I have decided to reverse my usual policy of looking at my portfolio about as often as Dracula out the window on a sunny day. Why? Because while we’re being roughed up I might as well discover a few home truths about my risk tolerance.
How big a beating can I take?
I don’t think I know.
Sure, I’ve done some tests. According to Finametrica’s industry-standard metrics, I’m quite the risk jockey – in the top 2% when it comes to laughing in the face of volatility.
But, but, but… the only test that counts is real life.
How do I feel when the numbers are actually streaming red down the screen? As they are right now – we touched bear market territory last week. A true test of nerve as the FTSE veered 20% below last April’s highs.
Obviously 2008 was bigger. The FTSE buckled by 31% then.
But I had a lot less to lose in those days. I got a statement at the end of the year and everything looked shot to hell, but it didn’t seem to matter much.
I was more worried about my job. Retirement was a faraway land – a 30-year pipe dream, minimum.
In skin-in-the-game terms, I chafed my pinky in 2008.
But now I could lose an arm and a leg.
It’s a test designed to provoke an emotional response
So I’m staring my numbers straight in the face.
And it’s weird.
Somehow, when I wasn’t really looking, my portfolio crossed a threshold. It grew up.
Now a day or two’s volatility can wipe off thousands from my name. Look again and the thousands are back. (Some of them, anyway.)
Wipe on, wipe off.
It’s like watching time-lapse photography of a watering hole. It shrinks in baking tropical sun. It’s replenished by the rains. It expands, it contracts, it expands, it contracts, at unreal speed. The only thing missing is a cameo by a curious water buffalo.
If that sort of money disappeared from my bank account I’d phone the Police.
I’d be on my knees sobbing, “It’s gone, Lord help me, it’s gone.”
If I won it back on a gameshow I’d be dancing like Topol.
But when money is dangled and whipped away faster than a card sharp playing Follow The Lady, it doesn’t seem to matter. It isn’t real, even though it is.
My emotions are caged. My pulse low. No sweat prickles my brow.
Why, why, why?
Is the risk tolerance test accurate? How much rougher does the sea have to get before I feel out of my depth?
That’s why I keep looking at my numbers. It’s a staring contest between me and the market.
I want to know how much wealth I can watch evaporate and not blink.
When I hit my limit, I want my withdrawal to safer ground to be orderly and gradual. Otherwise, I could risk years of gains.
Some clues that you’re nearing the limit:
- Feeling down, queasy, or panicked by the decline.
- Not sleeping well.
- Not able to rebalance into the teeth of the storm.
That last one is the best friend you’ve got, because who wants to live with the first two?
If it’s too scary to rebalance into the losers now then how would you feel if losses ramped up to -30%, -40% and beyond?
Dialing back your equity allocation and upping government bonds will reduce your exposure – but do it gradually in the coming months and years.
Not in a panic when equities are on sale.
To give you a sense of what carnage looks like, the biggest real terms stock market drop in UK history was -71% between 1973 and 1974.
It took the market ten years to return to its previous level. If you were accumulating equities on the cheap in the meantime then your portfolio recovered much earlier.
But if you were selling off then it took much longer. Possibly never.
For me, education is the best armour. Knowing that crashes are normal makes it easier to shrug off bad times.
The Irrelevant Investor has posted some brilliant stats about double digit declines in the US. We don’t have those figures for the UK but they’re likely to be in the same ball park.
- 64% of all years experienced double digit declines.
- 36% of all double-digit decline years ended positive.
There’s an even starker chart from Larry Swedroe that shows how often the US goes into the red even when the year ends in the black.
(Spoiler – all the freaking time.)
So we’re down a fair chunk. This is normal. Equities across the globe are now cheaper and that raises the prospects for future expected returns. If you’re still accumulating then this is good news.
The rewards of investing come to those who can take the pain when the world mood darkens. Many people can’t. That’s why they fold and sell out at lower and lower prices.
Do that and the spoils go to the winners who scoop up those unwanted assets and sell only much later when the fearful have returned, confidence restored, and confidently buying back those self same assets from you at much higher prices.
So hang in there and use the pain.
Take it steady,
Indeed! There is a lot of people talking the talk but if the pain gets worse let’s see!
Another sign that you are nearing your limit is when you start to dress up selling out of beaten-up positions as a strategic change in your asset allocation.
Some of my own recent examples …. “I have always felt 10% allocation to emerging markets is too high….” “Perhaps Rick Ferri was right these commodities futures have no expected return and no place in an individuals asset allocation…”
I’m very curious to see where this journey of self-discovery by my normally passively prone (and snoozing) co-blogger takes him.
One thing I would say (/warn?) is it may be TA’s insouciance until now has given him a layer of ‘stress resistance blubber’ that — eventually — looking at his portfolio every day will cut through.
The reason I say that is I’m pretty sure I get more stressed now than I did two years ago, for instance, following three years of *very* active investing. And more stressed again than say 5-10 years ago, when I’d often ignore my portfolio of stock picks for weeks or even months at a time.
I used to be an investing Vulcan, but after several years of experimentally tracking my returns versus my benchmarks very closely (my entire net worth marked-to-market and changing before my eyes with my unitised spreadsheet in a window, and at one stage archiving returns daily) with increasing stress, I don’t think it’s just the bigger ££ amounts at stake.
I think some sort of stress buffer fills up and eventually overloaded a bit.
Perhaps something along the lines of similar research into willpower:
But this is speculation on my part for now.
Anyway, let’s be careful out there. 🙂
I am/was still waiting for when the “fearful have returned, confidence restored” after the last time (2008? 2000?)…..
Whilst I’m no market timer, I find myself eager to select which investments I’m going to rebalance into monthly as my direct debits hit my account and almost find myself a touched chastised by the false start upswings at the moment whenever it’s time to pull the trigger. I’ve become a spreadsheet jockey, I enjoy the mechanics of rebalancing and trust my asset allocation matches my risk profile. So far so good.
I have done some strategic restructuring of a small Australian superannuation portfolio on which CGT was due to harvest some losses, balance some gains and shift from large cap S&P 500, S&P small cap, MSCI EAFE and MSCI EM ETFs into cheaper and broader Vanguard ETF equivalents Total US, ex-US and FTSE EM.
Stupid platforms in Australia are very limited for passive options and force you into holding actively managed home-brand funds. You have to have a large portfolio >AU$200,000 (>£95,000) to be able to justify the administration costs of more flexible superannuation options, and be resident in most cases.
I am 60 this year and if the pension system in the UK had not been changed by dear Gideon last year, I would be entirely in cash I suspect at this point. As it is, I am not seeing things any differently now to what I did 20 years ago. I have some cash to get me through the initial years if I do decide to bail out of work, but I can leave the rest in the market as I am not going to be forced into some immediate sell off at retirement.
I log in and look at the £’000s that have been taken from my DC pension and stocks ISA value and feel little emotion. I suppose constantly reading books and blogs has helped prepare me for it, expecting volatility instead of being surprised by it. Rather than the Market Value at the moment as an instant profit or loss opportunity, I look at my investments as a long term investment, brimming with potential energy in dividends and capital growth.
Then again, Mrs Z does say that I am an emotional stone…
Such times as these are when the importance of having an Investment Plan (usually called an Investment Policy Statement) comes into play.
If the investor has planned in advance what they will do under whatever circumstances may arise, that is at least some comfort, and gives asense of direction/control.
However that does not make it easy to buy into a declining market. No matter well thought out an Investors Plan, it is not easy to stick to the plan in times of stress.
But the stress then arises from will the investor be able to stick to their plan, rather than what the hell is going on!
If it is any comfort, looking back at an investor’s trading record, it is often those decisions that were hardest to make, that turned out the most advantageous.
One suggestion that can make life a little less stressful is to take account of that irrational wretched fellow ‘momentum’ (aka the band-waggon effect), by approaching any target at a controlled rate, say 10% of observed deviation from target per month, thereby keeping 90% back each month to benefit from ‘momentum’.
Good Luck to us All and Keep on Trawling
Yes, as someone once said to me, ‘looking at it won’t make it any bigger’
She was a wise old owl..
When TA wobbles you know playtime is over..
Lash yourself to the mast, let the typhoon sing and strike its harp deep in your rigging. You will be fine. If times get really tough I’ll buy some of your book.
This is exactly why focusing on income is so much easier, psychologically speaking, than focusing on capital.
Dividends don’t bounce around from one day to the next and, across a whole portfolio, they don’t even move around much from one year to the next.
I am living off my investments, mostly in SIPP/ISA accounts now apart from some investments I bought with my pension tax free lump sum and some VCTs. I have no other income until the state pension kicks in, which is still quite some way off. I rebalanced our portfolio at the beginning of January, which involved cutting back on our investment in Japanese equity trackers as they breached the 20% overweight limit and selling a short dated gilt. I am resolved not to do anything else until next January except shift unsheltered investments into our ISA accounts.
It is hard to resist the temptation to mess around with ones portfolio, say by rebalancing into equities at a time like now, but the outcome of doing that will be fairly random. Equity prices are almost as likely to be lower than now next January as they are to be higher, so why hand more money over to the City by rebalancing now? There is absolutely no point selling equities now either because the market has seen to it that I am underweight. By January I could be even more underweight, or I could be overweight. Whatever the situation, I will handle it next January. If I was still accumulating though, I would redirect savings each quarter into whatever is underweight.
I have no way of knowing what equity prices will be like next January and nobody else knows either, regardless of the delusional pronouncements that some people like to make.
With regards to accumulating, by underweight, do you mean underweight as per your carefully considered asset allocation, or underweight in terms of how you feel about it in your waters, sorry CAPE, Sharpe Ratio etc. etc. analysis?
@TA – I think I’m like you were in 2008, not at all troubled by volatility but have less than two months wages in my portfolio so doesn’t really affect me ! I’ve only your posts and the comments to guide me but hold your course and good things will happen (if you have 15 years left…) ;0)
@MR Z @ Magneto … I will read read and read articles and make a written plan as per your suggestions so when the next bear market comes, when I do have some assets accumulated (I hope) I’ll hopefully stick to the plan !
Just underweight the chosen asset allocation, principally the equities/bonds/cash split. I have no time for how I or anyone else feels in their water.
I would not totally dismiss CAPE, but it would have to be at a very extreme value before I would want to alter my asset allocation because of it.
As a thought experiment, I took 100 £1 shares paying 3.5p dividend and ran it forward 30 years assuming both 2% price and dividend growth and got £508 at the end, reinvesting the dividends
I then assumed the shares started the period at 80p, but paid the same absolute dividend, and ran that forward as well, and got £523. The initial hit is overcome by the ability to buy cheap shares with those dividends.
For a 60p initial price, you get £595, as the shares were even cheaper.
So even if you don’t continue to invest, pound cost averaging of your dividends will pull you out of the hole. It does take 26 years for the 80p scenario, and 23 years for the 60p scenario though
(The %ages are immune to the growth number BTW)
“except shift unsheltered investments into our ISA accounts”: the price reduction for equities makes that easier, and reduces any potential CGT bill too.
@helfordpirate: You bring up a really good point. Trying to be rational about making changes to investment strategy when it’s hard to prove something is rational and there’s plenty of reason to want to change.
Personally I’m still settled in the view that poor market performance is good. I’m buying for the long term, and if anything it’s annoying that prices haven’t been lower in the past so I could buy more for the same money!
Im 2 years in to investing in equities with about 65% of portfolio and im handling downturn very well. whats helped is ive moved my time horizon to 16 from now when im 67 and plan to drawdown alongside state pension. live of cash and small private pension pot before hand.
I plan on investing full isa allowance in equities this year and next year and then I may stop and save in cash /bonds from then on.
I was interested in Neaclue’s response as hes in drawdown and I found my self agreeing with his approach.
I do wonder whether it’s helpful to focus on “risk aversion” as if it is an independent quality. I think it is often a proxy for other things, including not being aware how volatile stock markets actually are, not understanding the importance of safe assets (bonds/cash) as well as shares, not understanding the importance of diversification within the equity allocation, not understanding the impact of time on your exposure to risk (and how to respond to it).
Of course, you can still be risk averse (or just plain worried!) if you understand all of these things, but it helps to keep things in perspective and even provide the basis of a potential strategy.
What a well timed post – I’ve not been in the game to long so I’ve only amassed a small pot which was doing quite well. That’s not the scenario today mind you as I am just about breaking even.
The funny thing is, although I’ve been checking my portfolio value more frequently, I’ve still been saying to myself hmm how much can I afford to invest from this months pay cheque due in a few days and how long will this downward trend continue for?
The lay person would say “cash it in and use it as a house deposit whilst you still can”. However the education I’ve been provided with from the content providers at Monevator and those of you who write in the comments has led me to understand that this is an opportunity for someone in my age range who still has 30 years + before retirement age.
One thing though I have been thinking about is how can I go about diversifying my portfolio further. Though that leads me to ask the question is adding more funds and making things a little more complex worth it in the long run as you never really know how things are going to play out….
@Grand “One thing though I have been thinking about is how can I go about diversifying my portfolio further”
Easier said than done. Once you get past the obvious diversification (global equity in some combination or other) and possibly REITs, it’s not clear where to go next. Commodity futures? Gold? (I’m not keen on either because they don’t, in principle, generate earnings.) P2P lending? I’m not sure that the price accurately reflects the risks. (If the marketing information is anything to go by, P2P is primarily funded by people who think of them as high interest savings accounts!) Property? I already own my home. (And see the previous post by TI – http://monevator.com/does-saving-still-pay/).
Sometimes I think the hunt for diversity (mine included!) is an attempt to deny the reality that there is no perfect portolio, and that the only portfolio that will never suffer serious losses is also one that will never grow much either.
I would let the equity capital bounce around whilst the income produced continues to grow. Any spare cash could be invested at these cheaper prices. Only sell if you need cash to spend. Preferably you have sufficient cash to wait out a two year down-turn in share prices.
As the tightrope walker crossing the Niagara Falls said…. a bit late to worry about if the wire is tied on properly. Get to the other side.
When I started investing nearly three years ago I’m pretty sure I was promised an average 6% growth on my returns. Thats guaranteed right?
Anyway I’m not faltered by the current losses which are in my accounts. I’m not touching these figures yet and now the shares are on for a discount. I’m negative for the 3 years invested but that money if left in cash would have been long spent and not on the purchase of trackers that follow the market.
I just can’t wait to get some more funds in the bank account to buy at this reduced rate no matter how many pennies my accounts are down
@ Rhino & Planting Acorns – no wobble yet. But I assume there comes a point. I’m not stone. So that’s what I’m trying to explore. That and the fact that risk tolerance is an obscure trait.
@ Helford – great point on the ad hoc rationalisations.
@ Dawn – it’s also helped me to think about my timeline as continuing past the point of retirement. I’ll still need an equity allocation so much of what I have now could still be in the portfolio for Mrs Accumulator and myself in 40 – 50 years from now (with any luck).
@ Tim G – I know what you’re saying and education helps, but I think that there’s a point where fear of loss exists beyond any rational attempt to control it. I know people who just can’t get past the idea that they could lose everything – as unlikely as that is.
@ Grand – http://monevator.com/how-to-build-a-risk-factor-portfolio/
@ All – good to hear everyone’s feeling calm and nicely buckled up. We’ll be just fine.
@TA “I think that there’s a point where fear of loss exists beyond any rational attempt to control it.”
Absolutely. I guess my point is that education shifts that point. When my partner looks at her portfolio she sees a 20% drop in equities; when I look at it, I see a 12% drop in the portfolio as a whole. She sees the middle of a cataclysmic meltdown; I see a fairly common occurrence. She sees a lot of investments in risky shares (and wants to stash everything in cash); I see a broad portfolio, where the worst bits (FTSE all shares and EM) are offset, to a degree, by dev-World ex-UK and REITs; and where the shares are balanced by bonds and cash.
I’m certainly not completely anxiety-free – and I think it would be foolish/macho to aspire to be so. I’m philosophical about current losses, but I’m also perfectly aware that this could be just the start of something much more dramatic (UK 1973-74 or Great Crash 1929-32). Rebalancing after one year and a 20% drop is one thing, doing so for several years in a row (as would have been required in 1929-32) is another matter altogether!
A very honest post, thanks 🙂 It is great that you are examining your response in these uncertain times. I kept being reminded of examples in Taleb’s Fooled by Randomness whilst I was reading it. Maybe now is a good time to re read it?
There is a Dilbert for this “I’m sittin in a box and checkin my stocks”. Its handy to check to see how your bond funds are reacting to equity crashing, and whether they are doing their job (or at least not going down at the same time), and until you have significant skin in the game you can’t know for sure how you’ll react, no matter how many risk assessments you take.
As for further diversification over stocks, bonds, cash and uk residential property (aka your home) I’ve narrowed it down to P2P loans, commercial real estate trusts (concerned about liquidity when there is a commercial real estate crash?) and gold (concerned about whether it has a place given no income).
As far as safe havens go Premium Bonds are probably a better bet unless our pound is debased. Gold has a much bigger appeal if you live in a banana republic.
It won’t pay the rent unless you sell it, but who wouldn’t want to be holding the Harry Browne portfolio (25% each in stocks, bonds, cash and gold) right now.
TA – How I deal with this is by making it really difficult for myself to log-in to my accounts.
I don’t remember any of my customer IDs. I have them noted down and hidden in another room in my house. Equally, I don’t remember my passwords. Again I have a hint in another room in my house (sounds secure doesn’t it…) It means that for me to log-in, it requires a deliberate and substantial effort.
We often consider that the proliferation of apps for checking investments is a good thing for the user. But it makes it (too?) easy to (unnecessarily?) check your investments on a regular basis. We can pretend this is to the benefit of the user, but really the benefit is for the brokers who gain through increased trading.
As such, I am in blissful ignorance to what is happening to my portfolio right now.
@Mr L – I use one of those prodders strapped to my forehead to type to help in this respect. works a treat. Prof Hawking has an even better system in place whereby he uses minute eye movements to type at a rate of 1 character per fortnight. As you may imagine, his portfolio performance is stellar, absolutely astronomical returns.
@TA – “We’ll be just fine.”
And so we will, I’m sure. Some wobbling is inevitable though, when you’re learning to ride a buycycle!
Thanks for reassuring us with your similar experiences. We’re not alone!
We have the same experience of looking at this latest market downturn with a different eye from the way we approached the last major one in 2008-9. At that time, despite severe portfolio depreciation, we didn’t really register the event as something that represented real losses for us. This time around, about 2 years shy of our retirement goal date, it does worry us a LOT MORE. It’s all perspective…
@ The Rhino
I know you jest. But do we need to look at our portfolios? I’m not planning on selling any time soon. So the ebbs and flows of the market shouldn’t bother me as I float along!
@Mr L – you are right, common wisdom is no we don’t. lets not forget the fidelity study that reported the most successful demographic within their enormous pile of investors were the dead ones. Put it all on auto and go out and do something more wholesome
@ Grand … You ever looked at ‘shared ownership’ schemes…imagine there’s a lot of good developments going in Lambeth with a shared ownership allocation. I did shared ownership and subsequently bought the outstanding share…banks not as free with their money now but worth a quick Google search?
Depressingly though…I know nothing about you and your girlfriends circumstances but I know I’ll never be able to buy an actual house in Streatham… Or ever drink with anyone that could ;0)
@ John from UK Value Investor – You are right. This is the one of the roles of the dividends. You can’t deny Your emotions. Dividends help to dampen the fear. They have very important psychological role.
This writing is a good explanation why the equity premium exists. And the value premium. In the long run.
@ Mr L – great idea. Someone should invent an app with a seven stage sign-in and a card reader. I’d never look again.
In all seriousness, I agree that not looking is the best way of weathering a storm. I’ve actually shielded my eyes when adding transactions to my Morningstar tracker so I couldn’t see my overall performance.
@ Tim G – Couldn’t agree more. Great points.
@ Rhino – heehee. I’d go as far as to say lol.
This is a great article and very timely! I just wrote about the same here: http://www.moneyahoy.com/the-stock-market-is-down-should-i-panic/
I also find myself checking my portfolio much more frequently. I think the only reason I have a bit more risk tolerance is I went through the 2008/2009 drop and came out the other side. I also have ~30% of my portfolio in cash and bonds 🙂
I’m still firmly in the accumulation stage, and have been since late 2007 (with a nice lump sum, from redundancy, right at the top of the market) although regular drip-feeding only started in 2008/9.
I have two shares providers so all of my shares, funds and investment trusts are spread across those, plus Premium Bonds, a savings account, two bank accounts and some lent to family. I don’t look at them regularly, I don’t know how much I have in each asset, and I love the quote ‘looking at it won’t make it any bigger’.
I’ve not touched the drips since last summer when I changed them to widen my exposure to other high yielders. I’m not going to change them now, as I’m buying them more cheaply but my spend is the same. You normally pay roughly the same in rates, utilities or petrol each month. If those were 20% cheaper you’d be delighted, especially if you could buy extra with the same money and sell the extra later on for a profit.
I’m thinking about venturing into an ETF that negatively tracks the S&P, which looks as overvalued as much as back in 2002/8. This would be a new thing for me, and worrying about when to sell my losing blue chip, old and established shares or well-diversified funds and ITs is too much for one man to handle.
@Justin — You probably don’t want to use a short ETF to take a bearish position on the S&P, as from what you’ve written here you likely don’t understand the maths yet. Hopefully this article will help:
Short ETFs are only really of use for traders with brief time horizons (ideally a day).
If I had to actively take a long-term bet against the US market, I’d probably use a spreadbet as a UK investor, or one could look into options. But remember the US market is about 50% of the typical global tracker. Most of us, by accident or design, are very much ‘short’ exposure to it already, and that certainly includes me — not least for the reason you state. 🙂
7 stage login with a card reader? Sounds like many of the U.K. Banks. Off topic, but I really wish investment platforms would have some 2fa. Not for security, but privacy.
“I’m thinking about venturing into an ETF that negatively tracks the S&P, which looks as overvalued as much as back in 2002/8. This would be a new thing for me, and worrying about when to sell my losing blue chip, old and established shares or well-diversified funds and ITs is too much for one man to handle.” Justin.
Looking on the bright side, with the bear market that started April 2015, valuations by Dividend Yield and PE1 are now approaching the longer term historic medians.
Several markets are now offering yields in excess of that which can be achieved on real estate! And we haven’t seen that for some time.
However the link below (if it works) does not give such an encouraging picture!
Then there are diverse reasons why all three measures may be faulty.
This investor is cautiously buying as stocks decline.
However it is possible that significant further stock declines await!
As a rule of thumb, it is often said that an investor in stocks should always assume a potential loss of 50% at any time and construct the portfolio accordingly.
Maybe 60% possible loss would be more conservative?
@Justin – a manual DIY alternative approach to shorting the S&P could be just to buy it at some point in the future? Would that achieve the same end? The argument you make about the delight in a fall in utility prices but not share prices has been made famous by Buffet in his anecdote about beefburgers. You’re right, but most people in the accumulation phases gut reaction is the opposite.
“”It took the market ten years to return to its previous level. If you were accumulating equities on the cheap in the meantime then your portfolio recovered much earlier””.
As you say, that isn’t a problem – if you are continuing to invest (& therefore to accumulate, during those 10 years of recovery).
But I am 70+ & the average age of death is 84.
So I have a tendency to be a little more concerned than younger people who are still in the accumulation stage of passively investing.
@Ed – are you holding (100-age) or ~30% in equities?
or have you got something else going on?
I have 50% passive equities; 40% passive bonds. (These partly in Vanguard L-S funds) + 10% Active equities + NS&I (Index-Linked).
All in ISA OEIC funds.
Thinking (but only ‘maybe’) of switching a small part of the passive OEICs to active.
@The Investor, spreadbets and options trouble me. I remember a phone call in late 2007 when I was thinking of shorting the S&P via a margin account with IG, a minimum of £2/point was offered. I’d lost £500 in a very short time, trading currencies and spreadbetting on the Dow and FTSE, which was the equivalent of about 5 years of my betting on sports. Unfortunately I pulled out and so had no hedge for my redundancy payout. I welcome having a passive short of the S&P, could you explain how that is?
@42 magneto, thanks for the link, would you have any particular countries and/or sectors in mind? I’ve been watching a few oilers and the yields look tempting but, of course, the sector could be about to undergo some substantial changes as dividends may be cut.
@The Rhino, the first time I’ve been held in such exalted company! I couldn’t start buying in the low of October 2008 when Buffet announced he was doing so, or the real low in March 2009. Fear was very much the overriding emotion at the time.
@Justin — Fair enough, but I strongly suggest you have no business going near a short ETF from what you’ve written here. Strongly suggest you read my article on short ETFs that I just linked to. The passive way to be short the US is to be underweight in your portfolio versus the global benchmark of c.50% allocation to the US. (i.e. Own less US exposure, if that’s what you want).
Note I can’t give personal investing advice, this is just some ideas for your further research / reading. I’ll leave it there. 🙂
“@42 magneto, thanks for the link, would you have any particular countries and/or sectors in mind? I’ve been watching a few oilers and the yields look tempting but, of course, the sector could be about to undergo some substantial changes as dividends may be cut.”
None of the following are recommendations : just information.
WARNING : DO YOUR OWN RESEARCH !!!
In retirement, income rising with inflation, dominates our thinking and portfolio. Accordingly we hold a mixture of yield tilted Investment Trusts plus the usual broad market tracking ETFx.
Yields of interest as of last weekend are :-
UK (where FTSE100 div cover looks precarious)
VUKE 4.1%, SCF 4.2%, CTY 4.1%
IVPG 3.9%uc, MYI 5.9%, SCAM 4.4%
Commodities Income (as observed expect div cut, but by how much?)
AAIF 5.9%, HFEL 7.1%, SOI 4.5%
Europe (nothing stands out)
JEMI 6.4%, JRS (Russia!) 4.6%
Again please do not take any of above as recommendations, just info.
For a brief moment I felt like clearing my mortgage early. But I can’t do it. Not with interest rates at an all-time low. This feels like a historic opportunity to me. A chance to earn more by staying invested in the market over the next 10 years than I could gain by removing the mortgage-leech that’s latched onto my cash flow.
My assets currently yield double the amount I’m paying to service the debt. That alone stays my hand.
But this is a story about trading certainty for potential.
My current mortgage interest rate is 1.24%.
The FCA is projecting nominal UK equity growth rates of 6.5% to 8% over the next 10 years. That would comfortably spank my tracker mortgage, as long as interest rates don’t go beserk.
And there will be scares along the way. Scares that could last for months or years. I don’t think I’ll panic. I believe I’ll keep on paying down the mortgage like everyone else while waiting for equities to come back.
But I don’t take many risks. This is one I understand and am well prepared for. The satisfaction of being mortgage-free is not as important to me as knowing I have the resolve to get there.
@John — A person who doesn’t pay off their mortgage when they can will always attract some critics, but I think for those who’ve thought deeply about it and understand there are big risks as well as potential rewards (insert standard ‘Japanese stock market is still its 1989 peak’ reminder here) it can be a rational choice. Critics are often inconsistent, too, in that they will have a mortgage and be saving into shares in an ISA, and yet then say somebody who explicitly decides to stay invested is being reckless.
That said, I wouldn’t take much comfort from a portfolio yielding twice a rate of 1.24% — that is an incredibly low cost of debt by any historical standard! (Which as you say is the opportunity, too).
I would also personally be very ready to switch to a Fixed Rate mortgage if rates really decidedly start to move higher — in fact I’d probably fix right away — although I can understand the temptation of staying on an incredibly low 1.24% rate. (It is of course your decision, we can’t give personal advice here as I’m sure you appreciate.)
Without an interest rate fix one would have two variables that could derail such a plan (rates and market) whereas with a fix this at least reduces the issue to one unknown.
You might find this article (and the comments below debating the pros and cons) of interest: http://monevator.com/not-paying-off-my-mortgage/
@The Investor, thanks for that information. Of course I will put it with other info and do my own research, and I will likely just stay with buying each month and not doing anything rash or that I don’t really understand. I must be short the US then, as I sold out a fund on medium-sized US countries back in 2012! Missed a lot of the run-up because I didn’t let that winner run.
@49 magneto, useful information and appropriate as I’ve only recently become interested in ITs. I won’t take your information as a recommendation but I will note you are confident those you have invested in are well run, and appreciate you sharing the information which in no way is a recommendation for myself.
Great post @TA!
I’ve so far really enjoyed this bear market, as it’s been the first real test of the portfolio I started almost two years back when I got into investing. Finally, an opportunity to see how well constructed my portfolio actually is, rather than how well in theory.
When the Chinese stock market began to crash, the headlines started, and then commentators turned their attention to a 20% fall closer to home. This got me thinking, is it really that bad? Why are you not talking about how this is actually great news for younger generations starting out? And what about reinvested dividends, and the growth of these, which mean anyone making regular contributions into a low cost index tracker that reinvests over this period won’t have lost anywhere near 20%? Especially if they’re not 100% in shares. And what about investing being a long term game?
As it turns out I’m down about 3% over the last year, which I can live with for all the reasons mentioned above. If the market goes down further, and it might, maybe stronger emotions will start to kick in – I don’t know, I’ve not been there – but so far so good. I just wish the media would give a more intelligent view. Alas, that’s not going to happen. So I’ve turned off the news, pinned up the Gordon Equation on my wall and will continue to read this blog in an effort to keep sane.
Happy Sunday everyone.