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Weekend reading: Putting 2016’s returns into perspective

Weekend reading: Putting 2016’s returns into perspective post image

Good reads from around the Web.

I bet you enjoyed stellar returns in 2016. Most well-diversified passive investors in the UK should have got into the 20% range.

Our own model portfolio flew up 25%!

It is easy to feel like you did really well last year, but a mistake to feel special. So put off the phone call to Foxtons and forget watching Billions or even Downton Abbey for lifestyle tips.

2016 was only a great year for most British investors because the crippled pound lifted our portfolios – both in terms of overseas holdings, and also by boosting our biggest multinationals.

And a currency shift is the most even-handed lift up (or slap down) that the market can give deliver. It’s largely blind to your talents, or otherwise, as an equity investor.

This chart of the FTSE 100 in pound, dollar, and euro terms is sobering:

It was Brexit wot won it. (Blue is the FTSE in $ terms, white in £s).

Source: 3652 Days

You got much richer as a global investor based in Britain in 2016 because the UK got much poorer.

In the stocks

To do relatively badly in 2016 with equities you needed to be a stock picker, with all the wide dispersion of returns that entails.

Focusing on domestically orientated UK companies got full-time small cap investor Maynard Paton a bit over 7%, which is hardly a disaster. But a few wayward decisions saw John Rosier clock up minus 4%. Veteran investor and author John Lee [FT search result] did much better (and beat the UK index) with a roughly 18% showing from his UK companies, but even that hugely lagged a global tracker.

I’m not picking on these chaps to ridicule them, incidentally. As an active investor, I enjoy their writing and insights, and as best I can tell they’re all skilled investors.

I’m simply highlighting how easily (so-called) “dumb money” trounced the enthusiasts in 2016.1

As an active investor you know you’re going to have bad years now and then. It’s the price of admission. Anyone who doesn’t is either a quant genius far above my pay grade (and theoretically prone to blowing up) or else they’re running a Ponzi scheme.

Besides, the majority of hedge funds delivered yet another lousy index-lagging year, too. Some of those guys are paid millions to deliver worse than nothing.

Pounded portfolios could recover

Returning to currency, one elephant in the room for active investors like myself, Paton, Rosier, and Lee is if and when the pound will reverse.

Normally long-term equity investors can choose to ignore currency fluctuations, for various reasons we’ll save for another time.

But the speed, scale, and political nature of the pound’s shock drop arguably means things are different today.

If the pound rallies hard, then UK stock picker’s portfolios pregnant with home bias should spectacularly outperform, all things being equal.

But all things are not equal, and for Brexit-phobes like me it’s a daily challenge not to try to see the UK markets through Marmite-coloured glasses.

As for the passive investors who hopefully make up the majority of our readers, I say enjoy those great returns.

Why not? The science tells us we feel losses twice as much as we enjoy gains – one reason so many people avoid investing in volatile shares in the first place. Perhaps taking a moment to appreciate the good times can help counteract that.

But remember the good times won’t last forever.

I’ve long been more optimistic about stock market returns than the gloomsters. But another crash someday is a nailed-on certainty, and the pound seems unlikely to fall so spectacularly again.

Remember, the long run real2 return from shares is about 4-6%, depending on who you read. When I hear even John Lee talking about a “steady, unspectacular year” which ended with a return three-times in excess of that, it does make me worry we might be getting complacent.

Let’s stay sensible out there.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Resolved to join a gym? Shed the right sort of pounds by finding the best value opt-in sweatshop from The Guardian’s run through the options.

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.3

Passive investing

  • Jack Bogle: The secret to becoming a winning investor – MarketWatch
  • It’s time to ignore advice about which stocks to buy in 2017 – New York Times

Active investing

  • Five economic terms we should all use – Bloomberg
  • Mini-bond firm may not survive, auditor warns – Telegraph
  • The world’s cheapest markets in 2017 – Telegraph

A word from a broker

Other stuff worth reading

  • Can money make you happy? [Search result]FT
  • New year’s resolutions for your money [Search result]FT
  • Round £1 coins will cease to be legal tender in October – ThisIsMoney
  • The taxman unleashes its ‘snooper computer’ – Telegraph
  • How to tackle your debts if you overspent at Christmas – Guardian
  • Is night time the right time for cheaper electricity? – Guardian
  • Why UK cities must make homes more affordable for key workers – Guardian
  • What history tells us about your investments in 2017 – The Washington Post
  • Young Britons increasingly reliant on inherited wealth… [Search result]FT
  • …but even the Left is terrified of properly taxing inheritances – Guardian
  • Solar power could be cheaper than coal everywhere in a decade – Bloomberg
  • Fixing globalisation (featuring BRIC-coiner Jim O’Neil) [Podcast]BBC
  • Swedish six-hour workday is [apparently]4 proving too costly – Bloomberg

Book of the week: For a year or so my American friends have been waxing – and wailing – lyrical about Amazon’s ubiquitous voice-activated assistant, Alexa. Well, the hype is now hitting the UK. You can’t hold back the future – especially not at just £150 or £50 for the smaller Echo dot. But make sure you fit a manual override to your pod bay doors.

Like these links? Subscribe to get them every week!

  1. I suppose it’s only fair to hint at my own returns, given all this finger pointing. I did better than those writers cited, but appreciably worse than a world index fund in sterling terms. And much of my gains were simply due to holding a decent slug of US stocks and other overseas assets. []
  2. That is after-inflation. []
  3. 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”. []
  4. Trialing this with hands-on nurses as the guinea pigs seems to set up the experiment to fail. Test it with accountants or engineers or warehouse employees. []
{ 54 comments… add one }
  • 1 The Rhino January 7, 2017, 1:29 pm

    Until inflation possibly kicks in im chalking it up as a win

    Its certainly true that your £ can work harder then you can from time to time

    Makes you wonder why you bother working? For example, December saw a return double my annual salary!

  • 2 Young(ish) Investor January 7, 2017, 1:44 pm

    I’ve only come to Monevator in the last month, and have started moving my small (£25,000) cash savings into Vanguard Index Funds (definitely favouring the passive approach over active) – I’m trying to get a headstart over the likelihood of higher inflation with the money I already have. I’ve just turned 24, so I’ve got a long way to go.

    I’ve read the posts on lump sum investing vs. drip-feed, and I’m keen to just put in up to the S&S ISA limit for the year in one go, but I’m worried – with the big gains in 2016 due to currency fluctuations, and with Brexit announcements all coming in March, do I need to be doing something to counteract the impact those might have on sterling? [or does that count as ‘timing the market’ and should it therefore be ignored due to improbability?]

  • 3 The Investor January 7, 2017, 1:45 pm

    @The Rhino — One way to see why it isn’t a win for most is to consider that most readers of this blog are still in the accumulation of their journey.

    If the pound stays down here forever, then foreign stocks (and foreign earnings, and hence foreign cashflows/dividends) will be more expensive in perpetuity.

    If you’re a boomer who is ready to spend your retirement pot then admittedly it’s a different story.

    Insane house prices, triple lock pensions, potentially taking us out of Europe and all its opportunities, and now crashing our currency… the young have every right to be on the streets. 🙁

  • 4 The Investor January 7, 2017, 1:47 pm

    @Young(ish) Investor — I have a post coming on exactly that, hopefully next week. But for a pure passive perspective, here’s what my co-blogger had to say:


  • 5 Young(ish) Investor January 7, 2017, 1:57 pm

    @The Investor — Thanks, I’ll look forward to reading it!

  • 6 Passive Investor January 7, 2017, 2:07 pm

    Sterling : Dollar 1 Jan 16 1.4734
    1 Jan 17 1.2279
    It’s a 17% devaluation from what was arguably (appreciating that fair value is a matter of judgement) an over-valuation. Is that a “crash”? I agree that house prices are badly overvalued in the south east but large parts of the country haven’t experienced the runaway house inflation which makes life so difficult down south.

  • 7 The Investor January 7, 2017, 2:16 pm

    @PI — Another side of the “on the other hand” with respect to the £/$ is the latter has strengthened so markedly against a basket of global currencies. So you have to look at a many different pairs.

    Even doing so the £ is (largely) well down against them all.

    I don’t subscribe to the “£ was over-valued” school of thought. It was already well down on where it had been pre-2009. And I don’t see any reason (or, personally, have any strong desire) to want a weak pound for the benefit of the lower-value adding manufacturing exporters.

    So by my book it is a crash (it mostly happened on the day of the result, so empirically it’s a crash in response to a changed situation). But there are a range of credible views (and timescales) one can consider for sure.

  • 8 FI Warrior January 7, 2017, 2:37 pm

    It’s such a weird sensation, this empty victory, my pension ‘current value’ up by 27%, the accessible part of my wealth up by 12% for 2016; yet it all feels like a con and that once the ponzi scheme of QE collapses, all will be revealed as just so much smoke and mirrors.

    And trump hasn’t even unleashed his brilliant plans (if he actually has any) on the world yet.

    And on this little muddy rock that the UK contributes to the map, (for all it’s delusions of grandeur) the seismic event of our generation hasn’t even formally been triggered yet. I’m not celebrating at all, it feels like the opposite.

  • 9 Gaz January 7, 2017, 2:41 pm

    What’s the best way to keep track of portfolio returns? Unfortunately Cavendish Online’s website is terrible and won’t let me see any performance statistics (I even emailed their support), so I actually have no clue how to work out my returns for 2016. Does anyone have any recommendations?

  • 10 Gaz January 7, 2017, 3:02 pm

    Just to follow up on my comment above, I’ve discovered that on Morningstar you can create your portfolio and view stats there. It’s not perfect, but it seems pretty good, although I’d happily look into any other recomendations still. Thanks!

  • 11 The Investor January 7, 2017, 4:06 pm

    @Gaz — It’s a complicated subject, but in my opinion if you want to compare your performance with others and with funds/fund managers then you have to unitize your returns:


    And indeed that’s how professional fund returns are tracked and reported.

    You’ll find all kinds of variation / waywardness / self-delusion in the reports you read from private investors, however. 🙂

  • 12 John @ UK Value Investor January 7, 2017, 4:08 pm

    @TI: Every sensible investor I know (and that includes me, and you, of course) bemoans the pointlessness of measuring one year returns, but then does it anyway. Having read yet another anti-short-term rant on the Value and Opportunity blog…


    …I’m going to completely leave out 2016’s performance when I do my 2016 performance review. Instead I’ll mention the 5yr total and compound return, and the same from inception in 2011. Alongside growth I’ll also mention income (yield) and risk (maximum peak-to-trough decline), but I won’t mention 1yr returns because they are quite simply pointless. You might as well leap with joy or cry in pain at your portfolio’s performance relative to some benchmark over the last week, day or hour. All are equally stupid as measuring one-year returns (at least in equities; other asset classes can differ).

    Perhaps my stance in defiance of short-termism will usher in a new era of long-termism, where retail investors, fund managers and company directors alike look to produce decent returns over appropriately long time-periods, truly aligning the interests of ordinary citizens and corporations. But I doubt it.

  • 13 Passive Investor January 7, 2017, 4:08 pm

    @ The Investor I do share your view that a weak pound is a bad thing and makes people who hold or earn sterling poorer relative to the rest of the world. Any help it gives UK exporters is short term and disincentivises them from investing in productivity improvements etc.
    PS As a keen follower of Brexit you may enjoy Tim Shipmans All Out War – a balanced view of events that lead to the referendum result – worth reading the last summary chapter even if you don’t have an appetite for the rest.

  • 14 The Rhino January 7, 2017, 4:44 pm


    yes I see what you mean

    bit glass half empty though

    we all want to buy low and sell high, but the change between the two has to happen sometime..

    my OP was a bit misleading as I only earn a pittance – so its not as dramatic as I made it sound..

  • 15 hosimpson January 7, 2017, 5:38 pm

    I see Grauniad is peddling advice again on how to deal with financial consequences of piss poor planing and a lack of impulse control (How to tackle your debts if you overspent at Christmas). Never fails to amuse me 🙂
    Though honestly I thought this one was hard to get wrong – reduce the cost of debt servicing, then immediately cut down on all non-essentials, knuckle down and repay every last penny ASAP. Seems to me they’ve omitted the bit about wanting to pay it off as soon as may be…

  • 16 zxspectrum48k January 7, 2017, 6:00 pm

    On paper my 2016 return of 30.6% in GBP terms feels nice but I can’t help but think it’s just an illusion. As a 40 something, if GBP stays weak long term, much of the 30.6% return is likely to be required just to offset the increase in my future liabilities. The best thing I can say is that in a “hard” currency like USD, my net wealth still increased, so I survived the hammer blow of Brexit.

    One ironic result of the Brexit and Trump votes is that my ex-colleagues at a certain US investment bank (who all voted Remain if UK and Clinton if US) have seen their large slugs of unvested stock rise by 70% this year and also their bonuses rise substantially on lower GBP/USD. Unintended consequences.

  • 17 The Rhino January 7, 2017, 6:28 pm

    This is a nice set of related articles giving the long view:


  • 18 Jed January 7, 2017, 6:45 pm

    Wouldn’t worry too much about £to$ exchange rate its been a roller coaster ride since the 1970s. Pound was worth over 2 dollars in 2007/8 and almost achieved parity in 1985. Who knows what the £to$ exchange rate will be in ten years time. However over the short term expect some higher inflation to take back some of those 2016 gains (cant have it every way)

  • 19 Jed January 7, 2017, 6:55 pm

    @Rhino good article you flagged up. I remember going to the states in the summer of 1985 and it cost a fortune just to buy a beer. Then again at Christmas 2007 we could barely carry back all the stuff we bought on the cheap.

  • 20 Gaz January 7, 2017, 6:57 pm

    @TI Thanks for the link, interesting read. Unitizing does look a tad strenuous – maths has never been my strong point! TA’s article about Morningstar ( http://monevator.com/portfolio-tracking-easy/ ) explains the site well, I think I will just use that from now on. Cheers.

  • 21 The Rhino January 7, 2017, 7:04 pm

    @Jed – I had the good fortune to be out in south america in the 1st half of 2008 and the living was *easy*. Bolivia was spectacularly good value.

    @Gaz – prob worth persevering with the unitizing – once you’ve done one cell then you can cut and paste it everywhere! I remember suffering once, but now its done I’m glad of it and can forget about how it was achieved..

  • 22 Mr optimistic January 7, 2017, 7:09 pm

    What is note 4 about?

  • 23 The Rhino January 7, 2017, 9:51 pm

    @MO – Swedish six-hour workday is [apparently]4 proving too costly – Bloomberg

  • 24 Matt January 7, 2017, 10:49 pm

    *sigh* I really like your blog, but I do wish you’d be less dismissive of my profession (manufacturing).

  • 25 Learner January 7, 2017, 11:55 pm

    With the March Article-50 announcement looming, wondering if now’s as good a time as any to convert the small amount of GBP I still have to USD since moving to the US. I thought it couldn’t get any worse when the rate was 1.3, then it dropped to 1.2 and stayed there. (I could add a few things to that 10 ways to be a terrible investor list!)

  • 26 Mathmo January 8, 2017, 12:02 am

    Happy New Year, TI and all. Great to have you and the weekly update back. Proper rich pickings this week too. Love the round-up of the year. While I get and like the unitised approach, I don’t aim to track invesment return (I’m not trying to prove I’m a marke-beating active genius), but rather I forecast my predicted future FI income based on guessed but constant investment and withdrawal rates. This keeps the whole thing real and stops me being suckered into the inevitable highs and particularly lows of the tides of fortune.

    Elsewhere, I enjoyed TEAs writing as ever on his bar job and nearly spat my coffee at his owner anecdote. It’s a powerful liberator, clearly, to know that ones own ironic misfortunes might provide entertainment for ones blog readers. Bravo.

    The new pound had passed me by — isn’t 6 months a bit quick? I’m sure I have coins in my pocket / car parking ashtray / etc older than that — and in today’s tap to pay world cash seems to get even less of a look-in.

    Can’t help feeling that the HMRC computer story is being timed to coincide with SA return deadlines. All feels a bit TV Detector van-ish. I’m a fan of people paying what they owe — I think that making it all simpler might be a good way to do that!

    Finally what a joy it was to see indices at record levels on Dec 31st. Made me feel like 1999 again.

  • 27 principa January 8, 2017, 10:00 am

    Yes, a great year. It’s 1999 🙂

    However I still painfully remember nursing my losses with the FTSE at 3500 in the early 2000s …

  • 28 Rob January 8, 2017, 10:45 am

    In its recently published review of competition in the asset management sector the FCA says:
    Past performance does not help investors identify funds that are likely to outperform in the future, mainly because the majority of firms do not persistently outperform.
    Yet elsewhere in the report it states:
    Some investors may choose to invest in funds with higher charges in the expectation of achieving higher future returns. However, academic research from the US and recent Morningstar research suggests that higher charging funds are not on average generating higher performance, compared to cheaper funds in the same investment category. Our initial analysis indicates that, while there is no clear link between price and performance, on average the cheapest funds generated higher returns (both gross and net) than the most expensive funds.
    On one hand the FCA says past performance is no guide to future returns then, on the other hand, it says research, i.e. historic returns, demonstrates that lower cost funds generate better returns than expensive ones. Is this not contradictory?
    It certainly seems that way. Either past performance is a guide or it isn’t, you can’t have it both ways. However, there is a difference between the two sorts of comparisons. In the first case investors are considering the merits of different active funds where the competition is all about the investment process used by the various fund management firms and managers. They are not competing on price; they are competing on returns, which can only be demonstrated ex-post.
    In the second example the selection criteria are based on price and processes that are simple to measure and describe ex-ante in a way that is not possible with active processes that relies on second-guessing someone making many decisions. It therefore seems perfectly reasonable to use past performance to compare different types of passive processes against each other, and against active funds as a cohort, in a way that is not possible within the category of active funds itself.
    A secondary issue is the time scale used to measure funds. The problem here is the period over which the signal exceeds the noise. No one seems to have a definitive answer on this but the industry convention is three years. However, given that quantitative easing (which inflated the value of assets relative to cash generation as interest rates fell) has now been in place for nearly eight years it is reasonable to argue that anything less than ten years is not conclusive.
    It looks then as if past performance, over a long period, can give us some guide to future returns when comparing costs but less so when comparing subjective processes that can only be judged with hindsight. Nevertheless, we probably did not need to be told that cheaper usually means better; especially for investors.

  • 29 Rory January 8, 2017, 4:17 pm

    @TI I’m still counting it as a win since the money that I have outside markets hasn’t “benefited” from the bull market.

    @Rhino I know exactly what you mean – the rise in portfolio last year was equal to half my yearly savings and this is just the beginning!

  • 30 Tony Bage January 8, 2017, 4:21 pm

    Hi Monevator,
    I am hopefully looking to hear your views regarding a fund versus fund. I am currently invested in VLS 60% Eq Accum (OCF: 0.24%). However, the HSBC Global Strategy Balanced fund (Acc ) (GB00B76WP695) appears to provide very similar returns BUT its OCF is only 0.19%. Your thoughts please on me switching (or simply leaving the Van alone and invest in the HSBC fund going forward?

  • 31 Mr optimistic January 8, 2017, 8:16 pm

    0.06%! Your mill grinds exceedingly small. I would set these as basically equal. However, I am never sure that funds that invest in funds give the charges on a full look through basis, ie report the charges on the underlying funds in the headline number. Need to be clear on this first I think. However everything else being equal, just the charges difference at that level is worth a shrug.

  • 32 Marked January 8, 2017, 9:19 pm

    Very interesting comments. I was going to email @Investor to do piece on what I think he’s proposing. Let me explain my predicament. My kids are in cash with their JSIPPs currently and I can’t bring myself to buy a world fund due to thepounds currency weakness thinking I don’t think our currency could go any lower than the shocking amount it is now. I would hope it may begin to climb back a bit as GB PLC seems to be more robust than I imagined it would be. Politics is still a mess – all the current ministers seem as though they couldn’t organise a p?SS up in a brewery.

    So I am sitting in cash (or my kids are) because I don’t know what to do with it. If the world does fall into recession then all the accumulator themes go out the window if rates rise and bond yields change. I’m just too scared to so anything. I am hoping there’s an infrastructure investment theme that will go on from both sides of the pond, but doubt it. America has an advantage where they can get infrastructure planning shovel ready in 2 years, the UK takes 10 to 20 – cases in point Heathrow, Nuclear, HS2. And let’s hope the tech unicorns with American money keep coming due to more bang for their buck in London.

    I just feel more confused than I have for a while – I think fed interest rate hikes will have a knock on effect in Asia and that could mean world trackers start losing out. They’re good in normal times, but not sure about now.

  • 33 David January 8, 2017, 10:06 pm

    As a novice I was delighted with my VlS achieving 14 pc return until I read your 1st paragraph (most well diversified funds reached over 20 of ) as someone once asked G. Best where did it all go wrong. Regards.

  • 34 martyn January 9, 2017, 12:03 am

    I keep having to say this. It is not that the pound is low now, it is that it was over valued. Britain has been crying out for a lower pound for years and BoE/government policy had been trying to engineer it (without a lot of success). QE and abnormally low interest rates are there in part to weaken the pound.

    Interestingly, has it fallen more than it would have done had Carney not attempted to counter a slowdown that never happened (by dropping interest rates and buying foreign corporate bonds of all things!)? Would things have been smoother had less hysterical forces not been spinning doomsday, ie had the BoE and Treasury not mixed politics with prediction and passed the result off as fact?

    I think the answer on balance is yes, Carney and the rest of the BoE economics have caused the currency to correct more than it would have done. Is that a bad thing? For once no. (Despite comments on this blog to the contrary).

    I would also suggest that unless economic fundamentals change (Ie we start to actually pay our way in the world), then the currency will be valued more realistically going forward. I took a bet it bottomed out and cashed out dollars, but thats a bet, it could easily fall further.

    As an aside, regularly I do “what if” analysis in work and quite often I will ask the person who wants the work done what answer he wants, I can make a spreadsheet support any position we may collectively decide is right. To be blunt, quite often we’ll decide what the right answer is and fix the numbers to back it up. If I can do this how much better at it would the Treasury be?

  • 35 Tony Bage January 9, 2017, 12:16 am

    Mr optimistic, 0.06% isnt hat what some funds charge?

  • 36 Lee January 9, 2017, 9:51 am

    One lesson I took from 2016 was how many of my dividends are paid out in GBP. A bit troublesome as I live overseas. The 17% drop would be problematic were I retired. Now I’m in the process of further diversification away from the pound – probably not by selling GBP towards other currencies, rather just switching what I buy from here on, even though the pound is cheap, because I’m super pessimistic about the implications of Brexit, which holds no positives. Trump, on the other hand, may be a bit of a prat, but I can see some grounds for optimism for some sectors.

  • 37 The Investor January 9, 2017, 10:56 am

    Thanks for all the comments guys, clearly a lot to talk about this year. A few quick replies:

    @FIW — As you know we agree on Brexit, but I’ve never been in the QE ‘smoke and mirrors’ camp. No doubt when the inevitable next recession / crash in the US comes some will say it was QE reversing, but such cycles have been going on for 100 years, as you know. QE has surely boosted asset values, but it’s but one of many factors IMHO. Personally I’d let it go. 🙂

    @John at UKVI — Actually, my experimental trading-heavy active investing strategy of the past few years (or perhaps ‘tactics’ would be a more appropriate word!) does put quite a bit of emphasis on shorter-term returns. I definitely wouldn’t suggest others follow this path though! I think 12-month reviews are worth *something* for everyone, but absolutely they are arbitrary time periods, irrelevant to factors such as the business cycle and say a pension savers time horizon, and can easily encourage myriad kinds of bad investing behaviour.

    @everyone on currency — Look at it this way. Simplistically either £ pessimism is overdone, in which case it is a one-time boost that global investors with a sterling base will see reverse (i.e. some year these portfolios will be down 20%+ on currency!) or the market has it right, Britain is poorer for structural more than political uncertainty reasons, and we are going to have to spend 10-20%+ more of our money (/labour/assets/whatever) on overseas goods in perpetuity. Despite the daydreams of arch-Brexiteers we’re not a self-reliant manufacturing nation coming out of emerging market status. We really massively on imports for everything from food and clothing to components for the much-discussed manufacturing industry. Certainly there will be some offsets from a weaker pound, in terms of improved competitiveness, but they will be a long time in filtering through and figuring them out in advance is beyond my pay grade. As I said in the article, by all means enjoy the gains, but, well, have a sense of perspective. 🙂

    @Gaz — As @TheRhino says, unitizing isn’t too bad and once done is easy to keep on top off. In my experience it opens the door to a deeper level of understanding your finances from a saving/perspective point of view. Just be wary of over-obsessing.

    @Matt — I’d argue I’m not dismissive about manufacturing, I am dismissive about political posturing about manufacturing and the deification of especially low-end sweatshop volume manufacturing. I just had a check and I’m about 15% directly invested in manufacturers right now, or around 25% if you include pharma companies, which the export figures do. Value-adding high-skill manufacturing I am all for. I don’t think we should drive the economy off a cliff to boost a low-ish figure by 10-20% though, at the cost of a bigger hit to our far larger and *in general* more value-adding skills/services/financial sector. (I am not saying that is definitely happening, just offering a rejoiner to the media/pundit rhetoric).

    @Learner @marked and others — I started writing my article about this before Christmas, and it’s become an unreadable monster that I couldn’t finish. I need to hack it back and tighten, as well as finish it. Luckily the pound is continuing to fall on the prime minister’s latest pronouncements, giving me more time. Huge work bomb hit this week so article may have to be pushed back again. 🙁

    @mathmo — Happy new year! I agree that if you’re not concerned with performance versus peers/alternatives, then tracking other metrics such as progress towards financial freedom income has a lot to recommend it. Indeed, targeting projected income was my main strategy for years. (Before ‘the experiment’ 😉 ).

    @rob — Yes, I think I agree that in aggregate the data says cheaper funds do better, but looking at individual active funds the correlation is not so robust. (It’s there, from memory, at an aggregate level, though. Pretty sure for instance hedge funds do worse than vanilla mutual funds as a class. Of course they would argue you can’t compare due to supposed downside protection). Anyway as you say aggregate cost comparison hugely skewed by ever-victorious passive funds.

    @Tony Bage — I think we were waiting for more info when we last looked at that family (not that specific fund). Probably due a repeat, but my co-blogger @TheAccumulator has his head stuck in that book writing project!

    @Lee — Yes, people tend not to appreciate currency risk until they see it writ large. We saw this when some debating target date retirement fund’s home bias, which some readers deplored but I argued might make sense for retirees. At the moment people are generally seeing upside from currency risk now, but if the pound was to climb to reverse and go back up 20% (which would still be well below levels of past 15 years or so) then I think we’d see different kids of comments, focusing on the huge dangers of currency exposure. 🙂

  • 38 SemiPassive January 9, 2017, 3:10 pm

    @Marked, the thing is the pound could well drop to 1.10 or even parity with $ when Article 50 is invoked if a hard BREXIT looks (increasingly) likely. It will most probably rebound hard at some point, but the question is when and from what level? It could be several months or many years.

    I do agree that it is tough to want to buy foreign assets at the moment. But fortunately my asset allocation is already global equity, global bond and gold heavy enough so its not a personal dilemma as I will be putting any new money – and even ETF dividends – into shorter dated bonds and UK commercial property for probably the next couple of years.
    Note this is age related rather than trying to outsmart the market, I just want to get closer to the asset allocation I intend to stick with from age 55, so a happy coinicidence with £ weakness.

  • 39 FI Warrior January 9, 2017, 3:56 pm


    I would really love you to be right on QE and am happy to be wrong, mainly because on a selfish basis it would help my FI dreams, but I was brought up to believe there’s no such thing as a free lunch and that even proxy devaluations have to debase the currency. Are you saying there can be no ill-effects for the UK of that exercise? (excluding the hot potato of Brexit and cyclical crashes for clarity here)

    I can accept that the economy was seriously dysfunctional and something had to be done, I’m just not sure QE was the (best) answer. I can also agree with that serious structural dysfunction of the economy led to an quite an overvalued £ which was damaging to the country as a whole if not to the owners of assets, logically meaning a correction was helpful. (Easier to say when most of my earnings aren’t in £ of course)

    Even if devaluation/correction of the £ is mostly good, some inflation has to result and that surely will hit the vulnerable hard. Whatever happens, 2017 can’t be boring though.

  • 40 Jed January 9, 2017, 8:08 pm

    @marked, you list some good reasons for not investing in a world tracker and I could list some more, but then I could make a list equally as long of reasons to buy a world tracker right now. You could drip feed the money in over the next few years or you could choose a global tracker hedged to sterling such as iShares IGWD . It doesn’t contain Emerging Markets but the TER is 0.55 ouch! This is only my opinion but I think its worth doing a bit of research on what funds/ ETFs are available, there may be something out there that you find suitable.

  • 41 martyn January 9, 2017, 8:43 pm

    I do agee any longer term benefits from a lower currency will take time to manifest themselves, but the improvements to the real economy will come, where as before the fall they would not. I (and to be fair both UK Gov and the BoE) would have liked it to have happened earlier and been more gradual, but the world persisted in viewing the UK as a safe haven, post BrExit thats conviction is no longer so strongly held.

    I don’t think UK interest rates and QE can be dismissed lightly, interest rates this low are unprecidented in modern times, they must by definition be distorting, certainly I own assets at yields I would never have believed tenable. I have in common with most chased yield down and hence risk up. QE is even more scary, it’s nothing less than printing money and IIRC well over 400 billion has been deployed. The national debt is circa 1.5 trillion, so going on for 30% of it has been “printed”. To further put that in perspective, HMRC collected 533 Billion 2015-16. Given how close 430 billion of printed money is to 530 billion of real money, the argument could be made that that they should just print money and stop taxing us at all. Being less trite no can seriously tell me that manfacturing money doesn’t make it less scarce and hence less valuable.

  • 42 The Investor January 9, 2017, 9:04 pm

    @FIW — It’s a huge subject that I can’t really address in a comment. 🙂 (Plus I’m a humble blogger/speculator, so take my musings FWIW).

    In very short, I don’t believe QE has (thus far) debased the US/UK currency. If you look at for instance the US Dollar Index, it’s in about the middle of its 40 year range, and inflation (conspiracy theories aside) has been low.

    The dollar has recovered very strongly recently, so from that perspective any US QE impact of the past few years (leaving aside the little-sign-of-it inflation, in other words) is clearly very reversible.

    Asset price inflation has been high, but that’s basically the point of QE. It (and low rates) is a response to huge hits to a balance sheet, most especially the hit to banks. (See QE as a way of supporting the banking system and it starts to make more sense. Note here that it fell out of favour last summer when finally it seemed the pain of QE for banks (huge hit to profits) began to outweigh any gain. Also note much of QE has basically sat on bank balance sheets).

    Outright QE numbers sound huge but are actually not that vast compared to total economic activity, assets, or debt.

    During/after a financial crisis like 08, the choice really is to let everything be smashed to smithereens or to bail it out to a greater or lesser extent. QE bailed much of it out, by smothering the cost of those writedowns with cheap money (in many cases preventing companies/banks from going bust).

    From a Fed-style perspective, this has the advantage of moderating how much unemployment etc you get, although note US unemployment was still very high even with QE. When people (including me!) complain about the productivity hit of cheap money it’s always worth remembering another 5-20 million jobless US citizens doing nothing for five years is not wildly productive either. 🙂

    There is absolutely a cost to very low rates / QE — it’s not free. Indeed there are several costs. Firstly there’s the cost to the prudent/financially healthy who could have bought assets cheap, and are prevented from doing so. There is similarly the cost to competitors who made prudent/superior products/decisions and see their zombie competitors limp along regardless. There is very probably a cost to economic growth because all this slows down productivity and growth over multiple years.

    Then there’s the fact that (hopefully) the QE will have to be withdrawn. At this point it has the opposite effect, and dampens animal spirits / growth / balance sheets (or at least asset price growth that you would have seen had you NOT been withdrawing QE). This is the ‘borrowing from the future’ bit. This is part of the repayment.

    The US recovery for example is long in the tooth but very tepid in terms of total GDP expansion. Some of that is I suspect because the economy was puffed-up unsustainably beforehand, but also perhaps this QE smoothing affect (which may well allow the expansion to continue for longer than you’d expect to).

    Then there’s the potential cost of high inflation, which is I suppose the debasement you’re referring to and that I’d contend we haven’t seen. (Asset price inflation is as I say really inflation from a trough caused by the smash of the crisis back to or moderately above pre-crisis levels, which was the aim of QE to some extent as said, IMHO).

    This was what I got wrong, personally. I really thought we’d have seen higher inflation after 7/8 years of low rates and monetary operations. That we didn’t probably (a) shows how strong the case for QE was (as you do address yourself) and (b) latterly some negative affects caused by perverse consequences of very low rates, as I talked about in an article pre-Christmas.

    I think a lot of the talk about QE has got politicized, and for instance when I hear the word “debasement” I tend to switch off, not because it’s not a valid word or that some smart people don’t use it (I like Jim Grant a lot, for example) but because it’s a helpful heuristic to help avoid listening in *most* cases to posturing from people who’ve been wrong since March 2009 and have rarely/never course corrected, let alone admitted it.

    So I try to avoid (it IS hard, and I frequently fail) thinking about the morals of QE when assessing its consequences or justification.

    On a personal level I could have done with a massive London property crash for instance! So one could argue QE has “cost” me £500,000 on current house prices. 🙂 But then we have to think of the counterfactuals for jobs/other assets etc.

    Spreading the pain of the crash across the public/private masses/State via QE has a moral dimension, but that’s different (or at least distinct) from assessing whether its worked / the long term economic consequences, to my mind.

    It’s like for instance I think very little of Trump as a figure but I don’t deny some of his (apparent) policies could be good for US banks / other corporates (leaving aside long-term impact of any trade restrictions, stopping smart immigrants setting up companies in California etc, if that happens).

    Apologies for any gaps in thinking, wanted to bash out a quick reply but not much time!

  • 43 Gordon January 9, 2017, 9:16 pm

    Before the Brexit referendum we were assured an “out” vote would lead to financial Armageddon. Tbh, it seems like the impact of the referendum has been economically positive so far.

    Anyway, I predict the 100 being at 8,000 by the end of the year.

  • 44 The Investor January 9, 2017, 10:16 pm

    @Gordon — It is weird. I didn’t expect financial Armageddon but I did certainly expert a slowdown and more likely than not a recession, simply because of the uncertainty business would be confronted by and the consequent hit to investment/hiring. I’d have thought that would have snowballed. In reality the opposite has happened so far, and I soon realized my short-term prediction was wide of the mark. So am very curious about 2017. Perhaps my longer term concerns will prove wide of the mark, too, but as is always noted we don’t even know what Brexit will be yet, let alone ‘had it’.

    8,000 very plausible. On current momentum (in currency as well as markets) I wouldn’t be surprised by 9,000. But short-term is a mug’s game, as most of us would agree, and it could easily be 5,000.

    I’m still feeling okay about my 14,000 musings from back in 2011. That seemed crackpot optimistic then, of course. 🙂

    Perhaps a sign of how much momentum is gathering in the Western economy after all these years.

  • 45 Mr optimistic January 9, 2017, 11:30 pm

    Hmm, all this talk of exchange rates and future prospects for Brexit. Are you not trying to time the markets? My approach has always been to buy for the long term, generally investment trusts. When I have tried to be clever, like selling TIPS as a rebalancing exercise in July to ‘take profits’, it has generally been a mistake. Isn’t the idea of investing passively against a desired asset allocation what we are supposed to do, one advantage being that our clever brains don’t cause mistakes? Just sayin’.

  • 46 The Investor January 10, 2017, 9:37 am

    @Mr optimistic — As discussed in the past, and even in this post, I am an active investor.

  • 47 Mr optimistic January 11, 2017, 8:31 pm

    Ah true. However, there are degrees of activity. I invest in investment trusts which are actively managed, however I can also actively try and judge/ anticipate/second guess the market with respect to the choice of investment areas and timing. I would like to think my buy and hold strategy was a hybrid. When I have exercised my all knowing intelligence I generally catch a falling knife 🙂

  • 48 Percy Sugden January 11, 2017, 9:39 pm


    Vanguard LifeStrategy has not been tested by a crash yet. Any thoughts on how it might cope? (VLS 60% or VLS 80%, for example)?


  • 49 Scott January 12, 2017, 10:03 am

    @Percy Sugden
    I may be missing the crux of your question, so apologies if I’m stating the obvious, but VLS is a bundle of index trackers, 60%, 80%, etc. of which are equities, as opposed to bonds. So if there was a crash in a specific market on which one of the indexes is based, then VLS should drop by the magnitude of the crash factored by how much weight that index has in the bundle, e.g. if 10% of VLS80 is held in the UK All Share Index and that index crashed 50%, and there are no changes in any other idexes, then VLS should drop by 5% (50% of 10%.) However, if a particular market had a ‘crash’ it’s likely that other markets would also be dropping at the same time, resulting in bigger losses in VLS. The reason for having 60%, 80%, whatever %, in equities, and the remainder in bonds is you *hope* that when equities are crashing, bonds are not (and vice-versa) which should remove some volatility from the fund as a whole, however, there are no guarantees. It really depends on the nature of the crash you had in mind.

  • 50 Steve January 13, 2017, 7:05 pm

    The (in my view poor) decision to leave the EU has certainly benefited my portfolio if seen just in terms of domestic purchasing power. As you say, nothing to do with fundamentals, just the effect of the weak pound on an overseas-biased portfolio. As you also point out, the FX rate could later reverse to some degree and I puzzled how to protect these unusually large gains to a significant degree. In the end, I did two things. (1) I sold off many of the gains and popped them into other things (a mix of mainly shorter date sterling bonds, gold, some defensive multi-asset funds etc.,). I never sold whole positions, just the FX-related gains. (2) For the remainder (which was still the great bulk of the value of my foreign funds) I wanted to stay in the market but mitigate the FX reversal risk. So I switched 50% of these into GBP-hedged funds (when the Euro was at 1.15 and the US Dollar at 1.23), the idea being to buy myself some protection/time if the sterling rate versus US Dollar and Euro later reverses at any speed; eventually, I will wait for sterling to recover substantially before switching back again to unhedged funds. Time will tell if this made any sense.

  • 51 gadgetmind January 18, 2017, 4:56 pm

    I’m hitting LTA because of Bexitcide and no other reason. How delighted do you think that makes me?

  • 52 Steve January 18, 2017, 5:34 pm


    Not very, I would imagine. It is indeed odd to “enjoy” such gains in such a negative situation for the country. I see things like “Britain decides to jump off cliffedge” but even that does not do it; half of us are in fact being forcibly manhandled (more accurately womanhandled) over said cliffedge.

  • 53 gadgetmind January 18, 2017, 6:45 pm

    Yes, the amount of “sterlings” in my pension has gone up, but its real world buying power hasn’t. I now get taxed an extra 25% on the “excess”, an excess caused entirely by Brexit. Sweet. May’s recent “Brexit means hard Brexit over our own head with a brick” speech has made things even worse. I wish she’d keep her gob shut and take off the clown costume.

  • 54 AAJ January 20, 2017, 1:17 pm

    “I wish she’d keep her gob shut and take off the clown costume”

    Maybe it’s all part of a plan. It does appear she is talking the £ down. The hope being that she can pull a rabbit of the hat. Either way, everyone and their national bank wants a weaker currency. Politically, she can’t lose. Devalue for short/medium term gain or get a better than expected deal with EU.

    However, I wish she’d keep her gob shut.

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