What caught my eye this week.
Investing in riskier asset classes usually delivers higher returns in the long-term – unless you’re putting money into emerging markets as opposed to developed ones.
Economic shocks are more important to investors than geopolitics – unless the politicians turn to global war.
Geographic diversification has improved your return profile – unless you were a domestic investor in the US, Mexico, South Africa, or [checks notes] Chile.
Just a few of the (paraphrased) insights I gleaned from skimming the new UBS Global Investment Returns Yearbook.
When I first encountered this annual stats smorgasbord from professors Dimson, Marsh, and Staunton 20 years ago – when it was the Credit Suisse Yearbook – it seemed like something out of J.K. Rowling.
Here were the secrets of the investment universe, compiled into one handy tome!
But subsequent years have shown again and again that past is only partially prologue in our particular fantasy realm. (Negative interest rates, anyone?)
All the same, I’ll always have a read of the Yearbook. Even the PDF summary is packed with morsels such as:
Since 1900, equities and bonds have on several occasions lost more than 70% in real terms.
Yet a 60:40 equity:bond blend has never declined more than 50%.
It’s just that after nearly three decades in the game, I see a statistic like that and think, “I suppose it’s overdue then…”
Have a great weekend.
From Monevator
Gold: an asset for troubled times – Monevator
The cheapest stocks and shares ISA on the market – Monevator
From the archive-ator: Why commodities belong in your portfolio – Monevator
News
UK regulator examines glitch that showed customers others’ accounts – Guardian
OECD warns UK is the only country with inflation above 3% – This Is Money
Revolut finally has a full British banking license – CNBC
UK house prices hit £301,151, says Halifax – This Is Money
AI scams drove UK reports of fraud to 440,000 last year – Guardian
Government under fire over ‘bungled’ crypto ISA policy [Paywall] – FT
IEA agrees to release record 400m barrels of oil – CNBC
Rented property in UK sees ‘largest value decline this century’ – This Is Money
Tesla set to supply electricity in Britain – Reuters
Trump sees massive increase in wealth as new billionaire list released – Sky
The debt beneath the data centre dream – Om
Products and services
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Average mortgage rate tops 5% as lenders scurry to reprice loans – Guardian
Low-cost platform Lightyear has further reduced its fees – Lightyear
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this affiliate link. Terms apply – Charles Stanley
Barclays switch offer: £200, or £400 for a premium account – B.C.W.Y.C.
What’s happening to home insurance premiums? – Which
Get up to £3,000 cashback when you open or switch to an Interactive Investor SIPP. Terms and fees apply, affiliate link – Interactive Investor
Five mistakes not to make in your will – Which
Why authenticator apps are the best option for security – Oblivious Investor
First-class stamps going up to £1.80 from April – Be Clever With Your Cash
Victorian homes for sale, in pictures – Guardian
Comment and opinion
The 60/40 portfolio versus the bucket strategy – A Retirement Manifesto
Government is seizing ‘Henry VIII’ powers to direct pensions – This Is Money
How to rig an index to appease a billionaire – Keubiko’s Musings
Ways to cut the cost of commuting – Guardian
Why is it so hard to predict financial markets? – Behavioural Investment
“I make good money. Why do I still feel like this?” – Your Brain on Money
Rich or poor, we all share the same fate – The Root of All
How the Middle East war could affect your finances – Which
Buffett’s 90/10 is wrong. Even though it’s right – Humble Dollar
Portfolio theory in a spreadsheet [Podcast] – Rational Reminder
Naughty corner: Active antics
Hijacking the huckster’s hypebook – Investing 101
Exploring real wealth creation in UK stocks [Research] – J.O.A.M.
The untold story of Reddit – Quartr
Ten things on Berkshire Hathaway’s 10K – Kingswell
The best defensive strategies: two centuries of evidence [Nerdy, research] – Alpha Architect
Home or office working mini-special
Average UK office attendance at highest level since before Covid – Guardian
The great central London office crisis – Standard
Is legal uncertainty killing remote work productivity? – The Conversation
Kindle book bargains
The End of Reality by Jonathan Taplin – £0.99 on Kindle
Boomerang by Michael Lewis – £0.99 on Kindle
Money Men by Dan McCrum – £0.99 on Kindle
Economica by Victoria Bateman – £0.99 on Kindle
Or pick up one of the all-time great investing classics – Monevator store
Environmental factors
Net zero by 2050 is cheaper for the UK than just one fossil fuel crisis – Guardian
The planet is overheating. Why is the news looking away? – Grist
Peak District carbon capture plans hit opposition – BBC
Reversing extinction – Aeon
Can plastic-eating fungi help clean up nappy waste? – BBC
Extreme heat now affects one in three people globally, study finds – Guardian
Robot overlord roundup
The labour market impacts of AI so far – Anthropic
A library of ‘thinking prompts’ for Claude and other chatbots – Tom’s Guide
The legibility problem with AI science… – Asimov Press
…and the same sort of discussion regarding maths – Daniel Litt
The lobster – SpyGlass
Minimum wages and the rise of the robots [Research, nerdy, PDF] – NBER
Not at the dinner table
Carneymania is sweeping Canada – The Walrus
The Iranian warship the US sunk was unarmed. The US Navy knew it – New Republic
Why shadow tankers are the only ships moving through that Strait – The Conversation
TACOs with a side order of war porn – The Bulwark
I am sick and tired of all the winning – Drezner’s World
Freak out! – The Pursuit of Happiness
A web of financial ties between Trump officials and the industries they regulate – ProPublica
Why the US is facing a military defeat in Iran – Policy Tensor
What happens when low-skilled immigration is curbed [Research] – NBER
Off our beat
How geography determines architecture – Uncharted Territories
The science of personality change – Range Widely
Patrons of journalism – How Things Work
Should people start paying to visit the UK’s free museums? – Independent
Is low fertility in high-income countries here to stay? – C.R.R.
Rewind through 30 years of the World Wide Web [Interactive] – Web Rewind
Let it go – We’re Gonna Get Those Bastards
And finally…
“The statistic that separates skilled investors from the rest is the payoff ratio. If the hit ratio measures how often the investor right, the payoff ratio measures how right the investor usually is.”
– Clare Flynn Levy, Stock Market Maestros
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What a piece of sunshine in my inbox this morning!
> ‘It’s just that after nearly three decades in the game, I see a statistic like that and think, “I suppose it’s overdue then…”’
Well, all good-looking economies (Rome, Byzantium, Imperial Russia, Imperial China, Ottoman Empire, the Kingdom of France, Argentina and so on) imploded eventually, so investment, that is, sacrificing consumption note for disproportionately bigger gains in the future, has always been an act of faith and hope. That’s why people who lend money are called “creditors”: They have come to believe (‘credere’ in Latin) that they will get their capital back from the borrower, with interest.
At the moment, one has been far more likely to avoid the most extreme outcomes, good and bad, with an asset-class-mixed portfolio. You may be right that this is about to change, but is it any more likely than that the sky will fall down upon us?
This was a rather disturbing article about how Uber-style piecework is coming for white-collar workers too (because of AI companies … of course): https://nymag.com/intelligencer/article/white-collar-workers-training-ai.html (archive link: https://archive.ph/syqsk)
The problem here is in deciding what’s really the risky asset?
Are equities really more risky than bonds?
They’re more volatile for sure, but global stocks have provided an annualised real (inflation adjusted) return of approximately 5% in USD over the 126 years since 1900 beating Treasury bills by 4.6% and bonds by 3.3% per year.
Global equities outperformed bonds, bills, and inflation in all 35 markets surveyed in the Global Investment Returns Yearbook.
Given time, that compounds to orders of magnitude differences in returns.
And while, since 2000, gold has shown strong performance, looking back to 1900, global stocks have significantly higher appreciation.
As for commodities, they display high volatility, often with long term real returns close to zero, as they don’t produce any income (dividends or interest) unlike stocks or bonds.
So, which is the truly risky asset?
The one which moves around the most, or the one that, after decades, leaves you poorer? (I’m looking at you bonds, gold and commodo).
Stocks gyrate about like a rhythm free, tone deaf, embarrassingly drunk uncle hitting the dance floor at a out of control wedding party.
But, whilst the typical stock fails to beat the long term returns from investing in even 90 day T Bills (as 58% of US stocks did from 1926-2016, for example), investing in the aggregate of all stocks globally absolutely crushed it over multi decades time frames.
And for an investor building wealth with DCA, the volatility is an opportunity, not a threat.
That’s why you BTFD.
Eventually it works.
In that sense, and from that perspective, if you’re accumulating long term. then every ‘catastrophe’, be it war, banking crises or pandemics; is just another buying opportunity to take stocks out of weaker hands at discounted prices.
“Why authenticator apps are the best option for security – Oblivious Investor”
Who pays for authenticator apps?
@Delta Hedge #4
“The problem here is in deciding what’s really the risky asset?”
I suppose the corollary of that question, is deciding what constitutes your definition of “the long term”.
126 years is considerably longer than my own. Living prolonged bear markets and telling yourself that you’re a good strong handed long term owner and actually being one, are two different things. The smarter investor probably wants to use their judgment to avoid finding out just how strong a pair of hands they actually are.
Great take. Banks prey on the uninformed with such myths that historical data tells the future, or that experts could make profits from predicting the markets. (My father’s bank just tried to sell him wealth management at 3% p.a. cost. Reminded me of that classic book “Where are the customers’ yachts”.)
I see only two ways of dealing with the uncertainty. One is hyper-vigilant active management, trying to react faster than most (too stressful for me).
Or extreme diversification, beyond just stocks and bonds. It’s about the total portfolio and having a bunch of assets that work in different situations.
Suppose someone is eighty and is confident that he and his wife will both have died before his hundredth birthday. Is there anywhere he can look to see how different portfolios have done over twenty year periods? It might give him a natural comparison for an annuity purchase.
@TI:
As usual, some nice/informative links – thanks.
Interesting to see that the “planning horizon” is featuring more and more in the posts and comments @Monevator. Or maybe that is inevitable as we are just all getting older?
Somebody, perhaps it was @naeclue (apologies if I have recalled that wrong) once mentioned a very interesting take on his “planning horizon” when he said something like he was investing for his children/grand-children thus his horizon was not his anticipated time remaining on this mortal coil. What I took from that is that something more akin to a perpetual portfolio could be appropriate even for relative oldies – depending on the situation/desires.
Just my thruppence worth really!
@Johnathan the Evil. I believe the big authenticator apps are paid by their partners for customer pass through. However Authy is owned by Twilio and that company has a history of providing smaller stuff free to progress expansion.
@Delta Hedge #4
Ever heard of the Martingale strategy? Mathematically that eventually works. But as Keynes probably didn’t say
And therein lies the rub
@ermine #11: Ahhh yes, the Martindale, or the Nick Leeson, as I believe it’s also called. But, the thing is, 5 out of 6 Russian Roulette players only have good things to say of the experience. The 6th, not so much 😉
I think you’ll enjoy this:
https://www.linkedin.com/pulse/ergodicity-kelly-criterion-peter-lupoff
[God it’s annoying when you spot that you’ve mistyped after the 10 mins]. Martingale, not Martindale. I should blame the auto complete suggestions on the phone, but, tbh, it’s my own dumb ass. Paul Lévy and Jean Ville would turn in their graves (h/t to Wikipedia). It’s harder, of course, to misspell or misstype the St. Petersburg Paradox, which, upon reflection, this issue is actually rather closer to than to ‘pure Kelly’:
https://taylorpearson.me/petersburg/
@DH: “If 6 different players play Russian Roulette and you conducted an after that fact survey, 5 out every 6 Russian roulette players would recommend it as a very exciting and profitable game.”
Brilliant
The other one would be marked up “did not respond”. Good old Selection Bias.
@Rich — Literally survivorship bias in this case…
In some sense, it’s selection and survivorship effects all the way down.
We observe the universe we see because, if it was very different, then it wouldn’t have observers like us in it (the Self Sampling Assumption, as we now call it).
Barrow’s & Tipler’s canonical 1986 “The Anthropic Cosmological Principle” is the OG exposition:
https://www.amazon.co.uk/Anthropic-Cosmological-Principle-John-Barrow/dp/0198519494
For investors, they’re two lessons.
First, be somewhat sceptical of isomorphism in time between past and future returns and sequences of returns.
We are where we are with 5% CAGR real total 126 years’ returns because we had the sequences of events and the circumstances which we did, and then that’s how the market structures of that time responded to them; namely, we experienced a growing, urbanising, industrialising and globalising market with increasing energy intensity and both easy to access cheap fossil fuels and easy to pick low hanging fruits of impactful innovation for productivity growth. This was reacted to by a mostly lightly regulated free market where governments encouraged the profit motive. In China economic growth has not treated investors as well as in, say, the US in this regard.
Second, non-ergodicity likely rules: the average return is likely very different to the typical return.
But, at the end of the day, you’ve still got to be an optimist to some degree because, long term, pessimism has been a terrible bet to make.
@DH (#17)
“We are where we are with 5% CAGR real total 126 years’ returns because we had the sequences of events and the circumstances which we did, and then that’s how the market structures of that time responded to them”
Agree, but with the additional point that even the historical data varies by period. For example,
1) see McQuarrie’s paper (“Where Siegel Went Awry: Outdated Sources & Incomplete Data”, available at SSRN) that looks at some very long datasets (e.g., back to 1700 for the UK) – mainly from the point of view of the equity premium rather than returns.
2) For 60 year rolling periods (i.e., close to a lifetime of investing), the annualised real returns for UK equities varied from about 2.5% to 5% (median of roughly 4%) for rolling periods starting between 1872 and 1920, but from 5% to 7% (median just under 6%) for rolling periods starting after 1920. In other words, most of the good performance in equities in the 20th century came relatively late on.
@Alan S #18: very intriguing. Thank you.
There’s no law of nature behind 5% real total equity returns, as the longer data series (back to 1700 for the UK) shows.
And there is a notion that, on the very longest scales, a sort of symmetry may be found in the human condition, and that we won’t, based upon anthropic reasoning, either find ourselves in a world of millenniums of 1% annualised growth in both population and per capita wealth (which would require a break out of the human condition from its earthly constraints) or forevermore stagnating at current levels of both people and production (which would be like indefinitely balancing on a knife edge).
Rather, just as human population merely doubled every 1,700 years (just 0.04% average CAGR) over the 10,000 years to 1500 CE (from ~4-10 mn to ~500-600 mn), and just as per capita production in that period only doubled (from the equivalent of $500 to $1,000 p.a. per person, an average annual rate of change of less than 0.01%); so too, in the future, the numbers of people and their productivity/wealth will decline gradually (the reverse, mirror image of the previous 10,000 years).
A more extreme scenario of this, from statistical reasoning, are the various versions of the John Leslie & Richard Gott ‘Doomsday Argument’ / the (Brandon) ‘Carter Catastrophe’.
But one can reject the premise that decline need spell ‘doom soon’ in favour, instead, of a slow running deflation of the global economy and population (per the issues with structurally declining global TFRs in the above linked CRR piece). Our own Fermi filter.
In the long run that will be very bad news for equity returns. Ever fewer and less wealthy customers means less sales and ultimately profit.
There’s even a credible notion that LLMs will accelerate and elongate this trend to ‘worseness’ by unintentionally
hobbling the emergence of more productivity through genuinely novel innovation; thus further crippling the growth side of the ledger:
https://monevator.com/weekend-reading-first-they-came-for-the-call-centres/#comment-1941823
But I still think that you ultimately have to invest like a rational optimist because what’s the alternative?
I learned something new this morning about IHT/taper relief/7 year gifting rules.
The article in the finance section in the mail is very informative and worth a read, because it doesn’t worth the way you (or maybe just me) would expect.
Effectively while gifts are in their 7 year waiting period it uses your £325k allowance for the full amount, not the tapered amount – the taper is in the tax rate.
My understanding would be that a £325k gift 6 years ago and a gift of £325k on death today would result in full IHT on the second £325. Not what I expected having never looking into it.
It was a quick look so perhaps I misread.
#4, 11, 12, 13, 14, 15, 17, 18 and 19:
Noone knows anything, a timely reminder:
https://open.substack.com/pub/spilledcoffee/p/i-dont-know-and-neither-does-warren