a bit high for current conditions? What would Ben Graham say, I wonder? I also invest in individual shares, looking for value and quality, and try to base my asset allocation on overall conditions. Right now I’m at 40% equity, so this week I was down 5% at the worst point. I sold a few things on Monday and Tuesday, and felt pretty nervous on Thursday.

    But as @ermine rightly says, there could much further to go. I always keep an eye on this – http://www.multpl.com/shiller-pe/table?f=m – the Shiller PE ratio. Only US stocks, but that’s still 60% of the world equity market. When you made your famous and brilliantly timed Keep On Buying Equities call in March 2009 (sadly I wasn’t a reader – or a buyer – back then!), the measure was at a generational low – 13.32. Now it’s at the extremely high level of 31.22 – actually, close to a generational high. To me, that’s a sign that it’s a good moment to reduce equity exposure and keep a lot of powder dry. Especially if the cycle is turning this month – and after all we have quite a storm brewing, what with the Brexit clusterf*ck, the Italian debt clusterf*ck, the criminal moron in the White House, trade wars, Chinese debt levels, oh, and the impending end of the world due to climate change, of course. Anyway, aren’t we due a recession and stock market fall around now, all things being equal? It’s been a while, after all. After a nine year bull market, it’s reasonable to expect a two or three year bear market, based on historical patterns. Or – am I being way too pessimistic? As a centre-leftist, middle-aged, pro-European Brit, it’s very easy to feel gloomy, after all.

  • 20 Hari Seldon October 13, 2018, 10:35 am

    Oddly I’m going back from passive to somewhat active, I believe the private investors advantage of patience can be used and I am now seeing opportunities.

    Added a closed end investment company yesterday, at a 20+% discount which in turns includes 20% holding in treasuries and other investment companies some on big discounts, previous experience suggest that over time these can work out well.

    Absolutely agree I have no edge but I can apply a different time frame and that helps.

  • 21 L October 13, 2018, 10:40 am

    For once, I haven’t checked! 🙂

  • 22 Tammer October 13, 2018, 10:43 am

    The Moneywise article is a similar one to the stories that appear every year ahead of the budget as pensions always seem to be a tempting target. This year though, there is the challenge of more funding from the NHS but few easy ways to raise the money.

    The irony is that Tax Relief isn’t really a free hand out from the government, as they like to portray. If tax rates were lower, that would lower the tax relief “bill”.

    I occasionally read stories about our generous tax reliefs in the UK (more generally) and that Americans are astounded when they come over here to work. Perhaps we could tackle allowances like ISAs? Do many people really need an annual limit of £20k plus the potential to save another £20k or so in cash tax free on top?

  • 23 Fatbritabroad October 13, 2018, 11:21 am

    I got an inheritance in August and after considering put the lot in the market in one hit (about 30k in one hit). It’s done nothing but tank since lol but I’m not worried.i find it helps to look at my pension (I’m 38) which has 3 times the amount that I have in isas. I’m not going to stop paying in my pension so why would I do any different wuth my isas

  • 24 Chris October 13, 2018, 11:22 am

    On finding more than one passion and shifting mindset, I highly recommend this free coursera course:
    The earlier learning how to learn course from the same people is a good compliment too.

  • 25 dearieme October 13, 2018, 11:25 am

    @ZX: “I’ve use 200-day moving-average trend smoothing to manage my equity exposure (buy above 200-day/sell below).” I’ve been reading about this idea e.g. at

    How do you do it? I mean – excuse my ignorance – where do you get the 200 dma from? Do you apply it to (I suppose) the US, UK, Japan, and whatnot separately? Does that mean that a sensible way to execute it would be with tracker funds that you move in and out of? Do you manage all your equity exposure this way, or do you have some sort of “core” buy and hold as well? What do you move into – cash?

    Any comments &/or links would be most welcome. Even if they do mean I’d have to give up my rather relaxed approach to portfolio management.

  • 26 dearieme October 13, 2018, 11:34 am

    @FatBrit: “I’m not going to stop paying in my pension so why would I do any different with my ISAs” – because diversification? If you’re piling up equities in your pension why not elsewhere pile up GBP, FX, premium bonds, wind-rippled fields of ripening wheat, silver napkin rings, low carat second-hand gold jewellery, a pretty patch of broad-leaf woodland, or a herd of goats?

  • 27 Vanguardfan October 13, 2018, 1:05 pm

    Well I thought one of the key principles of the passive approach was to be aware of emotional responses to market movements, and thereby understand that you should not be making impulsive changes to asset allocation in response to short term market movements. Further, asset allocation should be decided with the knowledge that your equity portion can and will crash at some point, and when it does, you do not change your asset allocation in response to this perfectly predictable event (predictable in the sense that the chance of it occurring is probably 100%, even if the timing is unpredictable).

    I notice that when markets are going up, I feel good. When they are going down, I feel uneasy. I tend to avoid looking at my accounts during the bad times. I certainly don’t monitor my percentage losses (it actually takes quite a long time to add up all my accounts and work it out, so I only do it once or twice a year). I have a written investing plan which puts my equity allocation at 50%, and my cash allocation at about 30%. So I know I have plenty of cash reserve.
    I also know I know nothing and only aim for market returns.
    Personally, I think if you are trying to encourage investors to be aware of emotional and behavioural biases, and reduce the chance of self sabotage, then the less public hand-wringing and angsting the better. Keep calm and stick to your investment plan, and DON’T look at the red numbers on your account.

  • 28 FIRE v London October 13, 2018, 2:11 pm

    Lovely post, @TI, and thank you for sharing.

    I have been feeling reasonably pleased with my own emotional control in the last week or so. I do appear to have at least as much “oh great, things are cheaper” as I have “feck, that’s a sizeable six figure sum I’ve lost”.

    My portfolio is down 6% on the start of the month, and about 7% from peak. My max drawdown is close to being breached, for the first time in years. This is taking me back to April. That really doesn’t feel too bad. As @MorganHousel’s excellent tweet put it: “Today was the worst decline since the February decline you don’t remember anymore.”

    As to how I have seen 6% decline…, well I have outsized Tech holdings too. I’ve been wondering what price I’d top up my AMZN holding, but we aren’t near it yet.

    I also remain leveraged. And my leverage, unlike @TI’s, is ‘on balance sheet’.

    But I have also been slightly underweight equities, and also underweight Asian equities (despite recent buying). These things have, I think, helped me.

    I felt in control enough this week to consciously extend my leverage by about 1% of my NAV to top up equity positions by buying indices that are 10-15% down. Touch wood, my future self will say Thank You. But now I’m off to work out my leverage sensitivity …

  • 29 Mulberry October 13, 2018, 2:28 pm

    Wow! Stunningly good coverage this week – especially appreciated Sir Ivan Roger’s article which I would never have found otherwise!

  • 30 ZXSpectrum48k October 13, 2018, 2:55 pm

    @dearieme. I have a Bloomberg terminal so data access is not an issue. I assume, however, to get a time series for most major indices is not that hard (Yahoo Finance)?

    I cap listed equities at 50% with a floor at 10% in my portfolio. My equity exposure is essentially trackers. I find holding equities hard since I don’t understand them, nor am I interested in them. I do know I’m too rise-averse to buy-and-hold so I need some form of intellectual crutch to risk manage the process. While using momentum is an active tilt, it’s just part of the toolset. I don’t manage fixed income and fx this way where I take discretionary positions.

    Based on various datasets the impact seems most pronounced for the S&P500. A backtest (1872-2018) implies it adds around 200bp/annum of return and reduces volatility by 450bp, almost doubling the Sharpe. It reduces the worst drawdown from 77% in real terms to 35%. For the UK equity market, the impact in return terms is just 60bp but with 500bp less volatility. Drawdown, in real terms, reduced from 75% to 30%. For global equity, Gilts, property, commodities etc. the impact is positive but less dramatic. Based on historical simulations and Monte Carlos calibrated to historic return distributions, the impact on sequence of return risk seems substantial, hence why I use it. Unfortunately, however, history is no predictor of the future. DYOR etc.

  • 31 SurreyBoy October 13, 2018, 3:20 pm

    My SIPP and ISAs have been spanked for £40k which has removed this year’s gains and sent them slightly negative. I’m not too bothered and am thinking of topping up. There are some lovely household name companies with nice looking yields.

    Part of the reason I don’t get fussed with market drops is I ignore net worth and look at what 4% will give me a year. So to make things up, if the pot was £200k the planned yield was £8k a year. If it tanks 20% the annual draw will fall to £6,400. I find it easier thinking I will be £133 a month worse off when I quit work, rather than thinking about the £40k vaporised by the market. Its mental trickery but it works for me.

    This week’s drop has been an excellent reminder that for the reward from equities there needs to be some risk. For me the big reminder as well is don’t have any money in shares if you want to spend it in the next few years. I know all about the drag on long term returns by holding cash, but the ability to sleep and (hopefully) not panic is more important for me.

    I don’t know the point at which I would panic and sell. I would massively resent the idea of someone buying my shares for a song in 2018 and 10 years later sitting on large gains cruising the world in style, whilst I sat at home next to a one bar fire etc. The general air of gloom and uncertainty these days makes me think a decent 30% drop could be on the cards. If so, it’s happened before and the world keeps turning.

    Keep smiling all.

  • 32 Fatbritabroad October 13, 2018, 3:21 pm

    At the moment i want to be as heavy equities as i can tbh. I have a similar amount in house equity and 5% of my net worth in p2p. I’m not keeping much cash atm at all 3 months or so but my jobs stable and I am saving cash as well to build this back up

  • 33 YoungFIGuy October 13, 2018, 3:42 pm

    @dearieme, ZXSpectrum48k

    You can create the dataset using the Googlefinance function in google sheets – it’s quite straightforward. As ZX says, the measure ‘crossed’ on Friday with the S&P closing at 2,767 and the 200 day average at 2,766.

    The strategy, at least as the S&P500 is concerned, has worked very well historically. That said there are three major ‘pitfalls’. 1. The strategy can ‘underperform’ the ‘market’ for significantly long periods of time, so it becomes as much a test of mental fortitude as anything. 2. The strategy gives lots of ‘false positives’, mini-dips that result in you selling out low and buying back high. 3. The strategy doesn’t offer much protection against ‘flash-crashes’ (like Black Monday 1987).

    That said, if you consider it for the viewpoint of an insurance type policy or a way to protect against absolute capital loss, it has historically done the job. (Which I think is the best way to look at it). That said, what has ‘worked’ before, may stop working in the future.

    Early Retirement Now wrote a very good post about this, worth a read for those interested: https://earlyretirementnow.com/2018/04/25/market-timing-and-risk-management-part-2-momentum/

  • 34 MrOptimistic October 13, 2018, 4:02 pm

    For just about the first time ever I have been buying bond funds over the last year and still have a big chunk of money to invest. I was inclined to a 40/60 equity/bond split but I am reluctant to buy bonds as they seem a one-way trip with unlikely recovery. HELP needed!

  • 35 WNeil October 13, 2018, 4:28 pm

    This week 8% down from top, holding global, small cap, EM, and high div. total 70% equities. Enough upside, and sufficient options to rebalance to a much bolder allocation when markets go really squeaky. Nowhere near that yet. Thanks for sharing your experience TI.

  • 36 Hospitaller October 13, 2018, 4:54 pm

    Not bad at all. On the basis that US valuations had been elevated for a while, I had moved the equities to 45% a couple of months ago, with 5% in cash, 5% in gold, and the rest split between straight bond funds and inflation-linked bond funds. I don’t intend to stay that way for ever and will move bundles into equities as and when we get to bear market territory (20% off peaks); all I could do this week was add a little Emerging Markets exposure and some Asian exposure.

    Which said, the pace of the sell-off was surprising to me. I guess it is a combination of automated trading using pre-set parameters and the amount of money in “passive” portfolios (which are often not really passive eg they contain a judgement-driven equities/bonds split).

  • 37 Hospitaller October 13, 2018, 5:15 pm

    @ Mr Optimistic

    “buy bonds as they seem a one-way trip with unlikely recovery. HELP needed!” They looked that way to me too until a few months ago, the main problem being duration risk and the drops in value that come automatically with yield/interest rate increases (there are also concerns over a repayment crisis but that should be sorted by choosing quality bonds). To significantly counter that duration risk, I hold a lot of good quality straight bonds on up to 5 years duration. Over the last month, however, US 10-year Treasury yields have moved over 3% and been towards 3.25% at times (and that was partly the cause of last week’s equities drop, as these bonds offered more serious investment competition to equities). There is an old saying that “at 3% bond yields begin to look attractive and at 3.25% are an outright buy”. So what I have been doing is buying chunks of the Vanguard US Government tracker fund (the GBP-Hedged version) and aim to add a bit more every time this 10-year yield ticks up. There may be small capital losses as we go along and the Fed ploughs on with rate rises – but these should turn to profit over time. I have a notion also that, if/when we next have a global recession, the sometimes unstatesmanlike figures who are today’s worldleaders will shrug their shoulders and again leave the central banks to sort it out via more QE (=lower yields = higher prices); in which case these bonds would generate nice capital gains.

  • 38 dearieme October 13, 2018, 5:34 pm

    @YFG: many thanks. “Google sheets” – I’ve not used a spreadsheet since lovely Lotus 123 died. Ah well, needs must if the devil drives.

    @ZX: many thanks too. “Yahoo Finance”: I hope that’s better than Yahoo’s rather lousy web browser which, when I entered ‘Google sheets’, gave me as its first hit “Egyptian Cotton Sheets”.

    Both: I assume that this 200dma lark is best done by buying and selling rather than trying to use derivatives to get a comparable effect?

  • 39 ZXSpectrum48k October 13, 2018, 5:58 pm

    @Hospitaller. At the risk of teaching my grandmother to suck eggs, remember that a US 10-year bond yielding 3.25% will yield 1.40% after the impact of GBP/USD currency hedging given the front-end rate differential. So it will actually yield less than the 10-year Gilt (1.63%). That doesn’t mean it isn’t good value but it doesn’t offer UK investors any yield pickup. It’s a pure duration play. One of the issues US Treasuries currently have is that they are becoming less attractive to foreign investors as the Fed hikes because as the currency hedging cost becomes higher the implied yield has goes negative for investors in Europe and Asia.

    @dearieme: I tend to use derivatives to add or reduce risk and then spin that into an underlying tracker fund but that is simply for speed of execution.

  • 40 Mathmo October 13, 2018, 6:24 pm

    @zxspectrum — very keen to understand that hedging cost calculation further. I have been trying to abandon UK bias so gilts have moved to hedged global bonds — I suspect there’s less political monkeying around globally than locally. But hedged because my long term costs will be GBP. I’m not sure I care too much about yield as it’s a store of value (and presumably the damped yield means a damped effect on valuation when global interest rates move?).

    @TI — I still think that time lost rather than mythical peak lost is a healthier way to think about it. It makes you feel better when melt-ups happen. I’ve dipped a few % below the Q3 balancesheet. How people have made it back to January is beyond me. But if you take credit for the rain then you will have to be blamed for the drought.

  • 41 YoungFIGuy October 13, 2018, 6:45 pm

    @dearime – Lotus 1-2-3, now there is a blast from the past. Believe it or not, I would ‘play’ on 1-2-3 with my late father as a child in the 90s (so is it any wonder that despite my teenage protestations I’d always end up an accountant?) Of course, ZXSpectrum48k ‘cheats’ in that he gets Bloomberg to do the fancy pants charts for him. I suspect there is probably a browser-based financial charting service that also does it. I just tend to favour calculating everything myself (once a forensic accountant, always…)

    In answer to your question, you can use derivatives (or options) as ZXSpectrum48k notes. You can also do it by simply buying and selling the relevant trackers. The former is probably quicker and has lower transaction costs for those that have such trading options available to them. The later may more readily confer tax advantages by defusing capital gains or realising losses. I’ll confess I do neither! I’m far too lazy an investor (and I don’t enjoy it enough) to use this strategy – I trade once (or twice a year) and that’s it.

    p.s. If you’d indulge us, I’d also be very interested to hear your thoughts on Mathmo’s comment, ZXSpectrum48k.

  • 42 Mathmo October 13, 2018, 6:54 pm

    Ps – TI – not sure you have the right link on the gold article (whilst we’re all flying to safety) — I keep getting private inequity.

  • 43 The Investor October 13, 2018, 7:00 pm

    @Mathmo — Darn, you’re right. Thanks — it’s fixed now. Sorry for the confusion everyone.

    @all — Great comments all, thank you, very interesting hearing how everyone is doing and how you’re set up for these unusual times. And these *are* unusual times, even more so for UK-based investors, even if the standard approach for 99.9% of people (and 100% of those who don’t enjoy it) should be to eschew doing anything active whatsoever with their portfolios and to stick to the age-old passive investing strategies we focus on here. Even then it’s still an unusual view out the passive investing train window. 🙂

  • 44 Vanguardfan October 13, 2018, 7:15 pm

    But aren’t times frequently unusual? Of course each crisis is unique, but is today any more unusual than the GFC, or the tech boom and bust, or the oil shock of the 70s, or the Cold War (no idea how that impacted on markets but I bet things felt pretty ‘unusual’ during the Cuban Missile Crisis…) etc etc.

  • 45 Vanguardfan October 13, 2018, 7:16 pm

    And as for the first half of the 20th century….
    (Hmm…so how do I invest in gold again?)

  • 46 Mathmo October 13, 2018, 7:34 pm

    @TI – thanks. Will go and indulge my fascination with the barbarous relic.

    @YoungFIGuy — I remember my father showing me supercalc! Avoided the profession, though. Just about.

  • 47 The Investor October 13, 2018, 8:07 pm

    @vanguardfan — Yes, in some ways times certainly are always unusual one way or another — in fact that’s probably how I’d retort myself. 🙂 But I think moving off a long period of negative real rates and quantitative easing (and headline nominal near-zero rates) has the potential to be classified as particularly unusual.

    The risk-free rate on US government bonds is the gravity (as Buffett has put it in the past) that underpins the financial system (including, as you know, the valuation that might be put on shares, as I flagged up in point #10 in this article back in November 2016: http://monevator.com/the-problem-with-low-interest-rates/). I’m not sure we’ve ever seen a normalization on a global basis like this before.

    It doesn’t mean it needs to be unusually eventful — perhaps the surprise will be it all goes blandly! 😉

  • 48 ZXSpectrum48k October 13, 2018, 8:10 pm

    @Mathmo. The cost of currency hedging represents a no-arbitrage condition (interest rate parity) between the spot and forward exchange rates. In one scenario we can simply deposit £ in the UK at a rate r(UK). In another scenario we can take our £ convert to $, at spot rate S, deposit that at interest rate r(US) and convert back to £ at forward rate of F. Now the rates of return must be equal or there would be a risk-free arbitrage. Thus 1+r(UK) = (S/F)*(1+r(US). Rearranging the forward rate F = S(1+r(US)/(1+r(UK). Given that rates in the US are higher than in the UK, then the GBP/USD forward rate is higher than the spot rate.

    So you want to invest £100 into US Treasuries with a coupon of 3.25% for 12 months, currency hedged. To simplify we assume these are par bonds with yield is 3.25% at purchase and sale, with no accrued interest. So we take our £100, sell spot GBP/USD at 1.315, to generate $131.5, and invest this amount into USTs. After 12 months, you will have earned interest on the bond of 3.28% for a total of $135.81 (USTs pay interest semi-annually and we’ll reinvest the first coupon). If we were doing this currency unhedged, we convert this $ amount back to £ at the prevailing spot GBP/USD rate at that time. So, for example, if spot GBP/USD was still at 1.315, our GBP proceeds would be £103.28, a return of 3.28%.

    If we want to do this transaction currency hedged, however, when we initially sold spot GBP/USD, we would also need to buy GBP/USD for delivery in 12 months time. The 12-month GBP/USD forward rate is 1.3397. So here we take our $135.81 and convert back at 1.3397 to generate £101.37, a return of 1.37%. The drop in return vs. the unhedged case is 1.91% which we find happens to be very close to the difference between 1-year US$ Libor (2.98%) and 1-year UK Libor (1.09%) i.e. the money market rate differential as predicted above.

    TI, apologies for the length and going off-piste.

  • 49 The Investor October 13, 2018, 8:21 pm

    @ZXSpectrum — No apology necessary thanks, an excellent explanation!

  • 50 Mathmo October 13, 2018, 11:23 pm

    @zxspectrum — thank-you so much. That was exactly what I was after. I note that the periods of the two rates are different, so I guess that’s what you meant by the fact that it’s a duration play — you might believe that the US and UK yield curves will hold different shapes?

    I have a couple of questions —

    In your example you take a year as the period which we wish to hedge being how long we’re going to hold that bond. If I buy a hedged bond fund, then the period becomes less clear. Does the manager hedge every cashflow (ie quarterly or semiannual interest payments and capital repayments — these are reasonably well known in fixed income), in which case how is the hedging cost calculated — is it difference in libor over the effective duration in each currency? Alternatively is it hedged daily or some such, so any movement in the fund each day is corrected for currency movement? In which case I guess we’d be looking at the difference in overnight rates?

    How does the value of the fund move with rates? Does it move with the UK rate (because the difference is the hedging cost) or does it move with the underlying US rate. Or third option — does it move with the fund yield — ie US rate less hedging cost? In your example, if the dollar were to suddenly appreciate and the hedge costs close down then the yield on the fund would increase so presumably the value would drop? Or would some movement in UK rates likely compensate for that?

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