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Weekend reading: You are not average

Weekend reading: You are not average post image

What caught my eye this week.

You really ought to read You Are Not A Monte Carlo Simulation, an excellent post over at the Flirting With Models blog.

The article tackles a subject a lot of us struggle with – the mathematics behind the distribution of returns that mean the same investment can have a positive expected growth rate and yet wipe out most people who put money into it.

Sounds complicated, right? Fear not, the article makes it all pretty simple. (Not least thanks to some super crisp graphs that made me nostalgic for my Investing for Beginners series.)

As the author, Corey Hoffstein, notes:

Under the context of multi-period compounding results, “risk aversion” is not so foolish.

If we have our arm mauled off by a lion on the African veldt, we cannot simply “average” our experience with others in the tribe and end up with 97% of an arm.

We cannot “average” our experience across the infinite universes of other potential outcomes where we were not necessarily mauled. Rather, our state is permanently altered for life.

Don’t get mauled by a misunderstanding!

From Monevator

Looking for a new platform for ISA season? – See our broker table and comparison tool

From the archive-ator: Five reasons why you’ll love index investing – Monevator


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

UK interest rates stay on hold, but Bank of England hints at rise – Guardian

Six reasons why the High Street is in crisis – BBC

(Some) salary sacrificing pensioners face income cut due to tax relief errors – Telegraph

Mortgages most affordable since the mid-1990s, says Halifax – Guardian

Aviva scraps controversial plan to cancel its preference shares [RNS]Investegate

A rebel bank, printing its own notes and buying back people’s debts – Guardian

Smart Beta investors are even bigger performance chasers than active fund owners – Pension Partners

Products and services

Hargreaves Lansdown wins £15m tax rebate in dispute over fund discounts – ThisIsMoney

Eight steps to choosing a financial advisor [Search result]FT

How to tackle your interest-only mortgage shortfall – Guardian

Natwest trials payments of up to £500 to customers who refer a friend – ThisIsMoney

Considering equity release but worried about inheritance? – Telegraph

Comment and opinion

Some alternatives to evidence-based investing – The Reformed Broker

Boosting returns with rebalancing – ETF.com

15 years of semi-retirement: A real life case study – Get Rich Slowly

Why the UK bull market could have a long way to go – UK Value Investor

Should you invest in an ISA or top-up your pension? – ThisIsMoney

Why we don’t want children – Young FI Guy

Reform council tax to close the inter-generational wealth gap [Search result]FT

Easy pickings in stock markets don’t last for long – The Irrelevant Investor

Why are money managers paid so much? – Cullen Roche

Vanguard’s dominance is not guaranteed – Evidence-based Investor

People don’t value to financial advisors for their investment advice – The Financial Bodyguard

Larry Swedroe: Why financial trends persist – ETF.com

Giant allocators love illiquid assets, but what about the risks? – Institutional Investor

Rethinking the case for European stocks – The Macro Tourist

Brexit schadenfreude

Printing blue passports will be £120m cheaper when done in EU – Guardian

Kindle book bargains

Make Your Bed: Small things that can change your life… and maybe the world by William McRaven – £1.99 on Kindle

The Marshmallow Test: Understanding Self-control and How To Master It by Walter Mischel- £1.99 on Kindle

Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street by Sheelah Kolhatkar – £1.99 on Kindle

The Spider Network: The Wild Story of a Maths Genius and One of the Greatest Scams in Financial History by David Enrich – £1.99 on Kindle

Off our beat

50 big companies that were started with little or no money – Hackernoon

Facebook is fundamentally bad and Mark Zuckerberg should shut it down – Vox

What is Fortnite? – Digg.com

And finally…

“Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time.”
– Warren Buffett, The Snowball

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  1. 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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{ 26 comments… add one }
  • 1 The Rhino March 23, 2018, 5:55 pm

    Having just watched ‘The Revenant’ I’m all for not getting mauled. Say what you like about de-caprio but he really does know how to suffer a bear market..

  • 2 Jim Mcg March 23, 2018, 7:07 pm

    Thanks for the Kindle recs, always looking to stock my “library” on deal!

  • 3 Charlie March 24, 2018, 11:08 am

    A couple of links I tripped over this week:

    The Pros and Cons of Bucket Strategies

    Beyond The 4% Rule: The science of retirement portfolios that last a lifetime
    (Not read it yet, so not a recomendation…)

  • 4 The Investor March 24, 2018, 11:22 am

    @Charlie — Thanks for the links, we actually included the bucket strategy in the links last week. 🙂 The Retirement Cafe is a great blog but he posts very inconsistently so as well to have a few pairs of eyes watching it.

  • 5 JonWB March 24, 2018, 11:46 am

    I am expecting what happened at Aviva to feature strongly in business school case studies around the world.

    Aviva actually have a reasonable Business Ethics Code (see: https://www.aviva.com/content/dam/aviva-corporate/documents/socialpurpose/pdfs/Business_Ethics_Code_-_Sept_2017__x0NwF4P.pdf).

    So how did the preference share debacle happen? This wasn’t a case of a lone – rogue – employee trashing Aviva’s reputation. It was a full on, CEO and CFO double act, under ‘advice’ from, no doubt, a magic circle law firm coupled with a top tier investment bank or two. The only people involved, at any level, would have been very senior.

    If anyone involved, at any stage, referred to the Business Ethics Code, it would have been immediately obvious that it fell well short of what was required; particularly as the market was always led to believe they were what they said they were – irredeemable preference shares. I suspect that Aviva did break UK Market Listing rules, particularly as the plan wasn’t disseminated by RNS, as is required.

    Aviva need to come clean on this….

    Did the full board approve this approach for the preference shares and if so, what does it say of the non-executives on Aviva’s board? If it didn’t go via the full board, then why not, performing a ‘capital reduction’ requiring full shareholder and court approval is, one would hope, something that a full board should meet, discuss and vote on before proceeding with any form of announcement.

  • 6 Vanguardfan March 24, 2018, 11:56 am

    I’ve just stumbled across the 4% book too – great to see something aimed at uk market. From what I’ve seen of the authors writings previously I anticipate something sensible. Maybe one for TA to write a post about?

  • 7 hosimpson March 24, 2018, 12:09 pm

    Mortgages are now most affordable since the 90s? That may be true – after all interest rates are at an all-time low – but not for the reasons the Grauniad cites. The typical mortgage length in the mid-90s was 25 years. Now about 15% of new mortgages are taken out for terms of 35+ years and about 20% are between 30 and 35 years (see chart A.16). I fundamentally disagree with an assertion that it’s possible to make a loan more affordable by extending its term and hence reducing the monthly payment.

  • 8 Boltt March 24, 2018, 1:41 pm


    I sold a BTL in 2016 and used the proceeds to buy Pref Shares (Aviva, Gen Acc, RSA, Santander). This is pretty shocking and leaves me wondering what next? Cancelling ordinary share where they trade above par!!

    This needs nipping in bud by the regulator, otherwise who knows what some of these companies will try next.

    I never got round to buying undated govt gilts, but i recall they were bought back on sensible terms.

  • 9 dearieme March 24, 2018, 2:41 pm

    Illiquid investments: suppose that a well paid thirtyish investor realises that his present pension capital will probably be invested for about 30 years. Could that justify his opting for illiquid investments for part of his pot? If so, what would you recommend?

  • 10 ermine March 24, 2018, 7:26 pm

    @dearieme well, this being the UK the obvious favourite illiquid investment for people’s pensions is res property 😉

    Are you proposing illiquid investments from a feeling that there must be a premium for illiquidity, which would work well with the three decade embargo on realising the investment?

  • 11 dearieme March 24, 2018, 9:34 pm

    @ermine, “Are you proposing …?”: exactly. On the other hand a well paid thirtysomething probably lives in a highly geared res property investment, so there’s a diversification argument against having more. Or at least against having more in the UK.

  • 12 Lord March 24, 2018, 11:17 pm

    There was a nice article in the FT about Germans and their saving rates which I enjoyed.


    « German households save about 10 per cent of their disposable income, twice as much as the average EU or American.« 

  • 13 Troy @ Bull Markets March 25, 2018, 7:07 am

    Just on the whole Facebook thing, this is the most true thing I read all day: “just because something is an addiction doesn’t make it bad. I’m addicted to showering every day”.

    I think people are blowing the whole Facebook privacy thing way out of proportion. People are generally aware that when they post stuff online, nobody knows where it will end up.

  • 14 old_eyes March 25, 2018, 1:00 pm

    I read the Hoffstein article with interest. What I conclude from it is that what is called Monte Carlo Simulation in portfolio evaluation is no such thing. Surely the whole benefit of MC is that you can explore the impact of a very wide range of conditions and events over time. To do that you need to look at the distribution of outcomes and why those outcomes, and you have to work very hard to avoid inserting your prejudices into the simulation by allowing ‘unrealistic’ situations to be part of the ensemble.

    Have I misunderstood? Looking at this article http://www.wealthmanagement.com/practice-management/why-some-advisors-just-say-no-monte-carlo-simulations suggests maybe I have as its complaint about MC is that it does not allow you to easily enough insert your ‘experience’ into the calculations.

    So I re-read the article carefully and tried to figure out the messages. They seemed to be:
    – We can’t readily predict future market behaviour
    – With hindsight we can usually spot an investment strategy with a better outcome than the one we chose
    – With foresight that better strategy can’t be spotted
    – Means and medians don’t tell you a lot about highly skewed distributions
    – Given the above downside risk is something you should think about more than upside risk if you are betting your whole pot (or a big chunk thereof)
    – Monte Carlo Simulations give you a sheaf of possible outcomes, but you can only experience one.

    All these seem to be either self-evident or the kind of common sense preached by this and other sites. Does MC really have such a pernicious effect on people’s thinking? I am genuinely trying to work out what risk this article is alerting me to, and what it is suggesting I change. The advice in developing your portfolio would seem to be:
    – You can’t predict the future
    – Diversify
    – Think about the downsides if things go wrong and check that this is a risk you are prepared to take

    As I said; the common starting points for most of the passive end of investment. Are there people out there using MC to ‘calculate themselves rich’? Are IFA’s using MC to confuse investors and tempt them into taking way too much risk? I would be interested to know.

  • 15 The Investor March 25, 2018, 1:11 pm

    @oldeyes — I don’t think you’re missing anything except perhaps that roughly 1% of the adult population could have written the comment you just did and that might be generous. 🙂

    Publishing caters for all sorts and repeating the same message via different routes can reach people one way but not another.

    For what it’s worth I think I’d been investing for at least 5 years before I really understood for example sequence of returns risk. One day I read the right article and: lightbulb! 🙂

  • 16 Marnix March 27, 2018, 9:57 am

    I also read the Hoffstein article with interest, thanks for the link, but I do have my doubts about how much sense it makes. Its main message is that what it calls ‘compound average growth rate’ is a better metric for the expectation of an individual’s investing experience than what he calls ‘expected average growth rate’. This is of course true, but I would argue that this expected average growth rate is practically never used to decide whether or not to invest in a given asset, because it is unknown. In practice the compound average growth rate is already used by most investors because it is measurable.

    The example investment he gives is simulated based on an a priori value for the expected average growth rate and for the risk of a major loss. In practice, such values are of course not available. Leaving aside any detailed information on the underlying value of the asset, the only information we have to assess the performance/risk of a given asset is its past performance and volatility. To have a reliable estimate of this implies looking back far enough so that the compound average growth rate is visible. Doing this for the example investment in the article would make it immediately obvious for any investor that the given investment is expected to loose money over time, since the potential gains don’t outweigh the risk at all. The only way that an investor can be fooled into expecting a positive return is if he only sees the gains in between the big losses and mistakenly thinks that was the compound average growth rate, while in fact it was not. For example: looking at the S&P 500 from 2009 to now will not tell you its compound average growth rate and should therefore not be used as an expectation for an individual investor’s experience in all time periods. Looking at the performance between 1990 and now comes closer, because it includes several major stock market crashes. But this is surely no news for any serious investor, is it?

    I don’t see how the author concludes from this valid but unsurprising point that avoiding risk will lead to higher long term gains. What he means is: avoiding investments that don’t offer sufficient potential gains to outweigh its risks, like the example investment he gives, will lead to higher long term gains. I fully agree with that 🙂

  • 17 old_eyes March 27, 2018, 12:36 pm

    @The Investor – fair point.

    I think the article presents a quite complex and subtle argument (one that I am not sure is actually correct) that would not be accessible to someone without reasonable mathematical and financial skills. Hence my confusion about the message.

    If I had been writing it to alert general readers to the risks of taking a simplistic view of what MC provides I would have said:

    – There is this technique known as Monte Carlo Simulation that works like this and allows you to explore A, B & C.
    – Unless you use it right it can lead you into errors K, L & M
    – Therefore treat with caution and always remember key investment principles X, Y & Z

    That is the kind of message on various aspects of investment and saving that can be repeated over and over again from slightly different angles.

    Like the Bellman in the Hunting of the Snark – “…what I tell you three times is true”. 😉

  • 18 The Rhino March 28, 2018, 12:07 pm

    Just done the end of year accounts

    man.. – feb and march decimated things, i.e. pretty much halved my returns for the year

    i’ll be interested to see how 2018-2019 goes

  • 19 old_eyes March 28, 2018, 3:05 pm

    @The Rhino – Yep! It was sharp! But we all believe and we are going to keep to the strategy right? 😉

  • 20 The Rhino March 28, 2018, 3:40 pm

    @old_eyes – I believe so.. now what was my strategy again?

  • 21 vanguardfan March 28, 2018, 3:46 pm

    @rhino. You’re looking too hard 🙂
    I have a very basic monitoring system – just add it all up at about this time of year, and check my asset allocation. I seem to have more than I had 12 months ago, so I’m happy.

  • 22 The Rhino March 28, 2018, 3:56 pm

    @VF – that is a pretty basic monitoring system 😉

    in some ways mine is even more basic as I’ve outsourced the lion-share of the asset allocation to Vanguard, who I’m aware you’re a fan of..

    But the fact remains my financial year 2017-2018 uplift in net worth is half what it was in January, close to 6 figures down on that months peak.

    But its still an uplift over the year so, by your metric, I’m still happy(ish)..

    Other unrelated changes in circumstance mean a bear market might do me a lot of good, so I’m reasonably sanguine whatever the next FY holds..

  • 23 Vanguardfan March 29, 2018, 9:07 am

    @rhino. I may perhaps have been overly influenced by an article I read once, which claimed that the private investors’ portfolios which did best over the long term were the ones whose owners had forgotten about them. :-). I have anecdotal evidence to support this, having taken on my elderly father’s finances…
    More seriously, I regard myself as my portfolio’s worst enemy, and have been actively working on an ‘ignore all market fluctuations’ strategy. I only check it once a year so that I can manage CGT… (not true, I actually look at my accounts fairly frequently, but I only fire up the spreadsheet once, well ok maybe twice, a year).
    In your case, the fact that you have apparently ‘lost’ money since January feels painful, but if you didn’t know that, you’d just focus on the yearly gain, right? And feel more positive? And tbh, unless you are liquidising your assets, it’s all just numbers on a screen…

  • 24 Vanguardfan March 29, 2018, 9:39 am

    Me again. I got curious and had a look at my losses since mid Jan. Only one of my brokers can give me retrospective valuations, but it looks like down by about 6.5%, less in my father’s cautious pf.
    What scares me is the prospect of 20, 30, 40% drops…and at those levels you don’t need a spreadsheet to tell you it’s painful!

  • 25 The Rhino March 29, 2018, 1:46 pm

    @VF – I think your very much right on this matter, less is more as they say

    If the article you mention is the same one I read, then there was an additional category of investors who did even better again. The ones that were dead. No if that isn’t a black and white lesson then I don’t know what is?

    Yes I think I’m down about 6-7%ish from peak.

    I’m thinking now if there are any good reasons for me to maintain monthly entries in the spreadsheet or just to move to annual as you suggest? It seems a sensible move..

  • 26 The Rhino April 3, 2018, 10:29 am

    Being as the new FY is almost upon us, I’m going to action your advice and reduce from monthly to quarterly updates to the borg-spreadsheet. This will dove-tail with my quarterly SIPP purchases and maybe prove to be a step enroute to only updating it annually

    I found a conversation re: FX charges that I’d forgot I had on the broker comparison thread. FIPiper seemed to suggest you could avoid FX charges on the way in out if you bought the right denomination flavour, i.e. VHYL.L but pointed out you’ll always get hit on divi conversion in an ISA – *but* outside an ISA they suggest it may be possible to keep payments in dollars? not sure whether that actually helps any though?

    I’m going to double check on the purchase flavour FX issue by attempting to do the relevant purchase on selftrade and see if that FX charge still pops up in their summary. I hope FIPiper is right but my I wouldn’t bank on it without verifying first..

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