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Weekend reading: Simple investing does fine

Weekend reading

Good reads from around the Web.

Investing can be very simple, provided you don’t want to beat the market. Since most people will fail to do that anyway, the conclusion is that investing should be simple for nearly everyone.

Once upon a time that was okay in theory but difficult to put into practice. Between you and simple investing stood the Financial Services Industry with its expensive funds and obfuscating flak, and its foot-soldiers – the legions of badly-named Independent Financial Advisers, who would have been better named the In-It For Themselves Advisers.

At their worst they were swindlers and leeches.

A lot has changed in recent years for the better. RDR has done away with much of the hidden costs of investment. Monevator readers may be aghast when their annual expenses go up by 0.3% a year, but that pales besides the 5% upfront fees and 2% annual commission my father’s generation paid.

Savvy readers are already exploiting simple passive allocation strategies and cheap index trackers to make their money stretch farther.

The ubiquity of such cheap funds – plus far more education about them, usually online – has been the other great change in the landscape.

Even a schoolkid can do it

Some are still skeptical about simple investing. Particularly if they have complicated investing products to sell.

Such people should read the always excellent Allan Roth, this time writing at Index Universe, where he details the 10-year performance of his “Second Grader” portfolio.

This mixes just three index funds – at its most aggressive some 60% in US equities with 30% international equities, and a 10% bond allocation.

Aggressive is 90% in stocks, moderate 60%, and conservative is 30%.

Aggressive is 90% in stocks, moderate 60%, and conservative is 30%.

Was this the perfect allocation?

No, but you won’t get that either.

Was it the highest returning?

No, don’t know what was, and for our purposes here I don’t care.

The point of such as strategy is not perfection. It’s simplicity and ease, and the fact that it works. And that’s all most people need.

UK investors should have more in international stocks and less in our home market because it’s so much smaller than the US, but aside from that there’s no reason you couldn’t repeat the trick here, and then go off and learn the violin or read the complete works of Proust or do something else with all the time – and money – you’ve saved.

Why does simple brilliance work, Roth asks?

First, it has the lowest costs, and we all know costs matter.

Second, it uses the broadest index funds. Research demonstrates that narrow index funds have larger gaps between fund and investor returns—geometric versus dollar-weighted—than broad funds. That’s to say we do more performance chasing on narrow funds than broad funds.Again, the conclusion is that broader is better.

Third, rebalancing resulted in investor returns exceeding the funds’ returns. While simple, it’s not easy to ignore the media, which usually predict the continuation of the past.

Wise words, but don’t ignore Monevator when you go on your media diet, I beg you!

You can think of our repeated doses of essentially the same message as a top-up vaccination jab that saves you from something much nastier. 😉

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Why can’t we have 40-year mortgage deals in the UK, asks The Telegraph? Longer fixes are common in other countries. The writer also rounds up the best fixed deals that are on offer.

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.1

Passive investing

Active investing

  • Emerging markets look cheap enough – Yahoo Finance
  • Goldman analyst barracked for calling market expensive – WSJ
  • The incredible gold / interest rate correlation – MarketWatch
  • Do Morningstar cover stars get cursed? – Morningstar
  • Terry Smith: Stick to the facts [Search result]FT

Other stuff worth reading

  • Are REITs right for property investors? [Search result]FT
  • Tackling your self-assessment tax return – The Guardian
  • Hargreaves Lansdown asking for cash upfront – The Telegraph
  • How to get rich, feel rich, and stay rich – Motley Fool
  • How to retire 35 years early – MarketWatch
  • 85 people as rich as the bottom 3.2 billion – NBC News

Book of the week: Jim Cramer has a book out that you might like if you’re one of the mad ranting active pundit’s many fans. It’s audaciously entitled, Jim Cramer’s Get Rich Carefully.

Like these links? Subscribe to get them every week!

  1. Reader Ken notes that: “FT 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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{ 7 comments… add one }
  • 1 Robert January 25, 2014, 1:37 pm

    I find the constant repetition of the same basic message in these postings at least as useful as the detailed content, as it serves as a constant reminder not to backslide and start listening to the siren calls of Squawk Box, tickertape news, Peston, economic “experts” and the others who constantly whisper in our ear.

    Keep being boringly repetitive – I need it !

  • 2 Matt January 25, 2014, 2:08 pm

    Strangely, enough I’m reading the article about Games Workshop shares in Warhammer World…

  • 3 neverland January 25, 2014, 5:46 pm

    There is a nice column in the FT today from Merryn Somerset-Webb (sp?) on why the constituents of the FTSE-100 make such a poor set of shares track with low growth prospects

    http://www.ft.com/personal-finance/advice-comment/merryn-somerset-webb

  • 4 The Investor January 25, 2014, 6:30 pm

    Yes, read that this morning and rejected it for recency bias. 🙂 Not a terrible read but I think most of those companies will do fine if/when the world grinds up a gear. The big issue IMHO with the ftse is really its lack of tech, which she sort of addresses, and the exposure to commodities, which she doesn’t.

    Worth a read I guess. 🙂

  • 5 dearieme January 25, 2014, 8:36 pm

    Merryn: “the declining sectors they give you so much exposure to are highly unlikely ever to make you rich” – I don’t want to be rich, I want to be, and my widow to be, secure and comfortable. But how?

  • 6 Mark Meldon January 28, 2014, 1:02 pm

    Please don’t tar all IFA’s with the same brush! I have met many who have adopted index funds and asset allocation techniques for years; perhaps they don’t feel the need to shout about it! Many of my acquaintances long ago adopted the “fair days pay for a fair days work” approach to remuneration, too.

    I have been using index funds since about 1990, although I also regularly recommend closed-end funds such as investment trusts, too. Neither type of funds have ever paid commission to intermediaries, with rare exceptions like IPO’s.

    It’s interesting to see that had you bought, say, Investec Special Situations (an open-ended fund) back in January 2004, you would have experienced a return of +166.0% to 14 January 2014. Had you bought, instead, the very similar, Investec-managed, Temple Bar IT, you would have seen a return of +237.1% (Source: Investment Week/FE Trustnet 27/01/14).

    As a “full-fat” IFA, I have, I think a fiduciary responsibility to do the best for my clients, as far as possible, in all areas of financial planning, not just investing. Clearly, I have to get paid but I get paid for my time, not based upon the amount invested in percentage terms (unlike the banks, for example) and abandoned “trail commission” for new clients some years ago – we therefore get paid for what we do.

    Sure, there are still a few “bad apples” out there, but RDR (and the requirement to up the ante as far as professional qualifications are concerned) has done much to improve matters for consumers, wouldn’t you agree?

  • 7 Oldie January 31, 2014, 5:03 pm

    I live in Canada and am a dedicated boring Passive Index investor here (in Canada), and pretty well know all the rules and tricks investing here. I am trying to set up an ISA for my under 30 son who is living and working in London for the the next 10 years or so (acknowledging the possibility that at the end of this period he may well decide to stay permanently in the UK). I am hindered by ignorance of UK investment terminology, investment community conventions, rules and tax law, which I’m trying to come up to speed on.

    I stumbled on this blog site by accident, and it fulfills my expectations for openness in discussion and similar investing and moral philosophy. I wonder if you could advise me of low cost on-line investment brokerages in the UK I might investigate for setting up a simple ISA that would likely be invested in some Global Equity Index Fund like Vanguard’s and Bonds in a 75% to 25% ratio. I might split the Global portion into Emerging Markets and Other if they exist inexpensively in the UK, but I likely won’t get any more complicated than that, with a view to re-balancing the allocations at time of yearly contributions. The purpose of the ISA is to start investing for eventual retirement, and the expectation is that he will not touch the proceeds during his working career; rainy day emergency funds and considerations of home investment will be dealt with separately.

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