Good reads from around the Web.
What a week it’s been in the markets! If you’re (sensibly) a passive investor, then hopefully the turmoil has passed you by.
But if like me you’re an active dabbler, then you probably know what I’m talking about.
The short summary is the US market has become much more volatile on a intra-day basis (though pretty flat on a weekly view), the oil price fell further than almost anyone thought possible, and to top it all the Swiss National Bank removed the cap on its currency – a dramatic and unexpected move akin to an elephant parascending onto a crowded kid-strewn bouncy castle.
The chaos left made some big name FX brokers reeling if not insolvent.
So the first lesson of the week is relevant for everyone, which is that things fail.
I’ve said before I would never have all my money with one fund group (not even Vanguard) nor one broker. This week shows why.
I still meet or read about people with nearly all their money in 1-2 shares, which is insanity unless you founded and run the company. Even then it’s extremely unwise.
But I’d also question the wisdom of running your entire diversified passive portfolio on just one cheap online platform.
Many do it. I wouldn’t.
Sure, the 50-1 leverage used by traders on those FX platforms was a clearly outsized risk compared to an online broker or platform with segregated accounts that supposedly keeps your money safe.
And yes there are investor compensation schemes.
But things can go wrong, and they’re always unexpected things. The fail-safes may fail.
As The Accumulator wrote in one of those articles on the subject:
Does it matter? Can the worst happen?
It’s rare, but yes it can.
It’s a personal choice, but for me paranoia is a price worth paying.
It doesn’t hurt to look, does it?
As for what you should do in light of this recent volatility, the house view is that most people are best off being passive investors and doing nothing.
Fiddle, and you’ll probably make things worse.
(Of course I’m assuming here that you’ve got an appropriate asset allocation for your temperament and long-term goals in the first place.)
At times of scary headlines, the best thing to do is often to just look the other way, as Morgan Housel said this week at the US Motley Fool:
Go do something else.
Maybe read more books and fewer articles.
Be more choosy about who you’re willing to listen to.
The amount of financial information available has exploded over the last decade, but the amount of financial information that you need to be informed has not.
You have to learn how to sift through the news, and filter out what you don’t need.
“A wealth of information creates a poverty of attention,” Herbert Simon said. It also creates a dangerous tendency to lose self-control over your ability to be a patient long-term investor.
Just look the other way.
It’s great advice. If you’re a passive investor then I suggest you skip straight down to the links below!
The gnomes of Zurich
Still here? Really? After seven years and ever fewer articles about active investing on Monevator, you still haven’t got the message?
Oh well, I can’t be a hypocrite. So for what it’s worth I’ll offer up a very brief bit of frothy speculation.
A few crazy long-time readers even asked me what I thought. (Careful! I am just a bloke on the Internet!)
To start with, I don’t think the heads of the Swiss National Bank suddenly woke up lobotomized. They knew the chaos their action would cause, and they knew it would inflict a lot of hardship on their own economy.
We also should keep in mind that there was only recently a (failed) referendum on returning Switzerland to a gold standard of sorts. Clearly a significant chunk of the Swiss population was growing wary of trying to fight the plunging Euro.
So I think it’s pretty much nailed-on that the ECB is going to announce full-blown quantitative easing in the next few days.
Either the Swiss got a heads up from Mario Draghi or took their cue from a recent EU lawyer’s decision on the legality of European QE, or else they spend all their days thinking about such things, and they’ve divined it ahead of the market.
(Of course people will say the market already expects QE from the ECB, too. But if certainty was really a widespread view, then we wouldn’t have seen the storms we saw following the Swiss move. I think more money would have already been positioned ahead of it, and hence the volatility would have been lower).
2015: A year of living dangerously
And what of the US intra-day volatility?
A few things are going on, I’m guessing.
Firstly, the collapse in energy prices was unforeseen, and it has wide macro-economic consequences as well as an impact on pretty much every listed company. So everything needs to be repriced in light of this development.
That is even leaving aside the fact that it may be telling us global growth is rolling over, because it’s really a demand shock. (I doubt it, but it is a risk).
Secondly, I suspect money is repositioning itself ahead of ECB action, possibly by buying into Europe (optimistic investors) or even more into bonds (pessimistic investors).
Thirdly, “everyone knows” (see Swedroe in the links below) that the US is an expensive stock market. So no wonder they dump it if they worry about the above.
Fourthly – and this is a gut feel thing – I think markets, including oil, are more illiquid or certainly less buffered than they used to be.
Perhaps it’s down to investment banks scrapping trading desks. Perhaps there’s less leverage in the system at hedge funds or similar. I can’t quantify it and it might be a misleading path to go down – because things have been so placid for so long, as volatility has been smothered by low interest rates, that we may have just forgotten what real volatility feels like.
But with that caveat, I think something has changed.
Fifthly, related, the Swiss National Bank move, the role of leverage at the brokers, and the associated fallout gives us an insight that you can’t regulate away risks, which regulators seem hell bent on trying to do.
As I’ve written before, risk cannot be eliminate, it can only be transformed.
Fifth-and-a-half-ly – It also gives us an insight into what happens when risk is effectively taken out of the markets and placed with Central Banks. Calmer most of the time, but the ever-present danger of big Central Bank initiated dislocations.
Finally, I don’t want to scare anyone but when stock markets crash, it’s my belief and experience that they behave in the way that the US market has been acting over the past six months.
Leadership narrows (fewer stocks go up) and at the end of the run you get violent swings up and down.
The US market has had a terrific six years. We don’t need to see a massive bear market crash, but a significant correction is well overdue, in my view.
It may be as I say that money is repositioning itself out of expensive US shares and into European equities ahead of the ECB move. It may even be that the volatility doesn’t presage a crash, but rather a lurch higher – that’s possible.
Think of an old engine juddering and coughing as it either roars to life or else conks out. I suspect that may be where we are with the US bull run at the moment.
Don’t do what I do
What have I been doing?
With most of my portfolio – nothing.
At the margin, at a portfolio level: Reducing US exposure, trading energy stocks, building up a position in commodity producers (from near-zero!), and adding more European exposure. (I waited a long time to buy more into Europe as I was and still am fearful of the currency risk).
Caveat: The active share of my active investing is active. This might all be different by next Saturday!
The bottom line is that if you aren’t a well-diversified investor because it has seemed pointless in the past few years of placid markets, you might consider this a wake-up call.
Or at the least, know all the risks you’re taking, however you’re invested.
Good luck!
From the blogs
Making good use of the things that we find…
Passive investing
- How passive funds work – Maven Capital Partners
- Questioning the small cap premium – Research Affiliates
- My investment portfolio – Can I Retire yet?
Active investing
- A dozen things learned from Tom Murphy – 25iq
- Forecasting the FTSE 100 – UK Value Investor
- Market timers Vs macro hedge funds – The Brooklyn Investor
- Stretching the high-yield rubber band – Investing Caffeine
- Beddard: The slide into certainty – iii blog
- Is any market on earth still cheap? – The Value Perspective
Other articles
- Why is currency risk bad? – Oblivious Investor
- Things we “know” but can’t prove about investing – mSantoli
- Where you live and your retirement budget – Simple Living in Suffolk
- Expenses report: The extreme bloodbath edition – The FIREStarter
- In contrast, Mr Money Mustache had a good year for spending – MMM
- A dynamic retirement income strategy [US, heavy going] – Advisor Perspectives
Product of the week: NS&I has finally launched its eagerly-awaited Pensioner Bonds, or “Guaranteed Growth Bonds” to give them their official name. That’s presumably a way to sidestep the fact they don’t pay the monthly income many pensioners wanted. Oh well, the rates are unbeatable for cash, so if you’re over 65 then go load up! (Actually so many have already done so that they reportedly crashed the website, says ThisIsMoney).
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
- Swedroe: Why do anomalies like low volatility still exist? – ETF.com
Active investing
- UK IPOs beat the FTSE 100 in 2014 – City AM
- Income hunt drives investment trust issuance [Search result] – FT
- “Dear hedge funds, it’s not you it’s the fees” [Search result] – FT
- Buffett’s stock picking successors damned for one duff year – Fortune
Other stuff worth reading
- Swedroe: Forecasting follies, 2015 edition – ETF.com
- Inflation: What’s really going down in price – Guardian
- Why now is the time to move to your second home – Telegraph
- Should you borrow instead of buy your next boiler? – Guardian
- I get the odd troll in the comments. This Saudi blogger gets flogged – Sky
Book of the week: Reader Phil spotted William Bernstein’s short investing pamphlet If You Can available for free as a PDF on ETF.com. Its presence on a mainstream site reassures me that this is not a pirated copy, but if you know different please do let me know.
Like these links? Subscribe to get them every week!
- Note some 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”. [↩]
Comments on this entry are closed.
Your ‘Book of the week’ is all very well, but it is aimed exclusively at readers in the USA. All of the funds recommended and where to put your savings prior to investing are all US based.
Would be great if you could write a version for the UK.
I actually had no idea anything was awry with the markets this week. Weekend reading as informative as ever!
Keep up the sterling work!
“So I think it’s pretty much nailed-on that the ECB is going to announce full-blown quantitative easing in the next few days.”
Frankly, I don’t understand. If ECB is going to announce a huge QE than I think the EURO would be weaker so the Swiss franc would be stronger. Or not?
Thank you for another informative article. You’ve got me worried about whether I should also use several investment platforms. I’m with Alliance Trust Savings, and perhaps naively assumed that each fund held on the platform was guaranteed by the FCA up to a value of £85K ? Please don’t tell me it’s £85k in TOTAL !!!!!
What have I been doing?
– I also think the US (S&P500) is over valued. As of Friday’s close I still think it’s up to 59% over valued. This has had me underweight ‘International Equities’, 40% of which is US equities, for some time.
– I also think the FTSE100 is only a little over valued at around 7%. So here I’m pretty close to a nominal holding. The oil price falls actually pushed BP up my HYP watchlist and I grabbed a healthy chunk on Tuesday.
– The majority of my holding is low expense, diversified passive stuff. This week saw my wealth increase by 0.8% which given I’m fast approaching financial independence equated to multiples of what my day job paid me.
Anybody recall that BBC series about day traders? Wonder how they faired this week given that 90pc of retail investors trading CHF were short… Doubt we’ll hear about it though…
@ljmuk — The Accumulator is working on it (he promises me!)
@Grand — Sounds like you’ve got your investing in the right place… 😉
@Gregory — That’s the problem, the Swiss National Bank doesn’t want their currency to appreciate any further because it hurts many of their indigenous businesses (among other reasons). So they’ve tried to contain their currency by capping it over the past few years, and spending their own currency (and buying Euros) to do so (and also by at least threatening to do so, which can be as good as doing it in the markets). Their fear would be (one supposes) that when the ECB does full QE it will become even harder / impossible to hold the line on the Swiss franc, so they have got out of the way. Many Swiss listed companies have plunged in value (especially banks) although if one holds their overseas listings one might not have noticed because the franc has soared in terms of say $ or £. (I say “one” because I know you are a pure passive! 🙂 )
@Mandrake — It’s complicated. It’d read the two articles I linked to. They’re a bit old but I think still cover most of the ground.
@RIT — Nice to see your automatic stabilizers doing the business. 🙂
@L — Well, one of the FX brokers that has gone down as you may know is Alpari, which is UK based. Maybe some of them found their way there. I am always amazed when I see the stats on the volume of people day trading currencies. Insanely popular compared to indices let alone stocks, yet if we can argue the toss about any active edge in stock picking it’s inconceivable to my mind that these guys can have an edge with currencies. (Maybe a few have a rare Rainman type gift, maybe there are some weird illiquid currencies, but Euro/Dollar?!) And then they have to use massive 50-1 leverage to turn the pennies they pick up into pounds… no thanks!
@Mandrake — I forgot to say the £85,000 compensation scheme you’re thinking of is the cash one. The sum here is £50,000. But as I say it’s complicated and I’d have to retype the entire article in a comment, so Id definitely do a bit more reading. 🙂
Also, remember I’m paranoid! From memory Mike the Oblivious Investor is all-in with one fund provider and possibly one platform, for example. He judges the risks sufficiently tiny. (He’s in the US though so different regulatory system…)
I ended up with 6 trading accounts.
First came the Halifax trading account (1), then a few months later I opened a Halifax ISA (2). For some reason linked to overseas trading costs, I later opened a IWeb account (3). Still Halifax).
After several years, I decided to bring in a second provider, in case Halifax failed. So I opened a TD Direct trading account (4) to see if TD Direct were OK. For the next tax year I opened a TD Direct ISA (5).
Then my pension -that’s mainly in an A J Bell Sipp (6).
To keep track of the total portfolio, I use a google docs spreadsheet.
The non-ISA broking accounts should be rationalised, however it’s not economic to sell all the stocks & buy them back in another account.
I’m pretty content not tinkering with my current portfolio but for one “once in a generation” crackpot temptation related to oil suggested to me by the devil on my shoulder.
That being a high risk strategy to rotate progressively out of equities and into oil ETFs between March and the end of this year. Hold until the price recovers to something like 75 dollars and then rotate out again. It goes against every principle us passive buy and hold trackers hold dear. Huge assumption that the bottom is well and truly in by the spring and that it recovers in 2016, even if it seems the most likely scenario.
Personally I feel much safer with my wealth held by a broker/platform than with a bank – where there entire business model is to “speculate”/”make sound commercial loans” (Strike as appropriate) with your money.
Are there any real world examples of bona fide retail platforms going bust and losing clients money? Sure you get rogue individual stockbrokers. You get Alpari – who are in trouble because they run margin accounts for currency traders and are left to pick up the pieces when margin calls go unanswered. Even with MF Global who traded fraudulently and used $1.6bn of client money as collateral for their own trading, the initial ruling gave clients 93% back and after two years they had all of it back. Painful for sure.
But I struggle to think of a scenario where the ladies and gents of UK firms in Bristol or Dundee could get anywhere close to such a mess. They don’t trade on their own account, they have no or small margin exposure and they avoid esoteric securities.
The biggest risk is probably that you or a small number of individuals are targetted by a criminal insider for some reason – lapse security, or they have your id cloned. But then I would be very surprised if the institution did not make up the loss.
Interested to hear any real world examples?
Thank you, as always for your thought provocation. I seem to have a bit of a block on currency risk, re your “adding more European exposure. (I waited a long time to buy more into Europe as I was and still am fearful of the currency risk).” So, might those optimists buying into Europe be wiser to buy Eu funds hedged back into GBP? Or is that too short term a view?
The whole business of platforms or funds going under is a continual bugbear. It’s not helped by the difficulty of transferring ISAs around in-specie either. I’m trying to consolidate my holdings down to about two or three platforms because otherwise it’s just too difficult to keep an eye on the platform charges (and you can’t take advantage of the cheaper fixed-fee platforms) and that’s probably going to have taken at least a year, maybe two, by the time I’m finished with it.
@All — Re: Platforms going under, to be clear I personally think it’s overkill to have half a dozen accounts or funds, or to try to manage around the compensation protection and so forth. But I think it’s worth splitting your pot into at least two ‘silos’. This way if one goes under (or more realistically freezes and your money is locked up for days/weeks/months) you have access to another. Remember any time when this sort of unlikely thing happens, there’ll likely be all sorts of other awful things going on economically. So you could be glad to have access to funds at such a time.
@helfordpirate — Pays your money (/time), takes your choice. If it hasn’t happened before that actually increases the risk in my mind! 🙂 But to be clear I see it in the UK with mainstream brokers as very remote. Say in the 1-5% range (as an absolute guess) over an investing lifetime. It would probably take fraud or some other criminal activity (perhaps electronic crime?) coupled with some sort of 2008 style system breakdown. Perhaps slightly more likely for a fund, not counting Vanguard where I’d imagine the risks are well less than 1% of any outright failure, although probably higher for some kind of liquidity event.
@allie — I rarely bother with hedged funds, but you could do that yes. If you’re a long term passive investor then over time the various swings and roundabouts, together with reabalance, should even it all out. Also — capitalism works! So if a currency is weak for a long time and successful companies exploit this, over time the currency will strengthen. Remember with hedging there is a cost, even if it’s hidden, that will add up over time.
im with i web .would opening another ss isa with Halifax be too close to home as its the same insitution really isn’t it?
I must admit I feel more safe with a platform thats part of a bank.
Re US market.
If we strip out NASDAQ and use S&P500 as a measure then :-
UK All Share PE is 15.77
US S&P500 is circa PE 17.90
It would not be unreasonable to assume higher growth for US, which using PEG ratios makes the valuations look pretty similar.
Much of the talk about high US valuations CAPE, q, etc, includes not unreasonably the NASDAQ figures.
Overall both markets seem expensive, but not wildly so.
The recent volatility is interesting, and as IT oberves can precede a top.
What to do about it? Search me guv!
Note : Why is the term volatility extensively used when we see market falls, but not so much when markets rise?
All Best
@dawn
“I must admit I feel more safe with a platform thats part of a bank.”
Not a recommendation (as there are past articles on this subject which TI may provide), but we use Barclays as our main broker, who are just introducing interest (albeit small) on significant cash balances.
Is this a first among brokers?
@ investor
Not all platforms are created equal
– rbs / Halifax is still mostly owned by the government
– other bank platforms are horrifically leveraged but report regularly and are probably government backed in a crisis
– some companies like ATS employ hardly any leverage and have sound finances
– then you get the tiny little private companies like iii and club finance
Then you get on to custodian risk…
http://www.economist.com/news/finance-and-economics/21639587-beware-heavily-traded-stocks-drop-pops
Interesting, though may have been covered in previous weeks.
Is there really any risk of platform failure? Surely insolvency risk is minor as you will own your funds or the platform will own for you as trustee (so you own beneficially) and your cash will be segregated. The only risks I see are 1 fraud (here I can see the advantage of a bank platform as they have the deep pocket to reimburse you) and 2 a shutout while the regulator sorts out the mess of a bankrupt platform.
@Fiscalist — Yes, that’s all exactly as it should be. 🙂
Read the links above (to our articles on compensation/nominee accounts) and it spells out exactly that.
The issue is not what *should* happen. The issue is what *might* happen. What a world we’d live in if nothing ever went wrong, no mistakes, technical errors, systemic failures, crimes etc!
As I see it, by splitting my money between two main brokers/platforms (I’m actually between 3 main ones, plus 1-2 minor) I *eliminate* the chances of losing/freezing all my money for any significant amount of time, at negligible cost and only a little extra bother, albeit for a slightly increased possibility of actually having a problem (because I am exposed to more/several institutions I am probabilistically more like to have some money with one that has a problem (in the very unlikely possibility one does).
This is presuming we’re not looking at total systemic failure across the system, where it probably won’t matter if you have your money with one or five platforms, at least not if they’re all the UK. (But then there’s Bullion Vault in Switzerland to help with that… 😉 )
Paranoid? Perhaps. I remember spending hours trying to get into certain mainstream / major bank brokers at the height of 2008, and not being able to get access to my funds. I went and saw a UK bank run with my own eyes. 🙂
@Neverland — Yes, that’s true. That said given the risks/chances I’m talking about are remote, I’d be more concerned about things we can’t see than things we can (so we can see scale, for instance, but we can’t “see” the data back-up procedures at a major broker, to give just one tiny example. Before anyone comments, yes, I am sure they back up every 3 seconds to a secure remote server under the mountains in Colorado. Everyone does everything right *nearly* all the time, which is why we *nearly always* have no problems. 🙂 )
@Alex — Interesting, it looks like another spin on the mooted ‘illiquidity premium’ that has come to light recently.
@Investor
Its nice to see you paranoid (my normal state) but the whole point about an investment strategy is you stick with the program and probably you will be alright over 25 years
I would rather buy stocks after a 30% correction than at an all time high myself
Fair enough, but this failure risk is nothing to do with when to invest, it’s about where/how.
If i was putting all my money into tinned beans and shotguns, I’d buy two brands and have two stashes! 😉
Thanks for linking to the one post I wanted to stay hidden in the depths of my blog. Oh the shame!!!!
🙂