Good reads from around the Web.
Last week’s Weekend Reading was about fund fees, but the comments became a – um – spirited discussion about currency risk in post-retirement portfolios.
It was an argument caused by different perspectives as much as about the facts.
A similar thing often happens when we talk about investing risk.
Often when people say one investment is less or more risky than another, what they’re really describing is transforming risk from kind into another.
In the currency debate, I noted the shortened time horizons of a retired person and the need to spend your pot in your domestic currency to meet your day-to-day living costs made currency risk more important at 65, say, than when you’re saving into a pension at 30 and can take a sanguine long-term view.
I suggested a greater allocation (note: not 100% or anything like it) to your home stock market might therefore make sense, as might hedging a portion of your overseas exposure (again, not all, just a portion to dampen the swings).
The other side bridled at the consequent higher costs – even if those costs were just a hypothetical 0.25% extra annual charge applied to just a bit of the portfolio.
The 0.25% cost was a nailed-on expense to be paid every year of retirement, they pointed out, whereas the impact of currency risk was unknown. Better to risk a bigger hit to your retirement income from currency swings than to guarantee a modest hit by paying that charge every year.
For richer or poorer
How often do we get into similar disagreements when debating finances?
(Okay, not very often if you’re a normal person into football or Facebook – I mean us personal finance nerds!)
Paying down your mortgage versus investing, whether or not you should buy an annuity in retirement or to stay in shares and bonds – they’re not really arguments with the “right” answer, because they depend so much on your risk tolerance, your circumstances, even your philosophy of life.
Sticking with the retirement theme, retirement researcher Wade Pfau posed one of these eternal questions directly this week in his article: Which is better for retirement, insurance or investments?
There are two fundamentally different philosophies for retirement income planning, which I call probability-based and safety-first.
Those philosophies diverge on the critical issue of where an individual is best served to place their trust: in the risk/reward trade-offs of an equity portfolio, or on the contractual guarantee of insurance products.
The fundamental question is about the type of strategy that can best meet the retirement income challenge for how to combine retirement income tools to meet goals and manage risks.
Those favoring investments rely on the notion that the market will eventually provide favorable returns for most retirees […] There is also a general unease about relying on the long-term prospects of insurance companies or bond issuers to meet contractual obligations.
Perhaps not fully understanding the implications of how sequence-of-returns risk differs from market risk, the belief is that in the rare event that the performance for the equity portfolio does not materialize, it would imply an economic catastrophe that would sink insurance companies as well.
Meanwhile, those favoring insurance believe that contractual guarantees are reliable and that an over-reliance on the assumption that favorable market returns will eventually arrive is emotionally overwhelming and dangerous for retirees […]
Even if there is a low probability of portfolio depletion, each retiree gets only one opportunity for a successful retirement.
This is the annuity versus income-portfolio-in-drawdown debate taken back to first principles.
At different times one approach might have an edge – when annuity rates are low, say, or stock markets scarily high.
But ultimately it’s a matter of philosophy and risk.
For better or worse
Coincidentally, Michael Kitces also published a really huge article comparing a whole bunch of different retirement strategies.
Again the same issue comes up:
What seems like a relatively simple question – which retirement income strategy is the best – is actually remarkably difficult to determine.
Because as it turns out, which is “best” depends heavily on how you measure what “best” really means in the first place.
This is a really in-depth article with some excellent graphs, and while it’s written from a US perspective there’s a lot to think about wherever you’re retiring.
Kitces also produced a table showing how the various strategies perform very differently across a range of outcomes:
Now, if you’re having a debate with someone who is most interested in (potentially) maximizing their final wealth, putting forward a strategy where at least some modest success is the top priority will cause some friction – unless maybe you both take a look at this table before you start your argument!
Retirement solved – and sold
You can also see from the table how the financial industry is able to spin the same problem into half-a-dozen different products for sale.
And that’s fine, if they’re providing different solutions for different needs.
But it can also be a misleading spin that says their favoured solution gets rid of the Worst outcome of some other hateful strategy – without pointing out the downsides of their own approach.
Remember, there are no free lunches in investing. Especially when you’re paying!
(Note: If you want to debate currency risk, could you please add your comments to last week’s thread. Obviously general comments on retirement strategies – or overall investing philosophy – are very welcome here).
From the blogs
Making good use of the things that we find…
- Do Vanguard funds have hidden costs? – Oblivious Investor
- Q&A with evidence-based investor Matt Hall – Abnormal Returns
- Are UK fund managers something special? – The Evidence-based Investor
- Where to find real value today – The Value Perspective
- Long-term stock market expectations by CAPE – Star Capital
- Avoiding cigarette butts – Investing Caffeine
- The trouble with BAE Systems – UK Value Investor
- Perusing JP Morgan’s annual report – The Brooklyn Investor
- Are we ready for a guaranteed basic income? [Podcast] – Freakonomics
- The importance of second level thinking – Farnam Street
- Do you really need to quit work? – SexHealthMoneyDeath
- The value of your time – Early Retirement Guy
- Journey’s End – Simple Living in Suffolk
Product of the week: The Telegraph reckons the savings you can make from switching your energy provider are the highest they’ve ever been. There are various tools embedded in the article to help you find the best deal.
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
- Bond investors turn passive aggressive [Search result] – FT
- Swedroe: Passive investing without indexes [Technical] – ETF.com
- Housel: Performance versus outcomes – Motley Fool (US)
- Ritholtz: Choose dividends over buybacks – Bloomberg
- Trials of the P2P biz model [Note “read more” button] – Institutional Investor
- Ordinary investors are afraid of the stock market – Business Insider
A word from a broker
- Brexit is creating opportunities in property funds – TD Direct
- Household budget calculator – Hargreaves Lansdown
Other stuff worth reading
- What would Brexit mean for me and my money? [Search result] – FT
- What retirees wish they’d known beforehand – ThisIsMoney
- Can these celebrities afford to retire? – Telegraph
- Merryn: Tax the living, and end IHT madness [Search result] – FT
- Will you pay extra stamp duty for the granny flat? – Guardian
- Graduates from richer families earn more… – Bloomberg
- …also, where the poor live longest [US but interesting] – NY Times
Book of the week: Tech site The Verge describes Amazon’s new Kindle Oasis as “a cork in a desert of screw caps”, saying “consider that the whole reason for dedicated Kindle e-readers to exist is to recreate the reading experience with digital convenience for book lovers, and the Oasis starts to make a lot more sense.”
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- 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”. [↩]