Some good reads from around the Web.
I enjoyed Don’t be the dumb money by Allan Roth this week – not least because I’ve been slightly trimming my equity exposure in recent days, and it’s always good to be reminded why.
As Roth writes:
When stocks were surging through April of 2011, investors poured $38 billion into U.S. stock mutual funds during the first four months of the year — just in time for an ensuing five-month decline that nearly hit “bear” status. Investors subsequently pulled $179 billion out of stock funds — just in time to miss out on the recovery.
And now that stocks are hovering around that all-time high, can you guess what’s happening? Yes, for the first two weeks of February, investors have put nearly $5 billion back into stocks.
It seems one cannot repeat this message enough. Personally, I was buying heavily again when the FTSE went below 5,000 back in August. And happily, so were many Monevator readers, judging by your comments on my report at the time.
This house believes the best way for most people to invest is passively. That includes you and me most likely, though it will be years until we can know for sure.
But if you’re going to play in the murky waters of active investment, then whatever you do don’t follow the crowds in at the top and out at the bottom – unless you truly appreciate the hard work of City folk, and aspire to make them richer!
(Just to be clear, since this is the Internet and most bloggers are hysterical, I am not calling the top of the market here, or anything like it. I was extremely long equities by the end of 2011. Now I’m slightly less extremely long – but I still think the stock market is the best place for the bulk of my cash, at present, on my usual long-term view).
From the money blogs
- The Total Economy portfolio – Rick Ferri
- Time diversification – Wade Pfau
- Complete transcript of Buffett on CNBC – My Investing Notebook
- Middle-class finances: Death by 1,000 cuts – Simple Living in Suffolk
- Why willpower isn’t the secret to saving money – Mint
- Learning from Lauren Laverne – Richard Beddard @iii
- A sign of slumbering – or of hope? – Vanguard blog
- It pays to start retiring early: A realistic analysis – Oblivious Investor
- Warren Buffett’s 2012 letter: Redux – The Dividend Monk
- Euro break-up not a disaster shock – Terry Smith
- The ideology of inequality – Stumbling and Mumbling
Book of the week: With cries of ‘do something!’ echoing again around Whitehall and Washington, it’s time some brushed up on Milton Friedman
Mainstream media money
- Technology quarterly (including the flying car) – The Economist
- Global poverty: A fall to cheer – The Economist
- Northern Rock: Bad bank going good – Peston/BBC & Independent
- School for quants – FT
- Property sex wars – FT
- Standard variable mortgage rates to rise – Telegraph
- Silly article about gold [But check out the batty comments!] – Telegraph
- Don’t shun ISAs: They are a bet for the long-term – Independent
- 0.5% base rates have cost savers £60 billion – The Guardian
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From the DT article
That’s going to be a rough old ride. Mind you, for those who don’t fancy the market at the moment, paying down the mortgage looks like it’ll be a good place to get a decent guaranteed return on your money, in terms of the interest you don’t need to pay on repaid capital 😉
The inference wherever I read about “dumb” money inflows and outflows always seems to be that it’s the small time private schmuck missing the boat, yet the narrative in most of the professionals end of year financial statements, whether from mysterious off shore based hedge fund managers or well known high street names, typically includes the justification as to why your investment hit the skids is “last year was particularly difficult”.
Just who is the “dumb money” they always refer to – the professionals who make the wrong choices or the people who entrust the professionals?
One of the many mysteries I suppose, oh well back to the passive investing, great blog btw.
@Romford Dave — Agreed, my definition of dumb money includes most active managers most of the time. As a guilty financial news junkie, I heard manager after fund manager explain why the market was too treacherous in late 2011.
Maybe 1/10 would say “hey, but at least it’s less risky at these lower valuations”.
Actually, make that 1/20!
I put lots of new cash, and some hoarded cash, into the markets during 2011. Some was in April (boo!) but a lot more was in August to December (yay!) and overall it was a good result during what was a difficult year.
I’ll be doing our S&S ISAs in April, but will probably bung in the money but then dribble it into the markets over the summer.
Hard to avoid it sometimes though, it’s looking a bit toppy to me at the moment, but I only scraped together the funds for my ISA this month, so that will be dictating my buying. I don’t want to stay in cash, and bonds look overpriced as well. Shares are the best of a bad bunch at the moment I think.
@TI – whats the message here? Roth is saying punters are typically buying high selling low over periods of months, ok thats bad but to be expected, but you’re saying you spotted the bottom and threw your chips in and then people are commenting that he market looks ‘toppy’. You’re right when you say bloggers are hysterical.
This isn’t passive investing, this is short term speculation. You’re not the messiah, you’re a very naughty boy.
Can i restore some sanity by saying I just pound-cost-averaged over the time period in question and it seemed to work out ok for me.
And that as of Friday the PE of the FTSE All Share was 10.75 which is *low* meaning the chances of making a reasonable return on an index fund moving forward into the future is *good*.
Well, I hit it when London was rioting and am all out of ammo at the moment. No, I don’t claim to be clever either and it’s probably all luck, but I took some inspiration from some of TI’s non-passive writings here, enough to turn a depressive world-view into at least sporting some of my ill-gotten gains on the possibility of a brighter world ahead . The day those non-passive posts cease is the day I’ll stop reading 🙂 And don’t get me wrong, I thing TA is awesome and I’ve learned losts there too. I just need the dark side as well, to give me hope…
@ermine – i think TA and TI are one and the same person – think Jekyll and Hyde…
@Ben I have to confess I’ve suspected that too 😉 He’s a master of the art of dual personality though!
@Ben — Bit harsh. I am surely the only active writer on the entire Internet who feels bound to put in a passive disclaimer/reminder into almost every article about active investing / direct shareholding that I write, as I did above, as usual
The takeaway message is surely this line: “if you’re going to play in the murky waters of active investment, then whatever you do don’t follow the crowds in at the top and out at the bottom”
I blog about this stuff for those who find it interesting, because I do. I’m not claiming to be “The Messiah”. If I was, I’d have posted to my article on the day of the bear market low in March 2009! 😉 (Just pulling your tail — that post doesn’t claim to call bottom of course, and it was very lucky with the timing.)
There are different ways to try to market time, which is what Roth is discussing here, effectively. One way is through following and reaching a view on ‘the news’. Another is through valuation. I think the latter is more sensible (I am not saying “is sensible” necessarily), if you’re going to do it at all, which in reality I do and many others do (including many supposedly pure passive investors who withhold and then pile in with lump sums for that matter).
Obviously I’m well aware of the advantages of pound/cost averaging (I use it myself in my SIPP account) and I’m glad you’ve shared it worked out for you. Very happy indeed! 🙂
I have a longstanding concern that the passive/active schism on this blog will one day cause annoying bust-ups. At the moment the odd mini flare-up with a regular reader like yourself is fine, but I don’t know what I’ll do if bombarded with them every day.
TA argues that it’s all part of life’s rich tapestry, and that it’s better to represent the waterfront of options. My main argument is I blog about what I do and believe (even where those two things are slightly inconsistent, which is human). My second is that I find going around in circles on it boring.
Also, TA doesn’t have to moderate the comments! 😉
Ironically it’s passive investors who have ‘got the religion’ who will cause that schism if it comes. Very very rarely do I find an active investing reader posting critically of a passive strategy. In fact the only regular I can remember doing it was Ermine (glad you enjoy my articles E!) and had did it in a pretty measured way, talking about his own experiences principally.
p.s. In case it’s not clear from the above, the bit with your comment that has set off this long reply is “The Messiah” bit/tone. I am very happy for the reminder that passive strategies avoid all this timing nonsense, and work best for most, and for the personal vouching for them. 🙂
@TI – I think you need to google “The Life of Brian” to understand the “Messiah” quotation. I’ve no idea who Ben is, but I now know his taste in films.
Just a question – what is the likely reaction of the markets if there is a war in the Middle East in April/May/June?
@Elizabeth – mad panic and blind sell-offs initially, and then back to business as usual. (Note to self: top-up holding of BAE Systems Plc.)
@TI – no offence meant. I think tone is often tricky to convey in posts. Only reason I stick around is cos your blog is so useful and well written. I d still only have a single cash savings account losing me money if I hadn t stumbled across it. Ps you re not telling me you haven’t seen life of brian?
He’s not The Investor, he’s a very naughty boy!
@Ben & @Simon — Oh dear, have I already become one of those old duffers who doesn’t get cultural references?! 😉 Worse I have seen the film, though 20 years ago…
Thanks for the clarification.
1. For so many reasons, it’s surely impossible to answer Elizabeth’s question about markets and “a war in the Middle East in April/May/June”.
2. There may not be any markets left. (A bit pessimistic, I agree.)
3. What, exactly, do we mean by ‘war’?
4. Who are the protagonists?
5. How long will this ‘war’ go on for?
6. Will we know when it’s finished?
7. Which markets are we interested in?
8. Etc.
9. FWIW: I believe there are several countries in the world only waiting for the end of the current UK tax year before going to ‘war’.
Sorry, I forgot: “buy on the cannons, sell on the trumpets.”
@TI yes – intended a light-hearted reference to this:
http://youtu.be/Zjz16xjeBAA
clearly fell well wide of the mark,
apologies again for any offence caused
@Ben — No worries, cheers! Just a misunderstanding. (Was going to do a Spanish Inquisition skit, but too much pressure on my thumbs on this iPhone!)