What caught my eye this week.
For various reasons (none of them unpleasant) I’m having a bit of a busy time of it at the moment.
Hence we’ll crack straight into the links this week.
Cheers for checking in, and have a great weekend!
From Monevator
Eek! Like I said, it was a mad busy week… – Nothing new on Monevator. The horror!
From the archive-ator: Investing lessons from a card-based strategy game – Monevator
News
Note: 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.1
Watchdog says you can move your final salary pension, even if advised not to – Telegraph
Investing in alternative strategies is out of favour – Investment News
Barking dogs and CCTV the best deterrent, ex-burglars tell Co-Op – Guardian
Tax-dodging landlords find the net is closing in [Search result] – FT
One of the world’s few lucrative black boxes loaded up on Trump election – Bloomberg
West Sussex named the best place in UK to retire to – ThisIsMoney
Surprise! European junk bonds have been the best performing asset since the financial crisis erupted in 2007 – Bloomberg
Products and services
Best student bank accounts for 2017’s freshers – ThisIsMoney
Where to find inflation-beating cash savings accounts [Search result] – FT
The pros and cons of buying a Beckham-style nature swimming pond – ThisIsMoney
NS&I’s first Junior ISA pays 2%, but there are better options out there – ThisIsMoney
You can get a £50 bonus if you invest £1,000 with RateSetter for a year – RateSetter
Comment and opinion
Worried about the markets? Some crisp thinking about risk – Humble Dollar
Seven strategies for investing at market peaks – Ben Carlson
Invert. Always invert – Above the Market
Business vs investing, with Jason Zweig and Morgan Housel [Podcast] – T.I.F.G.
From zero to wealth in two years with AirBnb – Mr Money Mustache
An annual rebalancing Excel calculator – Retirement Investing Today
Worrying about risk can be very risky – A Teachable Moment
Are index funds too soft on CEOs? – Morningstar
Amazon: Is this the end for old-school retailers? – The Value Perspective
Do dividend stock funds belong in your portfolio? – Oblivious Investor
War: Time to buy or sell? – Fire V London
Willfully ignorant about pensions – SexHealthMoneyDeath
Save money on car insurance – The Escape Artist
A deep dive into the US corporate bond market, for the curious – Gordian Advisors
Your bond fund could be riskier than it looks – Morningstar
The rate of return on everything: 1870-2015 [Research, PDF] – NBER
[Riffing on above] Housing for the long run? [Search result] – FT
Off our beat
Get fit with accountability – Early Retirement Guy
“Ten years after the crash, there’s barely suppressed civil war in Britain” – Guardian
“I’ve seen Raiders of the Lost Ark, and I wasn’t confused by it.” – Tina Fey
And finally…
“Today, in our society, in economics, and in finance, we place far too much trust in numbers. Numbers are not reality . At best, they are a pale reflection of reality. At worst, they’re a gross distortion of the truths we seek to measure.”
– John Bogle, Enough
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The NBER paper is interesting. I’d like to see the detail of how they dealt with the near-destruction by war of Germany and Japan: are the figures presented really meaningful and internally consistent? Heavens, for Germany you could add the consequences of the Weimar inflation.
Choice of countries: survivorship bias. Someone investing diversely in 1913 would have had a bit of money in the mature market of Austro-Hungary (went to zero) and perhaps in the developing markets of Russia and China (went to zero). Perhaps Argentina too: how did it do?
Technical question: is it the geometric mean returns I should concentrate on, and if so why?
An annual rebalancing Excel calculator – Retirement Investing Today
I just wanted to illuminate that this essential primitive calculation is not trivial for everybody. Not mentioning the temptation to tinker the original asset allocation. Never underestimate our emotions. If somebody has invested regularly in a simple S&P 500 Index via Vanguard since 1976 he would be rich today. The reality is that we don’t know people who strictly followed it and have proven track record (neither Bogle!).
I strongly believe without a financial advisor the majority of DIY investors would be better off using target dated funds. Even Lars’ suggestion is hard to follow in the long run. It is no accident even William Bengen has financial advisor. https://www.nytimes.com/2015/05/09/your-money/some-new-math-for-the-4-percent-retirement-rule.html
dearieme
This is why people invest traditionally less in stocks in Central Europe in contrast to UK.
Housing for the long run?
Interesting. We know there are low-volatility and liquidity risk premiums. Houses are less volatile and liquid assets than stocks.
“This is why people invest traditionally less in stocks in Central Europe in contrast to UK.”
Fair enough: but how is one to know in advance? The USA could be the next Austro-Hungary. Or we could.
Housing: and one’s own house is a frighteningly undiversified investment. HS2, anyone?
dearieme
Yes You could. Nobody knows for sure. Equity risk premium. There is no Holy Grail in investing.
Thanks for the links this week, TI, despite good-busy. Some interesting nuggets in there this week, too.
I liked Ben Carlson on the peakiness — we’re thinking it’s all a bit “nose-bleed” up here — but what to do about it? Nothing. Or as little as you can possibly manage without twitching? Or sit in the relative safety of european junk bonds?! Eek!
I also enjoyed Jacobi’s quote being extended into a life-philosophy in the invert article. Given his branch of mathematics and the technical inversion of linear transformations he was responsible for developing, I’d like to see the context of the quote to confirm it was truly applicable to investing, but the general principles in the article are excellent. Start at the end point and works backwards (be end-product focussed) is a wonderful concentrating philosophy — and the advice to look for what is not there is equally useful in examining partial evidence on returns as it is when driving down a country lane (no deers have jumped out yet).
TEA is entertaining as ever, raging against the insurers. I am amazed as he is that people don’t consider the annual fight against utilities, insurers, phone and internet providers as their basic civic duty: a sort of economic National Service. Worth the time? Possibly not, but buggered if I’m not taking the savings. I ended up with fleet insurance on my cars — turns out that some premium benefits are worth paying for.
Finally, I loved ERGs Parkrun nirvana. A full 6 months before the January fitness craze is supposed to strike he’s opened a door to a better life. There isn’t such a thing as FI when it comes to your health and you can’t save it up and live off the interest. Exercise is a wonder drug for mood and fitness in general as well as supressing all sorts of chronic conditions. (Although runners do create all sorts of other chronic injuries). As is cutting down on the booze. Well done him. Wonder if he can stick to it. Always the challenge is to nurture the one habit to crush the other.
dearieme — geometric mean because that is the “annual return” figure that you would use for compounding purposes. The average or arithmetic mean will usually be deceptively higher for these sorts of numbers.
“The average or arithmetic mean will usually be deceptively higher for these sorts of numbers.” Thank you: so the other figures are just an arithmetic mean of annual growths? Bloody hell, so the answer is essentially that the other figures are true but bogus. What twits. Who could give a hoot about an arithmetic average of annual growth rates?
For the uninitiated: you have an initial asset value of £100. If its annual growth alternates at -10% and +11.111% the average is clearly +1.111%/2 = +0.556% p.a. However there hasn’t really been any growth at all because your investment is just bouncing up and down between £100 and £90. Indeed, you could argue that your investment is on average spending its time below £100 so you may care to look on it as potentially loss-making, depending on when you choose to sell. So the +0.556% p.a. is tosh.
How sad that often the lesson in life is that ‘you found them hard to understand because you had not realised that they would be so stupid’.
For readers who don’t want to look at the original: they report, for example, an average global real rate of return on equities over a long period as 7% p.a. But the useful figure is 4.7% p.a. Given that we are talking exponential growth, that’s a large difference. To put it in context: the difference between the annual return from equities and from bonds shrinks from the bogus 4.5% to the useful 2.7%. Jesu!
It does depend on which year you buy in — your total might be bouncing around between £100 and £111.11. The arithmetic mean is useful in telling you what the expected return is in any single year – and provides a centrepoint for the distribution and its moments. However, distributions don’t behave quite the same as numbers when you perform arithmetic on them (ie add lots of them up or multiply them).
As ever it always depends on what you are using the information for and ensuring that you know what the other person is telling you when they tell you the “average is x%”. If you are forecasting long-run returns from buys and hold then the geometric average (inc distributions) is what you’re interested in.
“The arithmetic mean is useful in telling you what the expected return is in any single year”: indeed, but that’s “expected” in the statistical sense rather than in an everyday sense – so, in my case, of more interest for bills than for equities or housing.
There’s a comment in the paper that takes my eye: “residential real estate, not equity, has been the best long-run investment over the course of modern history. We include wars but exclude hyperinflation.” Weimar!! I wonder whether housing would give better protection from hyperinflation than domestic equities. It wouldn’t surprise me.
Anyway, the upshot is that the average mug punter, making his highly geared investment in his house, would seem to have been wise, by and large. Or, at least, successful.
P.S. Thanks for your remarks, Mathmo.
“Anyway, the upshot is that the average mug punter, making his highly geared investment in his house, would seem to have been wise, by and large. Or, at least, successful.” (Dearieme, above.)
Well, not in the UK. If you look at the disaggregated numbers (Table 5, from memory), you’ll see that in the UK equities have beaten housing over all the periods sampled.
@Tyro: “If you look at the disaggregated numbers …. you’ll see that in the UK equities have beaten housing over all the periods sampled.”
You may be right but that table doesn’t prove it.
It reports “Average annual real returns” not geometric mean annual real returns. Suppose with a wave of the hand I use the ratio of the two different sorts of global means from table 3 to approximate the geometric returns from the average returns given in table 5. I get equities 5% p.a. and housing 5.3% p.a. The calculation is admittedly crude but it shows that the returns may well be neck-and-neck. Perhaps they’re close enough that tax treatment would have a substantial bearing on which would seem the better punt.
I hope that if the authors produce a second version of their paper they improve it by reporting a version of table 5 with geometric means. Housing typically is, and equities typically ought to be, a long-term investment.
“Perhaps they’re close enough that tax treatment would have a substantial bearing on which would seem the better punt.”
And, come to think of it, the ease with which the average mug punter can apply gearing would have a bearing. He’s happy to buy with a mortgage loan; few would be happy to buy equities with loans even if they knew a way of getting such loans on attractive terms. Of course the gearing could imply a wild ride for his equity in the house. He typically pays off the loan gradually over the years, so as long as he isn’t squeezed out of his house at the bottom of a price slump he expects to do well out of the gearing.
@Tyro @DM @Anyone — The following article in the archives explores this theme:
http://monevator.com/10-why-houses-are-a-better-investment-than-shares/
The problem is that the extraordinary tax privileges given to owner-occupied housing distort, and in part suppress, the natural market in rental properties. In my great-grandparents’ time many of the prosperous people in the population rented. Owner-occupation made sense for couples who expected never to move to another country, or city, or suburb, but for many people renting made more sense. I can’t see any government having the courage to try to equalise the tax treatment of the two ways of living. CGT on owner occupied housing? Income tax on imputed rent? Equality of tax relief on mortgage interest for owners, whether occupying or letting? The whole issue is poisoned by the emotionalism that attends it.
@dearieme – surely the point of tax relief for primary residences is to encourage the poor to buy and pay off their mortgages? People with some wealth at stake (house) are much more likely to toe the line, follow the rules and live in fear of losing that wealth. Equalise the tax treatment, esp up front or on going taxes and the poor won’t bother buying and you have the makings of a revolution.
Of course, the current high prices of housing is pushing us down the same route slowly.
@Richard: you may well be right, but combining over-incentivised buying of houses with planning permission-limited building of them seems a mug’s game to me. And the new tax penalties on owners of let housing seems mad since the economic incidence will end up on the tenants not the landlords.
I remind you that tax relief on owner-occupied mortgages was scrapped quite recently (Major and Blair governments, so that’s ‘recent’ in terms of, say, the design life of a house).
The tax on imputed rent (Schedule A income tax) was scrapped only in 1963. Exemption of owner-occupied housing from CGT was the decision of a Labour government; since it was Wilson’s first government that introduced CGT it was presumably that government that exempted owner-occupied housing.
After seeing woodford bloodbath, i am assured that active funds are mute spectators to the board room events in comparison to soft index funds.