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Weekend reading: The house that Jack built

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What caught my eye this week.

Hard to believe now, but when Monevator was born in the summer of 2007, passive investing with tracker funds was still a minority pursuit in Britain.

Few investors did it. Newspapers and magazines rarely wrote about it, except in a “oh if you can’t be bothered you could buy an index fund and just accept the market return (you loser)” sort of way.1

People had to be won over. The financial crisis didn’t help – it’s hard to make the case for index tracking when the index has just fallen 50%! All the talk was of clever fund managers who would pick through the rubble, absolute return funds and structured products touting upside without downside, and hedge funds that hadn’t yet posted a decade of lagging a cheap 60/40 ETF portfolio.

The US was way ahead of us, though. That’s because North America was where Vanguard founder John ‘Jack’ Bogle had conceived of and launched the first index fund back in the mid-1970s.

Long time horizons

The Accumulator joined Monevator after a year or two. He told me Monevator was the only site he’d found that regularly translated US passive investing ideas for an everyday UK audience.

My co-blogger turbo-charged our efforts to bring Bogle’s key insights to wider attention here.

In the meantime global stock markets began rising. Passive investing took off in Britain, too, as more people started to get it. Eventually, index funds went mainstream.

We were in the wilderness for maybe two or three years. John Bogle was in the wilderness for two or three decades.

The $1 trillion man

Bogle was questioning the value of traditional investment approaches in the early 1950s. He finally launched the first index fund in the 1976 – labelled by competitors as ‘Bogle’s Folly’.

In other words it has taken more than 40 years for Bogle’s principles to give us the highly-efficient investing that most Monevator readers take for granted today.

Talk about long-term investing!

John Bogle died this week. He was 89. You’ll find coverage of his achievements in the links below. The impression he made is as clear as his legacy.

It wasn’t a given that the inventor and populariser of the low-cost index fund would be a humble, inspiring, and tenacious individual. Tracker funds are essentially run by computers. Their progress would probably have been assured eventually, simply on account of the remorseless reality of their mathematical cost advantage.

But happily, on top of that, index funds were championed by perhaps the greatest investor of all time – at least in terms of money he’s saved the world’s savers.

It’s been estimated Bogle’s innovations will have left investors with an extra $1 trillion in their accounts by 2023.

Good luck getting that sort of edge out of the latest Top Funds To Buy in 2019 list.

Think different

If our website has patron saints, I’d say they are Jack Bogle and Warren Buffett.

These two men are more similar than you might suppose.

Warren Buffett – probably the greatest active investing individual the world will ever see – urges us to use index funds. On his death his wife’s money will be put into a tracker fund run by Vanguard. Buffett recently won a 10-year bet pitching cheap index funds against handpicked hedge funds. Convinced of the index fund’s primacy, this week he said Bogle had done more for the individual investor than anyone else he’s known.

Quite the contradiction then, but what of Bogle? He’s also not as easily dumbed down as some of his adherents seem to think. Bogle took the career path that led Vanguard to $5 trillion under management almost on a whim. He was not against active investing per se – more high costs and poor results. He had money invested in his son’s active fund. Bogle was a market timer, and he was happy to say when he thought stocks looked expensive. He also invested all his money invested in the US market – an anathema to orthodox thinking today.

As we inevitably march towards a far future where the vast majority of people run their money with the market in cheap index funds – following prices set by a diminishing handful of thrill-seeking stock picking winners and losers – it seems fitting to me that the man who started it all also contained contradictions.

Thank you Jack

In as much as they’d heard of him, for most people Bogle was a man who synthesized the latest academic thinking and his own insights to dream up the low-cost funds that will leave them richer in retirement. Cheers Jack!

But really he was a philosopher king for the ages.

As the Bogleheads say: “While some mutual fund founders chose to make billions, he chose to make a difference.”

Further reading:

  • “You cannot measure the quality of a man by the size of his bank account, but in John Bogle’s case, you can measure it by the size of your bank account.” – Rick Ferri, Forbes
  • John Bogle, who founded Vanguard and revolutionized retirement savings, dies at 89 – The Inquirer
  • “My ideas are very simple,” Bogle once said. “In investing, you get what you don’t pay for.”New York Times
  • Praise for John Bogle compounds, like his returns – Bloomberg
  • Jeremy Grantham: “What he meant to most people in the investment business was that he was a royal pain in the bottom… He was more concerned about the long-term benefits for society.”Bloomberg
  • CFA has made all Bogle’s papers free to read – CFA
  • “The only people who come across his message and then subsequently disagree with it are those whose careers depend upon their not believing.”Josh Brown
  • “Without a doubt, John C. Bogle is the greatest man I’ve had the privilege of knowing.” – Jonthan Clements, The Humble Dollar

From Monevator

The Pension Protection Fund (PPF) explained – Monevator

From the archive-ator: The simplest, most effective investing decision you will ever make [From 2008!]Monevator

News

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

Record year for ETFs, as active funds take a beating – Money Marketing

Lenders see sharp slowdown in demand for credit cards and mortgages – Morningstar

Pessimism about UK house prices worst in two decades: RICS – Bloomberg

Has the Brexit vote saved London tenants £1,800 pa in rent? – Guardian

Lords take aim at Statistics Authority’s failure to fix UK prices index [Search result]FT

Nearly 400,000 new dollar millionaires created [globally] in 2018 – WealthX

(Click to enlarge)

Is UK property headed for a post-Brexit meltdown? [Search result]FT

Products and services

Boost for savers as top one-year cash interest rates now match inflation – ThisIsMoney

HSBC cuts mortgage rates across its entire range, as price war rumbles on – ThisIsMoney

Ratesetter will give you a free £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

Freelance Fintech: Can apps replace accountants? [Search result]FT

Italian town puts dozens of homes on market for as little as €1 – Guardian

Comment and opinion

Invest like a JOMO sapien – Anthony Isola

Subtraction mode – Humble Dollar

Brexit and the risks of home bias – MSCI

When it’s time to do something – Morgan Housel

Careers and the hedonic treadmill – Fervent Finance

Are market moves happening faster? [Spoiler: No]A Wealth of Common Sense

Why it’s the right time to consider a tracker mortgage – 3652 Days

Does the ‘bucket approach’ destroy wealth…? – Advisor Perspectives

…perhaps in theory, but the optimal portfolio is not the same as the best one – CFA

First post sent from the other side of early retirement – Retirement Investing Today

Unitizing a portfolio can bring home disappointing truths – Simple Living in Somerset

10 years ago, Warren Buffett bought a railroad – Buffett, Berkshire and Beyond

Why one value investor sold GlaxoSmithKline – UK Value Investor

Fund managers do well when they buy, not when they sell – Morningstar & Bloomberg

Equity investing is riskier than you think [Nerdy, research]Alpha Architect

Brexit

It was never about Europe. Brexit is Britain’s reckoning with itself – Guardian

UK fails to close trade deals ahead of Brexit deadline [Search result]FT

Richard Stone: Why I believe Brexit will not happen now – CityWire

“I don’t trust the Government”: Meet the Brexit stockpilers – Guardian

Stop worrying about Brexit — it’s time to invest in UK assets [Search result]FT

A neat summary of how we got to this impasse – via Twitter

A reminder very few Britons fretted about the EU before they were asked to – Economist

Kindle book bargains

Creativity, Inc. by Ed Catmull – £1.99 on Kindle

Start Now, Get Perfect Later by Rob Moore – £0.99 on Kindle

Turning the Tide on Plastic by Lucy Siegle – £0.99 on Kindle

Off our beat

The most powerful person in Silicon Valley – Fast Company

Why one man lives homeless in the Alaskan wilderness – Guardian

Scientists unveil a ‘planetary’ diet that’s good for the world and our health – BBC

Tim Harford: Behavioural economics helped me kick phone addiction [Search result]FT

The indie book blog is dead, the golden era of blogging is long past – Vulture (although…)

Strong and weak technologies – cdixon blog

Cool thread on the human body parts evolution left behind – via Twitter

And finally…

“The grim irony of investing, then, is that we investors as a group not only don’t get what we pay for, we get precisely what we don’t pay for. So if we pay for nothing, we get everything.”
– John C. Bogle, The Little Book of Common Sense Investing

Like these links? Subscribe to get them every Friday!

  1. The Motley Fool website was a notable exception and an early champion of tracker funds, but it went in a different direction a few years into the new millennium. []
  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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{ 63 comments… add one }
  • 1 Bluecactus January 18, 2019, 6:40 pm

    For me, Bogles legacy was summed up by Paul Samuelson when he said he ranked the invention of the index fund alongside the “invention of the wheel, the alphabet, Gutenberg printing, and wine and cheese.” Praise indeed for a life well lived.

  • 2 Ben January 18, 2019, 9:52 pm

    I was wondering whether you were going to write about Brexit or Bogle. Nice to read about something a bit more positive* for a change.

    I seem to recall The Motley Fool (remember them?) being big on trackers back in the day. But you’re right, much more popular now.

    *In outlook, not the fact he’s died.

  • 3 The Investor January 18, 2019, 11:27 pm

    @Ben — Yes, I had a bit about the Motley Fool in the late 90s but it was all getting a tad cumbersome. Perhaps I’ll add back as a footnote. Cheers!

  • 4 William January 19, 2019, 1:13 am

    You have typed ‘active’ as opposed to ‘index’ in respect of Warren Buffett’s bet against hedge funds.

  • 5 BillD January 19, 2019, 1:42 am

    After reading Motley Fool UK articles on index trackers I started a cheap (at that time) FTSE All Share tracker ISA in 2000 with L&G. My only regret was ISAs seemed a bit complicated back then with maxi /mini variants etc so I did not put in as much as I could have early on. I had never heard of Bogle or Vanguard then. Motley Fool was my Monevator equivalent reading back then – this is an archive of one of the MF articles
    https://web.archive.org/web/19991008211019/http://www.fool.co.uk:80/10Steps/Step7.htm

  • 6 The Investor January 19, 2019, 1:45 am

    @William — Eek! Thanks for the catch!

  • 7 JimJim January 19, 2019, 8:40 am

    @TA .. Sad news about Jack. One that may be worth reading, a friend sent me an interesting link from Aussie. something I had not come across before that may make me act on the smaller active side of the portfolio… https://www.canberratimes.com.au/business/companies/how-companies-like-apple-bury-secrets-in-earnings-reports-20190112-p50qyp.html

  • 8 AtlanticSpan January 19, 2019, 10:21 am

    I credit two people for the money I’ve made from investing over the last ten years. First Monevator for it’s honest,simple,brilliant advice, and second Jack Bogle for creating Vanguard. And I have deliberately placed them in that order, because had I not discovered this website, I’d have never have learned about passive investing.Thank you Monevator and R.I.P. dear John C. Bogle.

  • 9 John @ UK Value Investor January 19, 2019, 10:34 am

    Bogle is definitely one of my heroes, more for his integrity and ethics than his stance on low-cost investing (as you point out, he wasn’t an index fanatic; his main interest was low fees).

  • 10 The Investor January 19, 2019, 10:49 am

    @all — If anyone is having trouble posting comments this morning could you possibly drop me a line via the Contact box in the top right? Apparently there’s an issue but I can’t recreate it so not show if it’s just a couple of people having local problems and it’s a coincidence. Thanks!

  • 11 xxd09 January 19, 2019, 11:10 am

    Jack did it for me. Now a 72 year old in Drawdown
    Having suffered With Profits Schemes incl Equitable Life then Investment Trusts -I found Jack,his books,Bogleheads Forum and the rest is history
    (Motley Fool was a great source for UK financial info-Monevator carries on the good work)
    Went through 2002,2008 and now hopefully Brexit without too much trouble using a 3 Fund Portfolio of Vanguard Index Trackers
    He was a great man for the small investor -incalculable the good he did for us
    xxd09

  • 12 ChesterDog January 19, 2019, 11:18 am

    Typo: first link (Money Marketing) in News section.

    “Passive” should be “active”.

  • 13 Ben January 19, 2019, 11:25 am

    The MSCI link has a table showing the ‘MSCI UK price index’ indicating we are back to where we were in 2000.

    I’m assuming that’s excluding dividends, but still that’s pretty poor.

  • 14 The Investor January 19, 2019, 11:39 am

    @ChesterDog — Thanks! (I’m staying at my mother’s at the moment — she’s just had her knee replaced, and I’m her live-in robot etc — and everything is a little more harried than usual. It shows, clearly!)

  • 15 hosimpson January 19, 2019, 11:55 am

    @AtlanticSpan – me too.

  • 16 Adrian January 19, 2019, 12:44 pm

    Buffett knows to beat indexes you have to have an edge. He was the son of a congressman, had an Ivy League education and maybe was just good at picking stocks. But even that doesn’t help him to beat the S&P500 any more.

  • 17 PC January 19, 2019, 12:46 pm

    I’d forgotten the Motley Fool, still have their book. That’s where I started .. thanks for picking the reins @Monevator

  • 18 The Investor January 19, 2019, 1:57 pm

    That Motley Fool book was indeed great, I must have bought and gifted at least 4-5 copies. Genuinely funny.

    (Incidentally have a draft of our book now and @TA has worked a few giggles in there. Watch this space!)

  • 19 tom_grlla January 19, 2019, 4:10 pm

    Perversely, Jack Bogle helped me with my active investing.

    Reading ‘The Clash of the Cultures’ was hugely helpful to me in understanding the importance of fiduciary duty, and to select investment trusts and funds where I believed the managers were properly aligned and had a sense of duty to their clients.

    I still believe that 99% of active funds are garbage, but I also dislike Passive investing for similar reasons i.e. I disagree with allocating capital blindly to badly managed companies.

    I believe it’s my moral duty to do better than that: for the sake of employees, for the environment, and to help prevent moral hazard.

  • 20 tom_grlla January 19, 2019, 4:12 pm

    p.s. Forgot to say – I hope your mother recovers well, and the operation was a success. I think the technology has improved immeasurably over the years, so hopefully it’ll be a great result for her.

  • 21 William January 19, 2019, 5:03 pm

    Looking forward to the Monevator book.

  • 22 Tim January 19, 2019, 5:10 pm

    Like BillD I also discovered indexing via the MotleyFool sometime in the mid 90s and as a result redirected my ISA contributions from Jupiter’s expensive active funds to L&G’s then newfangled trackers for at least a decade afterwards. I needed to discover Monevator and the online platforms sometime in the very late naughties before I discovered Vanguard though.

    Browsing classic MotleyFool via the wayback machine can be quite entertaining, and a reminder that they weren’t all about passive. Here’s a link to the archive for their “RuleShaker” portfolio which ran from 1999 to end 2000 and tried to navigate the dotcom boom and bust in a blizzard of trades. At 20% down on the initial stake and with markets plummeting, it seemed to be quietly forgotten. https://web.archive.org/web/20001207080200/http://www.fool.co.uk:80/ruleshaker/2000/ruleshaker2000.htm

  • 23 Fatbritabroad January 19, 2019, 8:38 pm

    What an interesting article on softbank. Almost makes me want to have a punt on their shares given the list of businesses he’s invested in

  • 24 A beta investor January 19, 2019, 9:41 pm

    I am just waiting for the day when passive funds top the performance league tables for UK funds to ram home the point that active fund management does not cover its costs or justify its fees.
    It can’t be long.

  • 25 E&G January 20, 2019, 9:14 am

    The article on active managers doing well when they buy but poorly when they sell is very insightful and suggests why your Buffets, Smiths and Trains have outperformed the rest (and, by far, the indexes) – they buy well and don’t sell. Food for thought there.

  • 26 MrOptimistic January 20, 2019, 9:47 am

    Mentally it is very difficult not to adopt a bucket strategy in one form or another. Theretirementcafe did a good survey of this some time back with the same conclusion, it’s non-optimal. However the overall conclusion ( aimed at financial advisers) was that if it helped clients sleep at night then perhaps the potential loss is worth it.
    Given that the stock indices have always gone up if you take a long enough period, it’s obvious to me that Monte Carlo back testing will point to high equity holdings as optimal. Stay in long enough and you will always win. Unless you are Japanese of course. I’m feeling a bit Japanese at the moment.

  • 27 Algernond January 20, 2019, 11:01 am

    Yes, the Softbank article is indeed interesting. Some people are afraid of AI. Myself, the Saudi investment of $45bn in the $93bn Vision Fund is absolutely terrifying.

  • 28 William J Urwin January 20, 2019, 12:39 pm

    Looking forward to the book, need some light at the end of the tunnel, to walk towards…

  • 29 The Investor January 20, 2019, 4:24 pm

    Thanks for the comments all (and thank you @tom, mum is on the mend cheers!)

    One thing to remember with respect to John Bogle is even if you don’t use Vanguard funds — and perhaps even if you don’t use index funds –- his innovations have had two major consequences for everyone including you. 🙂

    Firstly index founds created a benchmark and investible alternative to active funds, thus putting them on alert and holding them to account. This just wasn’t really done before. If you read the early letters of Buffett from the 60s you’ll see he almost as an afterthought starts comparing mainstream mutual fund performance to the benchmark return, and you can see his thinking evolve over the a few years as he realizes the big popular US funds are consistently trailing the market. Also, when Bogle first went to S&P to license their index to create his first index fund, they gave him the rights in use it for a song, because they didn’t see much value in either the general price index or his proposed fund!!

    Secondly, of course, the focus on low costs has at least produced a climate where costs have come down *for those who are price sensitive*. (I think the active industry continues to take advantage of those who have yet to get the message to keep fees high overall, at least in Europe. And let’s not snigger about 2/20 hedge funds and their investors.)

    Re: Active funds vs index funds, I’m not an expert on fund performance tables, I barely look at them, but I have a feeling some don’t include index funds? (Happy to be corrected here, even by my own co-blogger 🙂 ).

    But more to the point there are several thousand funds out there, and I am pretty sure a couple of dozen at least will continue to boast index-beating returns over 10, 20 or even 30 years or more.

    The argument should never be that some funds can’t/won’t beat the market (if only through luck and probability distributions).

    It’s that (a) you probably won’t invest any/all your money in them in order to do better than the market because (b) you can’t tell *in advance* which funds will achieve the feat and (c) because funds — active and passive and if you like individual portfolios of shares — are all together the market, in total it’s a zero sum game minus costs, so overall active fund investors can only as a group* expect market returns minus their higher costs, and hence expect a cheap index fund-lagging performance.

    (*More accurately total active dollars/pounds invested gets the market return minus costs rather than funds per se, but that’s getting into the weeds. 🙂 )

  • 30 Tim January 20, 2019, 9:46 pm

    @TI: Re Active funds vs index funds and performance tables… if you go on trustnet and screen “IA Unit Trusts & OEICs” and “IA UK All Companies” you will get a list of 257 funds which certainly does include a bunch of passive UK index tracker funds. I’m not sure it’s always been so though… I have a vague memory trustnet used to confine them to some sort of passive ghetto.

  • 31 ZXSpectrum48k January 20, 2019, 10:16 pm

    @MrOptimistic. In my opinion, negative articles on bucketing miss the point. I use bucketing (or silos) because it derives naturally from liability-driven investing. I’m investing to hedge forward liabilities. If I want to provide my two children with a house each as part of their inheritance then it’s a better replicating hedge to buy two houses (or a portfolio of residential property) than to buy a equity index tracker. Similarly, in 2009/10 when I was looking to pay for my children’s school/uni fees (rising at lets say CPI+3%) over the next 25 years, it was a better replicating hedge to own a diversified fixed income portfolio to generated the hedging cashflows that equities.

    The problem here seems to be that they assume everyone is investing to maxmize their wealth over the long-term. But I’m not! I’m investing to meet specific set of objectives, only one of which is to increase my wealth. Moreover, these studies tend to compare using cash/govt bonds/equities which always produces the result that you should be overweight equity funds. The reality is that I use a far wider set of investments including a variety of fixed income, property, alternatives and private equity. They make no attempt to model this type of portfolio.

  • 32 MrOptimistic January 20, 2019, 11:23 pm

    @ZXS…interestingly theretirementcafe chap has just posted an article along not dissimilar lines. His point, as far as I could tell, was that his approach to retirement was to focus on investment risk whereas what he should have worried about were liability risks, unanticipated demands on your money.
    Oddly, in terms of how I now invest for drawdown, none of this is very helpful! Dying young seems the best mitigation of sequence of return risk and a bunch of other issues, including brexit.

  • 33 dearieme January 21, 2019, 12:58 am

    “the best portfolio is not the optimal portfolio, but rather the one that the client can stick with through the market’s ups and downs”: that sounds pretty plausible to me.

    Another view of the matter comes from the work of the chap who computed the 95% confidence interval for the equity proportion of an equity & bond portfolio. The answer lies between 10% and 82%.

  • 34 Mathmo January 21, 2019, 1:05 am

    Thanks for the links this week, TI, particularly while caring. Hope she’s well on the mend.

    Loved the bucket article, but not for its bucketness, rather the introduction of something other than portfolio failure within 30 years as the measure of SWR success. There’s always been something fishy about the (fix it and add inflation) rules as well as the consequent sequence of returns findings. I tried to download the D-RAS article but it wasn’t available — has anyone seen that covered elsewhere in any detail? I also enjoyed the CFA perspective that it’s what works that counts — a bit like the doctor’s challenge: there’s no point prescribing something that the patient won’t take. Five portions of veg, anyone? 30 minutes of light exercise?

    The reality is that one is more likely to adjust and trim ones expenditure (providing one is aware of the state of play). So I wonder if there’s in fact a better way of turning the problem on its head and asking how expenditure should be managed given the actual returns. I’ve always found the whole “take your income and knock off your expenditure” calculations as a bit fishy — seems to be two numbers that I have literally no knowledge of….

    And then I see there’s an article from HumbleDollar explaining exactly how he’s trimming his expenditure (to leeward!) in the face of investment returns. No SWR-slave there.

    Was greatly entertained by the fund managers good at buying not selling analysis. Thought provoking too. I have redoubled my resolution to be a slave to everso just slightly trying to time the otherwise strict rebalance…

    @William +1

    RIP and thanks, Jack.

    Brexit? What Brexit?

  • 35 MrOptimistic January 21, 2019, 8:40 am
  • 36 Mark Meldon January 21, 2019, 1:38 pm

    @MrOptimistic,

    Hmmm…Why not cater for ‘liability risk’ via partially annuitizing your pension fund? This can help ‘seal off’ things like food, council tax, energy bills, etc. Depending, of course, on how large your drawdown fund is. Needs to be £500,000+ really, IMHO.
    As you age, will you really want to be worrying about the S&P 500 or FTSE All-Share? Perhaps not, especially if you lose capacity, thus passing the problems to your attorney.

    There are no ‘safe withdrawal rates’ with drawdown, period – if financial assets take a (big) tumble, which they will from time-to-time, can your fund cope or will you have to reduce the drawdown commensurately?

    Maybe you have a lovely mixture to ‘final salary’ and state pension income and don’t have all your eggs in the drawdown basket.

    We all know, intuitively, that the economy is in bad shape and that QE has driven up asset prices – any kind of sterling crisis because of the ‘B’ word might be horrid – not that I can predict anything.

    Hold onto your hats!

  • 37 MrOptimistic January 21, 2019, 3:31 pm

    @MM. Thanks. Not to mention the direction and pace of interest rate changes. I think that the biggest unknown is indeed currency moves and the whole current situation, in the UK and globally, is a trap for aspiring market timers. The papers and internet are full of opinion about the UK being cheap, the merits of high charging multi asset funds, how biotech is the way to go and so on.

    Theretirementcafe, Wade Pfau, McClung etc all stress the risk of having insufficient equities ( although to be fair McClung does say 40% is ok if the cyclically adjusted PE ratio is above 20 – all from a predominantly US position).
    I have just transferred a dB scheme to a SIPP so have about 50% income covered by pensions and £500k tormenting me as how, and when, to invest it: for me and my future widow ( bless).
    It’s all very confusing because, of course, there is no right answer. Being told that holding more than about 10% in cash is sub-optimal ( for which read dumb) just twists the knife 🙂
    This is a great site and thanks to TI and the other contributors. Hope his ear is still attached.

  • 38 Mark Meldon January 21, 2019, 4:09 pm

    @MrOptimistic,

    May I ask, why did you transfer the DB scheme – are you ill (I hope not)? Some ‘special’ reason to think you can outpace the income guarantee of a Scheme pension?

    £500,000? You have to jump, now you are out of the DB scheme – good luck with that (hint: investment trusts, period).

    Best,

  • 39 MrOptimistic January 21, 2019, 5:00 pm

    @MM. First off a reasonable ratio: x31. Second I had other DB schemes. One slightly larger (£10k) which is being wound up with the quid pro quo being to give unlimited inflation protection. The scheme I transferred offered inflation proof up to 5%. So, as a life long smoker, I hedged my bets. Also, having lived through the 70s, I worried that a few years of high inflation could wipe out a capped dB scheme. So, if I die in just a few years ( say less than 20, preferably less), I can celebrate being a winner ! Who wouldn’t want that?
    Only in the pension business would living a long time be a risk and dying sooner a good outcome :(.
    However, it was very stressful, mainly trying to find a decent IFA who wouldn’t insist they managed my money, and the timescales. Cost £2500, some wanted £6k. If I had only the one scheme I wouldn’t have considered it.
    I have ITs but the low discounts are a worry.
    These days some open ended funds are competitive. The market timer in me is itching to buy iShares Europe Quality factor etf, or would be if Alliance offered it (pains), so that will be in the HL ISA and the SIPP may have to settle for an HSBC global strategy fund or LS20 or something. But I hesitate…..and read more.

  • 40 Mark Meldon January 21, 2019, 5:15 pm

    @MrOptimistic
    Interesting! I’m a lifelong smoker too, and we know this risks. Not all IT’s are at narrow discounts – Law Debenture springs to mind. I do use a few OEICs, too, but they tend to be obscure like Munro Smart-Beta UK (indexed), Thistledown Income (mainly indexed) and (definitely not indexed) Kennox Strategic Value (strangely, the first two are all administered by Valu-Trac (www.valu-trac.com – look under ACD services) in deepest Morayshire!), but that’s not a recommendation, per se.

    Now a smoker annuity, level in payment perhaps, is worth a look for, say, £80,000 of your fund (this tends to be a pivotal price point with annuity providers, with the ‘rate’ gradually declining for larger sums – they think you know something they don’t about your mortality) and spread the rest among ETFs (remembering the potential for liquidity to evaporate should the proverbial hit the fan) and/or ‘value’ index funds and a handful of tortoise IT’s should do the trick. Oh, and maybe a life insurance for your partner, if you have one, and worry about them (annuities should be joint, in all probability) if you don’t think they would want to take on your drawdown fund.

    And so on!

  • 41 MrOptimistic January 21, 2019, 5:35 pm

    @MM. Obscure hardly captures it ! Yes the discount on Law Debenture looks interesting. We have more than the SIPP in ISAs but want to help children with housing so not as much as it might appear. Was looking at balancing out at 30-40% equities as allocation. The mantra that you rebalance and sell bonds to draw out money counts against the lifestrategy type of thing.
    What I have invested in the SIPP is 50/50 risk/ less risk as far as it goes with the cash overhang. Hedged US Treasuries ETF 5yr, Gold ETF, global IL fund ( duration a bit high at 8 years ish), vanguard hedged global bond, Alliance Trust, British Empire and Witan Pacific.
    More money than sense.

  • 42 MrOptimistic January 21, 2019, 6:08 pm

    Oh, meant to say, another reason for transferring was that the widow’s pension is half mine. In a SIPP she gets the lot.
    Considering how much I have planned around her wellbeing, you would have thought she would like me more.

  • 43 Vanguardfan January 21, 2019, 7:48 pm

    Oh Mark, you have just massively dented your credibility in my eyes! All that grief directed at people playing fast and loose with the gamble of drawdown and all the time you are playing fast and loose with your own mortality. You know that half of all smokers die from their habit? (Yes, I know we all have to go sometime and you are of course perfectly entitled to choose your own poison).
    Still, it greatly reduces the chances of outliving your money. Every cloud eh?

  • 44 ZXSpectrum48k January 21, 2019, 8:01 pm

    MrOptimistic: Small (possibly irrelevant) point but be aware that duration for index-linkers isn’t comparable to duration for nominal bonds. Most of the time (not always) an ILG portfolio with duration of 20 is only 30-70% as risky (in price volatility terms) as a Gilt portfolio with duration 20. Moreover, reducing duration will not necessarily reduce the price volatility in a linear way. This is because shorter maturity ILGs are more a function of actual delivered inflation, which is more volatile, while long-maturity ILGs tend to move with long-term inflation expectations which are more stable.

  • 45 Ben January 21, 2019, 8:10 pm

    >Still, it greatly reduces the chances of outliving your money.

    Ah but do you? What’s the price of a packet of fags these days? If instead of putting £X pm into a pension, you instead bought fags, would that be enough to kill you by age 65?

    I assume theres a cross over point. Research needed!

  • 46 Ben January 21, 2019, 8:27 pm

    Thinking about this some more.
    The optimal choice would be to take up smoking when you retire, assuming the extra cost of smoking doesn’t eat up the extra money gained.

    The worst option would be starting smoking at 16, then stopping smoking in your 30s (no body would do that would they?) If only I could go back in time and tell 16 yo me to open up a sipp instead on smoking behind the bike sheds. I’m sure I would have listened.

  • 47 dearieme January 21, 2019, 8:41 pm

    @MM: do they sell annuities on the same terms to pipe-smokers as fag-smokers?

  • 48 PC January 21, 2019, 8:50 pm

    @Ben you touched a nerve – smoking at 11 to 21 .. and spending the payout on an insurance savings policy maturing in the mid 70s .. even my parents didn’t argue because the payout was way below what they had in mind when they started the policy.

  • 49 PC January 21, 2019, 8:55 pm

    @MrOptimistic I transferred a deferred annuity in my SIPP for the same reason – my wife gets the full amount, instead of half – plus both my children have long term health problems and can inherit anything left over when neither of us are here. No brainer for me.

  • 50 MrOptimistic January 21, 2019, 11:37 pm

    @ZXS. That’s cheered me up a bit. I probably have 25% of all investments (ISAs and SIPP) in IL, funds and direct holdings. Over the years did better than I expected ( was the top performing asset in 2012 I think). Can’t add much to UK IL as it’s at – 2% real return last time I looked, hence the new stuff is global.
    Other issue just at the moment us I can get the 25% tax free commencement lump sum. Not much point risking a big loss for the sake of a few months potential gain and all the risk that would bring.

  • 51 Nearly There January 22, 2019, 9:20 am

    @ZXS @MrOptimistic can you confirm that IGL is index linked gilt, and IL is index linked?

  • 52 Mark Meldon January 22, 2019, 10:09 am

    I know, I know, about my dreadful smoking! ‘Nuff said, methinks. Mind you, I’m a teetotaller – I see too many people in my line of work who have, ahem, ‘issues’ with drinking too much. Indeed, the life offices are warily watching a cohort of people now in the 40s and 50s who grew up in the era when supermarkets started selling cheap booze and, alas, are starting to die young.

  • 53 Mark Meldon January 22, 2019, 10:52 am

    @MrOptimistic & PC

    Hmmm…’transferring a deferred annuity’. Whilst this can be a good choice, depending very much on the terms offered on what are known as ‘GAR’ (Guaranteed Annuity Rate) policies, in my experience that isn’t often the case. Let me give you a real-life example.

    Retirement Annuity Policies (‘RAPs’) were available between 1956 and 1988 – they were replaced by Personal Pension Plans (‘PPPs’) in July of that year. Unlike most, but not all PPPs, most RAPs actually offered a certain level of pension at your selected retirement age, based on a table in the policy. Remember, these policies were available to the self-employed and those employees without access to an occupational pension scheme. Contributions were paid gross in those days, with tax relief being claimed from HMRC, although the contributions were collected net from a few years ago, with the tax relief being given up-front. There remain hundreds of thousands of these policies on the books, and I find working with those who have them fascinating (well, someone has to).

    Back in the 1970s and 1980s, interest rates and inflation were much higher than they are today and, thus, annuity rates were much higher (although this is all relative, of course). As a marketing ‘gimmick’, many life offices operating at the time – there were well over 100 selling RAPs, compared to 6 or so serious PPP players today – offered annuity ‘rates’ at about 1% or 2% less than those available on the open market, never expecting interest rates to collapse in the way they did – so much for forecasting!

    The chap I’m dealing with bought a RAP from Scottish Widows and it matures tomorrow, when he is 60. Since buying it in March 1988, he has paid net contributions of about £40,000 into the plan over 31 years. The plan is a conventional ‘with profits’ policy and when he bought it, Scottish Widows guaranteed a retirement fund of £67,000 at age 60 (its a bit like an endowment policy – remember those?).

    So what, you say? That’s terrible! Well, it really isn’t.

    The plan has actually achieved a fund value of a touch under £100,000 and if my client used all of this to buy an annuity on today’s open market (he has no need for tax-free cash – bear with me before you shout!), then he will be offered slightly over £4,500 a year, fixed for life, paid monthly.

    Scottish Widows, however, on a ‘like-for-like’ basis will pay him – drumroll – £9,556.35 a year. So, that’s 9.5% on the pension fund, guaranteed 5 years and for life thereafter.

    But, this chap is married and, like many juicy GARs, the annuity is offered on a single life basis only. So, if he dies sooner than he hopes, that’s a bad deal for his wife. Because the GAR was so attractive, we felt we just had to take it up.

    To give his wife (a lady of certain means, which helps) some kind of return should the worst happen, we agreed to set up a temporary life insurance policy which will finish at age 75. We chose an inexpensive family income benefit policy that will pay out £7,200 a year (there being, ahem, one less mouth to feed), tax-free, from the date of death until age 75. The premium is a piffling £24.72 a month, so he will pay £4,449.60 over the term of the policy, which is written in a flexible trust. If she dies first, then the policy can be binned.

    Its not perfect, but suits the overall financial circumstances of the couple concerned. As far as my costs are concerned, I get paid £13.92 a month in commission for 48 months by the family income benefit provider, and 60p a month from then until the end of the term, so that’s not a great deal. Scottish Widows will pay me nothing for helping arrange the annuity, which is fine.

    A few years ago, I met a fellow who used to have a fund held in an old Equity & Law ‘executive pension plan’. I say used to have, because he transferred the fund into a SIPP with a well-know Bristol-based provider. The transfer value was £116,000, IRRC, but he didn’t realise that there was a GAR. He was 58 at the time of transfer, but this very old policy, into which nothing had been paid for donkey’s years, had a ‘guaranteed fund’ at 65 of £222,000! Even worse, had he left it all alone, the GAR was an astonishing 11.65% per thousand fund at age 65. I make that a pension of £25,863 gross, no risk, no packdrill. I’m afraid he didn’t like it much when I said ‘are you mad?’ or some other rude thing, so the meeting was a one-off – I do wonder how his drawdown plan is doing by comparison? Yikes!

    So, be very careful when looking at RAPs (sometimes called S226 policies) and some PPPs as they can offer sparkling, secure, returns! Same applies to the obscure ‘Section 32’ policies, but these interesting contracts are a subject for another day.

  • 54 MrOptimistic January 22, 2019, 11:38 am

    @ Nearly There. My typing isn’t great but yes, I was talking about index linked gilts ( held as direct holding in ISAs, 2.5% 2024, and a couple of funds holding global Index Linked bonds (hedged I hope), Royal London and L&G.
    @MM. Thanks, interesting. I held a Section 32 buy out policy, now in payment. GAR 8.5% from 1986. Trouble was I got no options, no commencement lump sum or chance to make it joint life. Equitable weren’t very helpful when I tried to vary it so I left it alone. The payout was twice that due on the underlying fund: even the Equitable winding up uplift didn’t dent the gap.

  • 55 Mark Meldon January 22, 2019, 12:12 pm

    Perhaps I should write more about retirement annuities? As I said, there are hundreds of thousands (I believe) still in force and I do worry that too many people don’t think through the GAR ‘issue’.

    @TI A ‘potted history’ of retirement annuities of interest or are your readers just far too young to worry about this? Mind you, they have (or had) parents!

  • 56 The Investor January 22, 2019, 12:44 pm

    @Mark — As you know, I’m always interested in your thoughts. Cheers for adding to the discussion here (and to the other interesting commenters of course) and let’s pick this up on email?

  • 57 Ed January 22, 2019, 10:38 pm

    I was really sad to hear about his passing. Whilst he looked his age, in interviews he sounded half his age.
    A lot of people have had and will have dignity in their old age thanks to him.

  • 58 MrOptimistic January 23, 2019, 12:36 am

    An update on structured products would be of interest to me, if you’re listening 🙂

  • 59 Steve21020 January 23, 2019, 8:39 am

    Re. The Motley Fool, I think they deserve a hell of a lot of credit for what they did in the early 2000s with their aim of educating plebs like me. In 1998 I’d come to the end of a 9-year contract in France and was given all my pension contributions as cash (non-permanent staff). We used this as well as the proceeds from selling our house in France to help purchase a house in Stevenage with a garden the size of our old vegetable plot. Don’t get me started on the tiny rabbit hutches that pass for ‘houses’ in the UK!! I realised that I had a huge gap in my pension contributions at the same time as discovering TMF and had a very steep but enjoyable learning curve. It’s thanks to them that I can look forward to retirement with no worries. Sad that they disappeared, but at least we now have Monevator! 🙂

  • 60 Tim January 23, 2019, 1:44 pm

    @MrOptimistic: Assuming “Alliance” means Alliance Trust Savings: they seem to have the “iShares Europe Quality factor” ETF available just fine under the IEFQ ticker (which is the GBP units). The “Research” tab’s list of “ATS Tradeable ETFs” does indeed omit it… but in my experience it’s not uncommon for the information there about whether something is available to be incorrect; if typing the ticker in the Trade Now search box finds it, you can buy it.

    And for ETFs which genuinely weren’t available on ATS, I’ve always found they’ve been been very happy to add them in response to an emailed request. I’ve probably had a 4 or 5 added over the past few years. The only requirement seems to be a firm commitment to actually invest, and that there be GBP units available (not all ETFs do; although I have a couple of things which subsequently dropped their GBP units and ATS converted my holding to USD units).

  • 61 MrOptimistic January 23, 2019, 11:09 pm

    @Tim. Thanks. Yes Alliance Trust Savings use Morningstar for research but only those investments tradeable can be bought in a SIPP. I will check if it’s an exception but when I have attempted to trade it can’t be done. When they become II may be it will change :). I did speak to them a while back about another stock and I got the impression that they didn’t want to add anything at the moment. It’s no Biggie, I like them and I hope II’s back office functions as well as Alliance.
    When the time comes I will try again. Still puzzled why I had to become a sophisticated investor to buy a physical gold etc though. Mind you, Halifax stopped allowing trading in INPP so it’s all a bit bizarre. Good old mifid and the benevolent EU.

  • 62 Tim January 24, 2019, 1:25 am

    @MrOptimistic: For some specific examples: None of IEMG, ERN1, ERNU, IBTL, DRDR, AGES, DGIT or RBTX actually show up in the ATS Morningstar “ATS Tradeable ETFs” list but I’ve had no problems buying the first 4 of those in my SIPP and the latter 4 in my ISA. The ATS trading screen certainly knows what IEFQ is… but I’m not going to try and buy any myself (already hold some IWFQ) just to see if it complains; what was the error message you saw? I have a vague memory of a couple of larger (5 figures) orders failing with a message to call ATS – I suspect this maybe related to the fact that some of these things trade quite infrequently – I once did call and spoke to a trader who put a market order in for me and got the goods at a good price (they don’t charge “telephone dealing” prices if you have to do this, just the regular online trading price); another time I just tried again online a few hours later and that time it worked.

  • 63 Ben January 24, 2019, 9:27 am

    @mroptimistic
    “Halifax stopped allowing trading in INPP so it’s all a bit bizarre. Good old mifid ”

    I had the same problem (also with the Halifax). You can’t buy certain investments unless you’ve had investment advice, but they don’t ask you if you’ve had investment advice, so as far as they are concerned, none of their customers have had investment advice.

    Added to that, they won’t actually produce a list of investments they’re no longer selling due to mifid. They wouldn’t even guarantee I could still buy a FTSE 100 tracker.
    I havent been back since to check whether that’s the case though.

    /rant.

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